Tax and NI treatment of termination payments to be aligned.

Mark Groom, tax partner at Deloitte, comments on the proposal to align the tax and National Insurance Contributions treatment of termination payments from April 2018:  Income tax relief will continue to apply to qualifying termination payments up to £30,000 exemption.  This proposal will mean that both tax and National Insurance Contributions will apply to termination payments above £30,000.  The government expects to raise around £420M of National Insurance Contributions per annum from 2018/19.

The government also wishes to ‘tighten the scope of the exemption to prevent manipulation’. It is not yet clear what this will entail and a detailed technical consultation will follow. This could include new rules that would exclude ‘payments in lieu of notice’ from relief, whether or not those payments are contractual.

The proposal is simple and a positive step toward tax and National Insurance Contributions alignment; however, the change in tax/NI treatment will still result in significant additional costs for employers.  There is no mention of a phasing in period which would have benefitted large organisations with long established redundancy programmes; however, this is compensated by the long lead in time before coming into effect in April 2018.

A budget for savers and investors

In his Budget two years ago, George Osborne stood up and announced the pension freedom reforms. Today, he has given a major lift to the ISA system. He has also reduced the amount of capital gains tax investors will pay on their profits, apart from buy to let landlords. Overall this was a budget which savers and investors will cheer because they can keep more of their money out of the hands of the taxman. 

Measures to help savers and investors 

• The ISA limit is increasing to £20,000 in April 2017.
• A new Lifetime ISA will be introduced in April 2017. This £4,000 allowance will form part of the £20,000 total ISA allowance. It will be available for under 40s which includes a £1 government top up for each £4 saved. Investors can withdraw this fund tax-free to buy their first house or otherwise to use in retirement (after the age of 60). However there will be a 25% tax charge if they withdraw it under any other circumstances (except terminal illness).
• Capital gains tax has been cut by 8%.
• Pensions tax relief has been left alone, so there is still a big up-front incentive to save into a pension. 

Tom McPhail, Head of Retirement Policy, Hargreaves Lansdown: ‘ISAs have been a hugely popular savings vehicle for many years now, and today they just got even better. Investors will now be able to shelter even more of their savings from the taxman in a conventional ISA, and the new Lifetime ISA adds an extra string to the ISA bow, to help people get on the housing ladder, or boost their retirement income.

The only note of caution we would sound is that the government needs to make sure that the implementation of the Lifetime ISA doesn’t add too much complication to the system. One of the keystones of the success of ISAs has been their simplicity, and consumers won’t want to see this change.

As anticipated the Chancellor has left pension tax relief alone, so there is still a big upfront incentive to save into a pension, particularly where there is an employer contribution too. We are mindful that we haven’t yet had a formal response from the Treasury to the pension tax consultation, so ultimately the future of tax relief still has a question mark hovering over it.

The new Lifetime ISA will help to supplement the existing pension system, and will be particularly attractive to self-employed people, who have been left behind by the private pension system. Indeed pension saving amongst the self-employed has collapsed in recent years, with just 10% of them now saving for retirement in a pension.

Similarly many under the age of 40 have wrestled with the tough choice of whether to save for retirement or to save for a first home. The new Lifetime ISA helps to address these problems by letting them keep their options open.

Investors will also be glad to see a cut in capital gains tax which will mean they are able to keep hold of more of their profits. However residential property will retain the current higher rates of capital gains tax, which is another kick in the teeth for buy to let landlords who are also facing higher stamp duty and bigger income tax bills.’

Economics

Ben Brettell, Senior Economist, Hargreaves Lansdown: ‘UK economic growth has been revised down significantly, but the Chancellor was at pains to point out that the UK economy is the best of a bad bunch, with growth slowing across most of the globe. Lower growth means lower tax receipts, but the Chancellor is planning to make £3.5 billion of cuts by 2020 in order to make good on his promise of a budget surplus.

One potential fly in the ointment is the forthcoming referendum on membership of the EU. If the country votes to leave, that is likely to prompt the OBR to take a red pen to the growth forecast once again, and could leave George Osborne struggling to balance the books by the end of this parliament.’

Markets and investment

A number of policies will affect stock market investors. The cut in corporation tax will be positive for UK companies when it arrives, and the changes to oil and gas taxes will help companies operating in the North Sea. The government has also announced it will revive the public offer of Lloyds shares in 2016/2017.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘Broadly speaking this has been a positive budget for UK businesses, with cuts to business rates and corporation tax coming down the line. The reduction in oil and gas taxation will help an industry which is struggling to cope with lower commodity prices, and both Shell and BP saw their share price rise on the back of the announcement. As helpful as the tax breaks will be, both those companies would much prefer to see a higher oil price though, because that is the key factor in their profitability. The Chancellor also confirmed that the sale of Lloyds shares to the public will go ahead in 2016/2017, though we don’t think it will happen before the EU referendum in June. As with the economy at large, the Chancellor is at the mercy of forces outside his control here. If the market turns south in the next year he may find it difficult to bring Lloyds shares to market while at the same time breaking even on the taxpayer bailout.’

