Financial Planning – Current Hot Topics

Current Hot Topics

With the Chancellor’s budget on 16th March and the tax year end on 5th April, now is the time to take a quick look at a few financial planning hot topics.

Pension contribution tax relief

Press speculation suggests that the Chancellor’s 2016 Budget, which will be unveiled on 16 March, may change the current system of tax relief on pension contributions, whereby relief is granted at the saver’s marginal tax rate.

This means that someone paying tax at 45% currently pays only £55 for every £100 received into their pension fund, whereas someone paying tax at 20% pays £80 for every £100 received into their pension fund.

Consequently, relief is currently going to those least likely to need an incentive to save for their retirement.

Two alternatives are being considered: either to replace the current system with one which provides a flat rate of relief, of say 30%, to all pension savers; or, more radically, to place pensions on the same footing as ISAs and to provide tax relief on withdrawals rather than contributions.

The second alternative seems the less likely, since it would remove the incentive to save; while the first option would have the advantage of providing a 10% up-lift on contributions by 20% taxpayers.

The new State pension

With effect from April 2016, the current basic State pension and the additional State pension (previously known as SERPS – the State Earnings Related Pension Scheme) are to be merged into one single-tier scheme.

Coinciding with the change, the basic State pension will rise from £115.95 per week to £119.30 per week, though the full entitlement will depend on National Insurance contributions or credits having been accrued for 35 years.

The £100,000 tax threshold

The personal tax allowance is reduced gradually when income exceeds £100,000 p.a. and ceases to be available when income reaches £121,200.

Now, the income level above which childcare benefit ceases to be available is to be reduced in April 2016 from £150,000 to the same £100,000 limit as applies to the personal allowance.

One way of avoiding these restrictions is for the taxpayer to arrange with his or her employer that a proportion of their salary should be paid as a pension contribution – an arrangement known as ‘salary sacrifice’.  However, the Government is thought to be considering whether put a stop to the practice.

Tax on interest and dividends

From 6 April 2016, banks and building societies will no longer deduct tax at source on the interest they pay. Instead, the first £1,000 of interest received in any tax year will be free of tax for basic rate taxpayers, while higher rate taxpayers will receive an allowance of £500 and additional rate taxpayers will receive no allowance at all.

Also from 6 April, the current system under which dividend payments receive a 10% tax credit is to be replaced by one under which they will be taxed in full, but investors will be entitled to receive dividends totaling £5,000 per year tax-free. Any excess over £5,000 will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Duncan R Glassey
Senior Partner – Wealthflow LLP

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