The first Finance Act of 2017 went through parliament at break-neck speed due to last year's snap election. Several clauses were dropped to enable a stripped-down bill to pass before parliament broke for the election.
Since then, some of the dropped clauses have been reintroduced, and the Finance Act 2017 (2) received Royal Assent on 16 November.
So which clauses has the government resurrected, and what are the financial planning implications of the latest amendments?
The reduction of the money purchase annual allowance (MPAA) from £10,000 to £4,000
This has been backdated to April 2017 so clients who have accessed their defined contribution (DC) pension benefits flexibly, taken income, and contributed over £4,000 this tax year, could have an annual allowance charge.
Now is a key time to speak to your clients who have triggered their MPAA and have already contributed, or are considering contributions to their existing DC pension schemes. Remember the MPAA only applies from the date DC benefits are flexibly accessed, so any contributions paid before that date are subject to the full annual allowance, including any carried forward. Unused annual allowance cannot be added to the MPAA.
For those clients who have triggered the MPAA but may also have defined benefits (DB) pensions, they retain an alternative annual allowance of £36,000, or more where they have unused annual allowance to carry forward in respect of their DB scheme membership. Care must be taken where the client’s total pension savings are close to the lifetime allowance.
The reduction of the dividend allowance from £5,000 to £2,000 from tax year 2018/19
This will be introduced from 6 April 2018, but planning with clients should begin now. The effect of this reduction will impact a number of clients in different ways. The table below illustrates the effect this change could have on clients' unwrapped portfolios:
|Yield||£5,000 dividend allowance||£2,000 dividend allowance|
Source: Technical Connection
Depending on the client’s rate of tax, this could mean they will pay more tax next year, depending on what other income they have. It is also important to remember the dividend allowance will not reduce the total income for tax purposes, it is just charged at 0 per cent. Hence, a basic rate taxpayer could be pushed into higher rate tax with this additional income.
Legislation to implement the making tax digital initiative
The government’s aim is to make it easier to report and keep track of taxes you have paid and could be due by storing information in one place, thus reducing the need to send repeated information on different forms.
Legislate for those affected by disproportionate gains
Those who create disproportionate gains on investment bonds can have their tax bill reassessed on a just and reasonable basis. This is done by writing directly to HM Revenue & Customs (HMRC) who will review the case and decide whether the tax bill can be reduced. The application should be made within four years of the year the tax charge was made, though it may look at claims outside this period depending on the particular aspects of each case.
The new trading and property income allowances of £1,000
Where the allowances cover all of an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice when calculating their taxable profits of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.
The new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership. The allowances will also not apply on top of relief given under the rent-a-room relief legislation.
Changes to rules on deemed domicile for non-domiciled individuals
Rules relating to the deemed domicile limit for non-domiciled individuals have changed from 17 out of 20 years, to 15 out of 20 years. This will affect non-domiciled UK resident clients who are currently paying income, capital gains and inheritance tax on a remittance basis. This is backdated to 6 April 2017 so clients who will now, or could in the future be affected by this rule change will need to take specific tax advice on their overseas assets.
The income tax exemption to cover the first £500 of employer-funded pensions advice
This can be provided to an employee (including former and prospective employees) in a tax year and is effective from 6 April 2017. It covers advice on pensions, and general financial and tax issues relating to pensions, allowing individuals to make more informed decisions about saving for their retirement. The changes replace existing provisions which limited the exemption solely to pensions advice, and was capped at £150 per employee per year. The increased limit is already excluded from the scope of NICs.
For further information on the Finance Bill 2017 (2) please click here