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Summer Budget outcomes

09 July 2015

Reviewing the likely impact on savers and investors post the Summer Budget

Rosie Murray-West, independent personal finance journalist, writes here about the key points impacting savers and investors announced in yesterday’s Summer Budget.

George Osborne delivered what he called a ‘Security First’ Summer Budget, revealing a wide-ranging package of measures that he said were aimed at making “necessary steps for the whole of the UK”.

But what will these measures mean for the finances of British households? Here are some of the main points*.

Dividend Tax Changes 
In a welcome move for those with equity investments, the Chancellor introduced new tax rates for dividend income, along with a tax-free allowance of £5,000 for dividends. This will benefit 85 per cent of those who receive income from dividends.

“This reform will take those with modest dividend income out of the dividend tax system altogether,” explained Iain McCluskey, tax partner at PWC. “It is a welcome simplification for the taxpayer who has some investments in shares.”

If you are considering purchasing shares, including to take advantage of the £5000 dividend allowance, Selftrade** offers competitive sharedealing services. For more information, go to selftrade.co.uk. 

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.

Inheritance Tax Allowance rises to £1m 
Inheritance Tax (known as IHT) is paid at 40pc on estates worth over £325,000, and this rate has remained frozen for 6 years.

As widely trailed, Osborne introduced an extra £175,000 inheritance tax allowance on main homes. This is transferrable between spouses and there will be a mechanism to ensure that the allowance is not lost if couples choose to downsize from their main home. As a result, couples passing down an estate worth £1m to a child or grandchild will be able to do so without the beneficiaries paying IHT. This measure will come in gradually, rising to the full £1m by 2020.

Additional rate pension allowance is cut 
Additional rate taxpayers, ie those earning over £150,000, will be able to put less into their pension and still gain tax relief. Mr Osborne indicated that the amount that an additional rate taxpayer could put in and gain relief (the Annual Allowance) will be tapered dependent on income down to just £10,000 a year.

This could potentially cost high earners £13,500 a year.  However, the new measure comes in in April 2016, giving additional rate taxpayers the chance to take advantage of putting in the maximum £40,000 a year in pension contributions this financial year.

Other pension changes 
The start of a secondary annuity market – to allow people to sell on existing annuities for cash – has been delayed until 2017, which may be disappointing for some who had hoped to switch a guaranteed income for a cash lump sum in the coming year.

The government also published a Green Paper looking at major changes to pension tax relief, suggesting an Isa-style system where savers pay tax on their pension when they put the money in, but not when they get it out. This would be a radical change, but the Government has pledged to look at this carefully before deciding.

The Government’s free Pensionwise guidance has been extended to those in their fifties, to give people more time to plan their financial futures.

Buy to let becomes less attractive 
Following fears of a ‘buy to let boom’ as pensioners who now have far more freedom over what to do with their retirement savings use them to invest in buy to let property, the Chancellor moved decisively to take the heat out of the market.

His decision is to restrict the tax relief that landlords receive on mortgage interest payments to basic rate relief only, at 20pc. This makes buy-to-let less attractive to higher-rate taxpayers. However, the move will be phased, starting in 2017 which gives current buy-to-let landlords some time to get used to it and prospective landlords time to do the sums.

But having a lodger is more attractive 
The government’s Rent a Room Scheme, which allows homeowners to take tax-free income from renting out a room in their homes, has become far more attractive.

Previously homeowners could rent a room and receive £4,250 tax free, a rate that had been frozen for 18 years. However, this has now risen to £7,500, reflecting rising house prices.

Income tax changes 
The Chancellor announced above-inflation rises to both the personal allowance, which is the amount you can earn before tax kicks in, and the basic rate tax allowance. The new basic-rate tax band is £43,000, while the personal allowance is now £11,000, up from £10,800. These new thresholds come in next April. This takes more people out of the higher-rate tax band, and goes some way towards the Conservative Manifesto pledge of raising the basic-rate threshold to £50,000.

Insurance will become more expensive 
Mr Osborne announced an increase in insurance premium tax (IPT), from 6pc to 9.5pc. IPT is paid by customers on many insurance policies, and Kevin Pratt, insurance expert from comparison site Moneysupermarket, calculates this will put the taxation on home and car insurance premiums up by 60 per cent, adding £35 to the cost of insuring a home and two cars for a family (based on an average home insurance premium of £115 and an average car insurance premium of £445).

Other important measures
In a Budget full of changes, savers should also consider the following measures:

  • A new National Living Wage, starting at £7.20 and rising to £9 an hour by 2020, replaces the National Minimum Wage;
  • A tightening of the rules surrounding non-domiciled residency;
  • The replacement of student maintenance grants with larger student loans;
  • Welfare changes that will see a four-year freeze on working-age benefits and tax credits limited to the first two children;
  • Housing benefit will be withdrawn from those aged between 18 and 21;
  • 30 hours a week free childcare for three and four year olds.

* Source: https://www.gov.uk/government/publications/summer-budget-2015

Equiniti Financial Services Limited ('EFSL') does not provide investment advice. This article is written by Rosie Murray-West, an independent personal finance journalist, and is not the view or opinion of EFSL and EFSL accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

** This article provides a link/ advertisement to Selftrade®; a trading name licensed to Equiniti Financial Services Limited. Please note that if you choose to use Selftrade, you are responsible for reviewing and abiding by the privacy policies of this website.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.