Budget 2016 – The Pension Perspective

Pension tax relief escaped unharmed but some tweaks in the Budget do impact on pensions;

• Lifetime ISA
• Auto-Enrolment Impact
• Access to Advice
• Pension Wise Extended
• Salary Sacrifice
• Pension Dashboard
• Lifetime ISA

A new Lifetime ISA will be introduced in April 2017. This £4,000 allowance will form part of the £20,000 total ISA allowance. It will be available for under 40s which includes a £1 government top up for each £4 saved, investors withdraw this fund tax-free to buy their first house or otherwise to use in retirement (after the age of 60)

Tom McPhail, Head of Retirement Policy, Hargreaves Lansdown: ‘ISAs have been a hugely popular savings vehicle for many years now, and today they just got even better. Investors will now be able to shelter even more of their savings from the taxman in a conventional ISA, and the new Lifetime ISA adds an extra option to help them get on the housing ladder or boost their retirement income.

The only note of caution we would sound is that the government needs to make sure that the implementation of the Lifetime ISA does not add too much complication to the system. One of the keystones of the success of ISAs has been their simplicity, and consumers won’t want to see this change.

As anticipated the Chancellor has left pension tax relief alone, so there is still a big upfront incentive to save into a pension, particularly where there is an employer contribution too.  We are mindful that we haven’t yet had a formal response from the Treasury to the pension tax consultation and that over the longer term, the new Lifetime ISA could yet evolve to replace the pension system.

The new Lifetime ISA will help to supplement the existing pension system, and will be particularly attractive to self-employed people, who have been left behind by the private pension system. Indeed pension saving amongst the self-employed has collapsed in recent years, with just 10% of them now saving for retirement in a pension.

Similarly many under the age of 40 have wrestled with the tough choice of whether to save for retirement or to save for a first home. The new Lifetime ISA helps to address these problems by letting them keep their options open.’

Auto-Enrolment Impact

The introduction of the Lifetime ISA may accelerate opt-out rates from workplace pensions amongst the under 40s.

Nathan Long – Senior Pension Analyst: ‘We may see an increase in the number of people aged under 40 opting out from their workplace pension as the carrot of a 25% savings uplift to get a foothold on the housing ladder proves irresistible. However, the power of inertia and the twin financial benefits of tax relief and employer contributions by no means make this a certainty.’

Access to Advice

With the introduction of another long term savings product, access to quality guidance and advice becomes even more important. So as not to disappoint the Government has announced two measures;

• An increase from £150 to £500 to the employer funded advice cost that is exempt from tax and National Insurance.
• A consultation will take place on introducing a Pensions Advice Allowance. Broadly this will allow those aged under 55 to access up to £500 from their pension to pay for advice. Essentially the cost of advice would become;
• £400 for a basic rate tax payer
• £300 for a higher rate tax payer
• £275 for an additional rate tax payer

Nathan Long – Senior Pension Analyst: ‘Any actions that are taken to improve the take up of quality guidance and advice has to be a good thing. Whilst the £150 limit has acted as a barrier for some employers to offer help in this area, there are not many who will have the resources to offer paid for advice for staff. Advisers already have the ability to take fees from client pensions to pay for advice and so any Pensions Advice Allowance may just bring this more into focus. We expect to see limited advice propositions developed to cater for this new £500 allowance.’

Pension Wise Extended

The Government announced it will re-direct funds from the Money Advice Service to expand Pension Wise. Nathan Long – Senior Pension Analyst; ‘It is hardly a surprise that the extension of Pension Wise comes at the expense of the Money Advice Service which has consistently failed to demonstrate value for money. The bigger remit, allowing access to guidance throughout the period spent saving for retirement rather than only at the point of taking money out, will allow members to influence the size of their final pension pot and crucially how much they have to get by on in retirement.’

Salary Sacrifice

The Government intends to look at the increased use of salary sacrifice in providing benefits, however their ‘intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.’ Nathan Long – Senior Pension Analyst; ‘Research from early this year found a significant majority of employers were worried about the Government pulling the plug on salary sacrifice’s role in the pension system. This news should provide a crumb of comfort for embattled employers.’

Pension Dashboard

Confirmation came in the Budget that the Government will indeed take the lead on ensuring the creation of a Pension Dashboard so people can view all of their pension savings in one place. This is planned to be launched by 2019. Tom McPhail – Head of Retirement Policy; ‘We welcome the Treasury’s announcement that they are going to take a lead on the development of the Pension Dashboard. The strength of the industry’s support for the Dashboard is matched only by its inability to actually agree who’s going to build it and how; hopefully the Treasury’s leadership will make the difference in getting this project off the ground.’

Budget – employment law

Responding to Chancellor George Osborne’s Budget announcement regarding employment law, Karen Plumbley-Jones an employment expert at law firm Bond Dickinson LLP said:  “There wasn’t a huge amount in the Chancellor’s speech today regarding employment law however employers will be concerned about termination payments costing them more in the future. There was some good news in relation to the top up of apprenticeship levies”.