For the last Spring Budget Phillip Hammond provided a few surprises from what was, on a the whole, a reasonably low key budget.
There were no pension surprises in the budget. Ordinarily, that would be a good thing, but on this occasion we had hoped for a U-turn on the reduction to the Money Purchase Annual Allowance.
We got what we expected in the form of the reduction to the Money Purchase Annual Allowance, and reform of the tax system for the self-employed has been on the agenda for some time with the Treasury concerned that the self-employed aren’t paying enough tax. The increase to Class 4 National Insurance Contributions for self-employed individuals from April 2018 goes some way to fill that estimated ‘tax gap’.
With advisers and the financial services industry just coming to terms with the impact of the removal of the dividend tax credit and introduction of the dividend tax allowance, it is somewhat concerning that this has again been changed and the amount of dividend income which can be earned tax free will be reduced to £2,000 from April 2018.
Income tax
Personal allowance
The tax-free personal allowance is being increased to £11,500 in 2017/18.
For higher rate taxpayers, the threshold above which higher earners start paying 40% tax is being increased to £45,000 in 2017/18.
Starting rate band for the starting rate of savings income tax
The Government has confirmed that the limit for the 0% starting rate for savings will remain at its current level of £5,000 for 2017/18.
Deduction of income tax at source from savings income
The Government consulted on the draft legislation, removing the requirement for tax to be deducted at source from:
interest distributions of open-ended investment companies
authorised unit trusts and investment trust companies, and
interest on peer-to-peer loans.
They have now announced that the legislation will be implemented unchanged with effect from 6 April 2017.
Dividends
From 2018/19 tax year the amount of dividend income that is charged at the nil rate will be reduced to £2,000.
National Insurance
Self Employed – an increase in the rate of Class 4 National Insurance contributions (NICs)
The Government has announced that it will legislate to increase the main rate of Class 4 NICs from 9% to 10% with effect from 6 April 2018 and from 10% to 11% from 6 April 2019. This measure offsets the increased differential between the rates of NI paid by employees and the self-employed, particularly with the abolition of Class 2 NICs from April 2018.
Pensions
The Money Purchase Annual Allowance (MPAA)
Regulations were introduced from 6 April 2015 to restrict money purchase pension contributions to £10,000 per annum for individuals who have flexibly accessed pension benefits. The Government consulted on reducing the MPAA to £4,000 per annum and has confirmed that this change will be made with effect from 6 April 2017.
The Government will publish its full response to the consultation on 20 March 2017.
State Pension Age
The Government will publish its first statutory review of the State Pension Age by 7 May 2017. This will take into account the independent report on the State Pension Age by John Cridland.
Master Trust Tax Registration
There has been much discussion regarding master trust pension schemes not providing sufficient protection to their members. To ensure greater member protection, the Government will amend the tax registration process for master trust pension schemes to align it with the Pensions Regulator’s new authorisation and supervision regime.
Overseas Pension Schemes
Legislation will be introduced in the Finance Bill 2017 so that:
transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25%, unless at least one of the following apply:
Both the individual and the QROPS are in the same country after the transfer.
The QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA country after the transfer.
The QROPS is an occupational pension scheme sponsored by the individual’s employer.
The QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of Statutory Instrument (SI) 2006 No. 206 and the individual is employed by one of the employers participating in the scheme.
The QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of SI 2006 No. 206 to provide benefits in respect of past service and the individual is employed by that international organisation.
UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer UK tax will be refunded if the individual made a taxable transfer and, within five tax years, one of the exemptions applies to the transfer the scheme administrator of the registered pension scheme, or the scheme manager of the QROPS making the transfer, is jointly and severally liable (with the member) to the tax charge and, where there is a tax charge, they are required to deduct the tax charge and pay it to HM Revenue & Customs (HMRC). This applies to scheme managers of former QROPSs that make transfers out of funds that have had UK tax relief if the scheme is a QROPS on, or after, 14 April 2017 and at the time the transfer to the former QROPS is received payments out of funds transferred to a QROPS on, or after, 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident
It will take some time to understand how these changes work in practice.
These significant changes are in addition to the changes previously announced.
The requirement that at least 70% of a member’s fund must be used to provide an income for life will be removed from the conditions that a pension scheme has to meet to be an ‘overseas pension scheme’ or a ‘recognised overseas pension scheme’, thereby enabling such a scheme to provide flexi-access drawdown.
To limit abuse, rules are in place that a tax charge may apply to individuals who have been resident outside the UK for less than 5 years. This period is to be extended to 10 years.
Where a foreign pension or lump sum is paid to a UK resident, 100% of the pension arising will be chargeable to UK tax (to the same extent as if they had been paid from a registered pension scheme).
There is a very niche group of overseas individuals who may have pension benefits under Section 615 of ICTA 1988. No new schemes can be accepted from 6 April 2017, and no further contributions can be made to existing schemes from that date.
Tax avoidance
Promoters of tax avoidance schemes (POTAS)
The Finance Act 2015 introduced changes to legislation to ensure that promoters of such schemes could not use associated or other new entities to circumvent the intention of the POTAS legislation. The Government clearly believes that the 2015 legislation didn’t go far enough and they are therefore introducing changes to Part 5 and Schedules 34 and 36 Finance Act 2014.
The amendment introduces the term ‘significance influence’ to ensure that promoters of schemes cannot re-organise their business so that they put a person between themselves and the promoting business. The change provides greater clarity and strengthens the Government’s commitment crackdown on tax avoidance schemes.
Disclosure of indirect tax avoidance schemes
The Government will legislate in the Finance Bill 2017 to strengthen the regime for disclosure of Indirect Tax Avoidance. Scheme promoters will primarily be responsible for disclosing schemes to HMRC in respect of indirect taxes.
Strengthening Tax Avoidance sanctions and deterrents
The Government will legislate in the Finance Bill 2017 to introduce a new penalty for individuals or entities who enable the use of tax avoidance arrangements which HMRC later defeats.
Offshore evasion: requirement to correct previous non-compliance
The Government will legislate in the Finance Bill 2017 to apply a new ‘requirement to correct’ for those who have failed to declare UK tax on offshore interests. Tougher sanctions will be applied for those who fail to this so before 1 October 2018.
Other changes
Trading and property income allowances
The Government will legislate in the Finance Bill 2017 to create two new income tax allowances of £1,000 each for trading and property income. The allowances can be deducted from income instead of actual expenses.
What we already knew
The government already announced a number of changes which would come into effect from the 6 April 2017. Our article provides some detail which includes the changes to the domicile rules.
The information provided in this article is not intended to offer advice.
It is based on interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.
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