Finance Bill 2017: Key takeaways for advisers and clients
With the Brexit negotiations taking centre stage and Theresa May’s decision to hold a snap general election throwing the usual business of Government into disarray, it was little surprise to see few fireworks following the unveiling of the Finance Bill 2017 earlier this month.
That said there were a couple of key changes introduced which could significantly impact advisers and clients…and one which might not.
Money Purchase Annual Allowance cut from £10,000 to £4,000 for the 2017/18 tax year
The UK’s pension tax relief system has unfortunately become increasingly complicated as successive Chancellors have attempted to raise revenue by paring back savings incentives for higher earners.
While the lifetime allowance (£1million), annual allowance (£40,000) and tapered annual allowance (affecting those with total income above £150,000) remain unchanged by the latest Finance Bill, the Money Purchase Annual Allowance (MPAA) has been severely cut back.
To recap, the MPAA was introduced in April 2015 amid fears the pension freedoms could be exploited by savers to ‘recycle’ their retirement pots and claim extra tax relief – potentially costing the Government money.
The MPAA limits the amount anyone who has accessed their retirement pot flexibly can save into their pension each year.
When the allowance was introduced in 2015 it was set at £10,000, but in the March 2017 Budget Chancellor Philip Hammond decided it should be cut by 60% to just £4,000 – despite the Government having no evidence of savers using the freedoms to dodge tax.
The Finance Bill 2017, which enacts the legislation, confirms the cut will effectively be applied retrospectively from April 2017 – before the rules have actually been written into law. The Revenue hasn’t confirmed how it will treat anyone who has already paid in more than £4,000 since April, but we have to assume they will chase up any tax owed.
Anyone affected by the MPAA who pays more than the £4,000 limit will have to pay tax on their excess contributions.
It’s worth noting that middle-income earners could be caught by the lower MPAA, particularly if they are being automatically enrolled into a workplace pension scheme at generous contribution rates.
If you have clients who are affected by this, it’s worth considering using other tax wrappers such as ISAs for savings over and above £4,000, where you can still pay in up to £20,000 in 2017/18 and withdrawals are free of tax.
Tax-free dividend allowance cut from £5,000 to £2,000 from April 2018
The tax-free dividend allowance was introduced by former Chancellor George Osborne in the 2015 Budget and set at £5,000. This meant someone with £100,000 in unwrapped investments could receive dividends worth up to 5% of the fund without paying any tax at all.
However, the current Government has decided the allowance is too generous and the Finance Bill confirms that from April 2018 it will be sliced to just £2,000. On the above example, that means the same £100,000 investment outside of a tax wrapper can only generate dividends of 2% before being subject to tax charges.
And those charges are not insignificant. Basic-rate taxpayers are hit with a 7.5% penalty, higher-rate taxpayers a 32.5% charge and additional-rate taxpayers a whopping 38.1% charge.
In our original example, where in 2017/18 £5,000 in dividends attracts a tax charge of precisely nothing, in the following tax year (2018/19) an investor receiving the same £5,000 in unwrapped dividends would pay tax of:
- £225 (basic-rate taxpayer)
- £975 (higher-rate taxpayer)
- £1,143 (additional-rate taxpayer)
Any client potentially affected by this might consider shifting their investments into tax wrappers like pensions or ISAs, where investment growth and dividend payments remain tax-free.
The decision will also hit small business owners, including many financial advisers, who choose to pay themselves through dividends rather than salary.