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Technical View

Making the most of the allowances

When the stripped down version of the Finance (No. 2) Bill went through Parliament, most people assumed that it was a temporary cull and that once the Conservative Government had been re-elected with a larger majority, these measures would be gradually reintroduced.  After the shock election result, and with Theresa May now having to form a minority government with the support of the DUP, it will be much more of a challenge for her to push through any significant or controversial changes.

So, what did the election result tell us about the future of Financial Services over the next 12-24 months?  Apart from the DUP and the Conservatives disagreeing over whether to keep the triple lock, not a lot. 

What it did tell us is that:

  1. There is no such thing as a safe bet.

  2. In the increasingly unpredictable world we live in, it’s always a good idea to make the most of what you have now as it could change at any moment.

So how does this translate to Financial Services? 

 

With Brexit at the forefront of the Government’s hive mind for the foreseeable future, it is unlikely that we will see any major changes approaching the scale of the pension freedoms of 2015.  However, the Government still needs to find extra cash from somewhere so it is entirely possible that this could be done through reduction of some allowances, and / or restrictions (or further restrictions) on others. 

With that in mind, let us take you through some of the main allowances that you may wish to discuss with your clients in the coming weeks and months.  It may well be a case of use it or lose it.

Pensions

 

The Lifetime Allowance (LTA)

Currently set at £1m, the LTA is one of the allowances that have taken the biggest beating in recent years.  In 2011/12 tax year it was £1.8m and within 5 years it fell by £800,000.  There are protections available (Fixed and Individual Protection) for those who had pension savings above the £1m allowance as at 05/04/2016 - further details of these can be found in our previous Technical View.

Annual Allowance (AA)

The Annual Allowance is currently £40,000.  Note that this is the case for those whose threshold income is below £110,000 and have not flexibly accessed their DC benefits.  It is possible to use carry forward of unused allowances, provided that the individual concerned has been a member of a registered UK pension scheme in the current and up to previous three tax years.  More information on carry forward.

Money Purchase Annual Allowance (MPAA)

Currently £10,000 – the plan to reduce this to £4,000 was one of the points culled from the Finance Bill. 

Once an individual has flexibly accessed any of their DC pension pots, they will be subject to the MPAA.  They will still have the remainder of their normal annual allowance (up to £40,000 for the current tax year depending on level of income) for any DB schemes of which they are a member.  Note that the MPAA does not apply if an individual takes PCLS only.  Once it does apply, it applies to all DC schemes that the individual is a member of, even if they have not flexibly accessed benefits from all of them. 

It is also not possible to use carry forward of unused allowances for the MPAA so in order to make full use, it needs to be maximised each year.

Tapered Annual Allowance

This restricts back the annual allowance for those whose income is over a certain limit.  In order to determine whether an individual is subject to the tapered annual allowance, they will first need to work out their ‘adjusted income’ and ‘threshold income’ levels.  Note that if their threshold income is below £110,000, they will not be subject to the tapered annual allowance.  If their adjusted income is more than £150,000, their annual allowance will reduce by £1 for every £2 of income over the £150,000, subject to a minimum tapered annual allowance of £10,000. 

Investments

 

Dividend Allowance

The current tax-free dividend allowance is £5,000.  Like the MPAA, there was a plan to reduce this to £2,000 but it was also culled from the Finance Bill.  These changes were due to come into effect from 2018/19 tax year so we may see this resurface before then.  Whether it gets through Parliament will be a different matter. 

Personal Savings Allowance

Basic Rate Taxpayers and Higher Rate Taxpayers have a personal savings allowance of £1,000 and £500 respectively.  This includes all interest paid by banks and building societies (which is now paid gross), interest distributions from authorised unit trusts, investment trusts and OEICs, income from Gilts or company bonds, and most purchased life annuity payments (up to the respective limit across all of the above). 

Income from any financial services product which is already tax free, such as ISAs or certain NS&I products, do not count towards the limit.
Chancellor Philip Hammond has already announced that there will be no Summer Budget (although take that with a pinch of salt given the amount of times we were told there would be ‘no snap election’), so there is time to take advantage of all of the above before any further changes are announced.

We hope that you find this useful in discussing options with your clients, if you have any queries regarding particular cases you are dealing with, feel free to email technical@sanlam.co.uk

A PDF version of this article is available.

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document are based on current tax law and HMRC practice as at June 2017 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should always be sought.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.