Philip Hammond, the chancellor, used the last spring budget to raise national insurance rates for the self-employed, as part of a drive to create a fairer tax system. This was, as far as pensions and savings are concerned, a quiet budget. A budget where all those people who have to deal with the constant whirlwind of change and new pension tax rules probably breathed a big sigh of relief. At least, there is no big change programme to kick start.
But there were a few headlines to be aware of:
1. Increase in self-employed national insurance contributions
A central theme of this spring budget was how to increase the amount of tax the self-employed pay to bring them more in line with the employed. A quick answer is to raise the Class 4 national insurance contributions, paid by the self-employed. These will go up from 9% to 10% in 2018/19, and to 11% the following tax year.
This increase will be brought in at the same time Class 2 national insurance contributions are abolished. The chancellor claimed the combination of these two measures means any self-employed person earning less than £16,250 a year would see a reduction in their national insurance contributions. But for self-employed individuals who earn more this increase will leave them with less disposable income. This comes at a time when it’s becoming apparent fewer self-employed are saving for their retirement income, and increases the danger they will reach later life with little or no savings.
The treasury has also launched a wider consultation on how the tax system could be made fairer for how people are differently remunerated. It will consider taxation of benefits-in-kind, as well as accommodation benefits and employee expenses.
2. Reduction in the tax-free dividend allowance
In a surprising move, the tax-free dividend allowance is to be cut from £5,000 to £2,000 from 2018/19. The cut will impact shareholder directors and investors with significant portfolios of typically more than £50,000. These individuals may be more mindful of whether they target dividend or capital growth, and using their Isa and pension allowances will become even more important.
The tax-free dividend allowance was only introduced in 2016, and will now be more than halved in value. This sends out a confused message to those trying to save for their future. It doesn't help them set a long-term plan, as well as hitting confidence in markets. It appears a regressive measure which penalises prudent savers and investors as well as entrepreneurs and small business owners. A classic sledgehammer to crack a nut.
3. Reduction in MPAA
The treasury confirmed it will go ahead with the reduction in the money purchase annual allowance (MPAA) from £10,000 to £4,000 from 6 April 2017. This will affect all those who have triggered the MPAA since April 2015 – mainly by taking flexi-access drawdown income or an UFPLS (uncrystallised funds pension lump sum) – or will trigger it in the future.
This follows a consultation to assess the impact the reduction would have. It’s disappointing that as most of the industry were against the reduction the government has gone ahead with it anyway.
There are many examples why a reduced MPAA is unfair. But strikingly, it sits at odds with the key government policy of encouraging people to work for longer, as it will restrict people who want to merge working with taking some retirement income to continue to save into their pensions. It shows on pensions freedom the government is talking the talk, but not walking the walk.
4. New charge for some QROPS transfers
There will be a new 25% charge on QROPS transfers, unless they are made within the EEA or the QROPS is provided by the individual’s employer. The charge is effective from 9 March 2017, and will be deducted before the transfer by the scheme administrator.
Furthermore, the treasury is awake to the fact some people may transfer to one QROPS and then transfer to another merely to avoid the charge, and has announced measures to forestall this practice.
This is a real crackdown on those pension transfers made overseas just to gain benefit of different tax regimes. Any new requests to transfer overseas will face a 25% charge unless the transfer is for ‘genuine’ reasons. Situations such as where the person wants to transfer their pension to their new employer’s scheme, or to a pension scheme in the EEA are all allowed without charge. But where the transfer is to merely take advantage of different pension tax rules the chancellor is coming down heavy.
5. Pension Freedom statistics
Finally, the treasury has published what revenue it expected pension freedom to raise, compared with how much money it actually received. And the results make startlingly reading.
The treasury initially estimated pensions freedom would raise around £0.3 billion in 2015/16 and £0.6 billion in 2016/17. But the Government actually received £2.6 billion (£1.5 billion in 2015/16, and an estimated £1.1 billion in 2016/17). Almost three times its original estimate.
Seeing it got these figures so badly wrong, we now need nuanced research to get a better idea of who is withdrawing what type of pension money and what they are doing with it.
Sanlam's technical team has also provided a summary of the key highlights. We hope you enjoy reading them.