Posted on: 24-05-2016
Basic rate tax payers benefit from a lower rate of tax relief (20%).
Rarely has there been a Budget that has generated as much media coverage as the one unveiled in March, but what’s
hidden behind the headlines?
It would be fair to assume that Chancellor George Osborne’s eighth Budget speech will go down as his most memorable.
In the weeks leading up to it, there had been a great deal of speculation he was about to radically alter the pension tax relief rules. In the end reforms in this area remained off the table, but a row over cuts to disability benefits prompted plenty of damaging headlines for the government.
Yet as that high profile fall out rumbled on, away from the spotlight the Budget presents some interesting possibilities for growing your finances and minimising the amount of tax you pay. And with the government not exactly ruling out changing those pension tax relief rules in the long-term, there could be a pressing need to act quickly.
This is because the idea that had been mooted was to introduce a flat rate of tax relief, which would have spelt bad news for higher rate tax payers. At present, they benefit from 40% tax relief on what they pay into a pension, which can significantly strengthen the size of their pot. For every £6,000 they save, tax relief tops it up to £10,000. Basic rate tax payers benefit from a lower rate of tax relief (20%).
With the pension freedoms opening up your options for using your defined contribution pension from the age of 55, the tax relief paid on contributions makes pensions a very attractive way to save for the future – you don’t even have to use a pension wrapper to specifically save for retirement.
There are no guarantees that 40% tax relief will remain indefinitely, so if you are a higher rate tax payer you may wish to consider making the most of it while you can. Elsewhere, Osborne announced that the rate of capital gains tax would drop from 28% to 20% (for higher rate tax payers) and 18% to 10% (for basic rate tax payers). Capital gains tax is paid on gains you make from selling possessions worth more than £6,000 or from investment growth. You have an annual allowance of £11,100, above which capital gains tax is applied. This change took effect on 6 April 2016, and means you will pay less tax on returns above your allowance.
Osborne is raising the annual ISA allowance next year too, from £15,240 to a considerable £20,000. The personal allowance thresholds on the rate that income tax is charged will also continue to rise in April 2017. The tax-free element will be increased to £11,500, and the amount before you pay higher rate tax will be raised to £45,000.
This combination of the pension tax relief remaining in place, the drop in the capital gains tax rate, the raising of the ISA allowance and the change in personal allowance thresholds means there are more opportunities to reduce the amount of tax you are paying on your personal finances. A new personal savings allowance was also launched this April, meaning basic rate tax payers no longer pay any tax on the first £1,000 interest earned – and higher rate tax payers won’t have to pay tax on the first £500 of interest earned.
Osborne announced that the rate of capital gains tax would drop from 28% to 20% (for higher rate tax payers) Osborne is raising the annual ISA allowance next year too, from £15,240 to a considerable £20,000 Basic rate tax payers benefit from a lower rate of tax relief (20%).
The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future. The Financial Conduct Authority does not regulate taxation advice.