The March 2020 Budget introduced some very significant changes, and these may affect your life as a busy professional. If you are saving for retirement, have a mortgage, run a business, or are involved in IR35, then this blog is for you.
This blog post will summarise the key points of the Budget, condensing them into six easy-to-digest topics so you can easily find the information most relevant to your own circumstances. The plans you had in place may face significant changes, but, depending on your situation, you might get away with minor tweaks.
Ignoring the Budget’s content and the changes it brings may lead to serious consequences for you, so it’s essential to know what changes the new Budget brings.
If you have a high income, making the right pension contribution has long been a challenging and complex process. Unfortunately, the rules regarding contributions have changed yet again. According to the latest data from HMRC, there are about 4.3 million UK taxpayers in the higher and additional rate tax bands, and 80% of these earners are under the age of 65.
This Budget had to adapt to the current situation regarding COVID-19. As in so many other areas, COVID-19 meant that extraordinary measures were required. There will likely be another Budget in Autumn 2020, and future taxation to reduce national borrowing may be a major factor of the new Budget.
Tapered annual allowance - increases to the threshold and adjusted income levels
In a mission to reduce the pension savings of high earners, the UK Government introduced a tapered annual allowance scheme in April 2016. The taper applied if you had total taxable income (less your own pension contributions) over £110,000 and a total taxable income over £150,000 (including employer contributions). Under 2019/20 rules, the annual allowance started to reduce once the £150,000 limit was exceeded, and tapered to a minimum of £10,000 once adjusted income reached £210,000 or more.
Each year, those not subject to the taper could have total tax-efficient contributions (including employer contributions) of up to £40,000 gross. This excludes any carry-forward provision. In addition to the annual allowance limit, there is a limit on personal tax-relievable contributions of 100% of your earnings or £3,600 if more.
The tapering rules can make pension payments a complex area for high earners (or for their accountants and financial advisers).
Fortunately, these thresholds have increased significantly. They have both been increased by £90,000, bringing the £110,000 and £150,000 thresholds up to £200,000 and £240,000 respectively. This means that only people with adjusted income over £240,000 (and threshold income over £200,000) will see their annual allowance tapered. The minimum taper has also been reduced from £10,000 to £4,000. This reduction will affect those with a total income of over £300,000 (including employer pension payments), with the minimum £4,000 applying once adjusted income reaches £312,000.
Many businesses have contacted their employees to see if their payments should be limited to £10,000. If the new taper means you have an annual allowance above or below £10,000, you may wish to contact your employer and have it changed.
Postponement of IR35 changes for the private sector
This legislation originally meant that starting from 6 April 2020, medium and large businesses would be responsible for deciding the employment status of their workers. Primarily, they would be held responsible for ensuring that, if an individual would be an employee if they were providing their services directly, they pay broadly the same tax and national insurance as a full employee. This had previously been decided by contractors.
This may harm self-employed consultants and contractors, as they may need to be treated as salaried employees rather than enjoying the flexibility that comes with being self-employed. Due to COVID-19, however, this legislation has been deferred until April 2021.
Depending on your industry, this deferral may be good or bad news. The government’s provisions for the self-employed under the COVID-19 support package may see your earnings decrease.
Entrepreneurs’ relief limit lowered to £1 million
This relief has been cut from a lifetime limit on gains of £10 million to £1 million. Gains on the sale of businesses that qualify for this relief are taxed at a capital gains tax rate of 10%.
The relief cost the treasury £2 billion a year, and about 75% of this money went to just 5,000 people. This benefit was expensive, ineffective, and did not work to support entrepreneurs.
The new £1 million limit should be beneficial for roughly 80% of business owners. This change came into effect for sales on or after the 11 March 2020.
Tax relief on mortgage interest – no higher rate tax relief on rental income
Before April 2017, it was possible to deduct mortgage interest payments from rental income for tax purposes, meaning that tax relief of up to 45% was available.
This has now been phased out completely, and from April 2020 you will no longer be able to deduct mortgage interest payments from rental income. Instead, a 20% tax credit will be given against mortgage interest payments. This will affect higher and additional rate taxpayers.
An illustrative example may help visualise this. It assumes rental income of £1,000 per month and mortgage interest payments of £600, where higher rate tax would apply to the rental income. The table below shows the difference between the two policies:
|Annual rental income||Annual mortgage interest payments||Tax at 40%||Annual net income|
|Before April 2017||£12,000||£7,200||£1,920||£2,880|
|After April 2020||£12,000||£7,200||£3,360||£1,440|
Net income is calculated before any other costs of renting out the property, such as maintenance or agency fees. Of course, if you don’t have a mortgage this won’t apply to you.
It may be tempting to think about transferring your properties into a limited company. In this case, mortgage interest payments should be an allowable deduction. However, this incurs high costs (both initial and ongoing) and increased tax payments, so it will not be suitable for every landlord.
Increase to the Junior ISA limit
When children or grandchildren reach adulthood, new life events loom – going to university, or preparing for a property purchase. These events, however, can be prohibitively expensive. Putting aside savings for children and grandchildren can give them a big leg up in later life, but it is important that this saving is done tax-efficiently.
The new allowance for 2020/21 is £9,000, more than double the allowance in the previous tax year. If you saved £9,000 a year for the first 18 years of a child’s life, starting today, they could have over £200,000 in today’s money when they turn 18 (assuming a 3% growth rate). This sum does not account for the fact that between the ages of 16 and 17 they can hold both a Junior ISA and an adult cash ISA.
If the child holds a Child Trust Fund (CTF), they can have up to £9,000 paid into it. If a Junior ISA is preferred, however, the CTF funds must first be transferred to a Junior ISA before the CTF is closed. A child with an open CTF is not allowed to have a Junior ISA.
The value of investments can fall as well as rise. You may not get back what you invest.
Income tax bands remain static
The tax-free personal allowance is £12,500, and there is a basic rate tax on the next £37,500. People with a full personal allowance will pay a higher rate tax on their next £100,000 of income, and additional rate tax on income over £150,000.
The income tax rates remain static at 20%, 40%, and 45%. Only the Chancellor and his team know what will happen to these rates in the future.
A number of the changes mentioned in this article may affect you, either now or in the future. If you would like a professional opinion, please contact Capital today.
This communication does not constitute personalised advice. This is our understanding of HM Revenue & Customs practise as at 17th April 2020. The levels and bases denoted are subject to change. The Financial Conduct Authority does not regulate Tax Advice or Estate Planning.