Tony Wickenden: Budget implications for financial planning

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I interrupt the current series of articles on the diverted profits tax with this important news bulletin on the summer Budget. You know when you have those “top five” dinner table challenges (top five Tamla songs, ska albums, Small Faces albums, Thierry goals – that sort of thing)?

Well, you could do the same in relation to the Budget: the top five proposals of direct or indirect relevance to financial planners.

Okay, it is all a bit subjective, but I am going to accept the challenge. My five proposals consist of two in this week’s column, with the rest to be continued in my next instalment.

Number one: Dividend tax changes

On the face of it, this is a simplification move. At its core, however, it is a dagger to the heart of SME owners remunerating themselves by dividend, rather than salary. Over the years, various kites have been flown on how HM Revenue & Customs can get more from those paying themselves by dividends as a salary substitute. While recategorisation, substance over form and some form of targeted National Insurance contributions charge have all been debated, all of these kites have crashed to earth after a short time airborne.

This latest proposal (to take effect from 6 April 2016) is quite elegant in its simplicity. No more tax credits, no grossing up, no deduction of credits from the liability calculated on the grossed-up dividend.

Instead, a simple £5,000 tax-free dividend allowance and then 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers on the excess taxable dividend received.

Basic rate taxpayers will be worse off once dividends exceed £5,000, higher rate taxpayers once dividends exceed about £22,000 and additional rate taxpayers when they exceed about £25,000.

SME owners with dividends exceeding these sums will find they are worse off, albeit still better off than if they took their pay by way of a salary.

It may be the narrower degree by which they are better off will widen once the corporation tax rate drops again in 2017 and 2020, but make no mistake – a substantial part of the £2bn target for this tax change will be delivered by SME owners. It is a clever move on the part of HMRC.

Advisers should use the period between now and 6 April to discuss strategies. There has been no reference, to date, to any anti-forestalling measures. The detail is likely to be in the Finance Bill 2016 (not the Summer Finance Bill) and we will probably have to wait until after the Autumn Statement for that.

Currently, it is not clear how dividends received by trustees and life companies will be taxed under the new rules.

Number two: Pension proposals

The speech provided confirmation on a number of pension matters, such as the £1m lifetime allowance from 6 April, CPI linking of the lifetime allowance from 2018, death benefits taxed at the beneficiary’s marginal rate(s) from 6 April, and tapering down of the annual allowance to a minimum of £10,000 for those with adjusted income between £150,000 and £210,000 and total income in excess of £110,000.

It also announced changes to pension input periods and pushed the development of the traded annuity market back to 2017.

Oh, and it introduced a green paper considering the reform of pensions tax relief. This is big news. The high cost of pensions tax relief (£50bn) has generated an official response.

In the past couple of weeks, we have had their two pennies’ worth from the Pensions Policy Institute, the Centre for Policy Studies and the past and present pensions ministers mooting everything from flat rate relief and lifetime savings accounts to a shifting of the tax scheme from the exempt-exempt-taxable model that currently applies to pensions to the taxable-exempt-exempt model that applies to Isas.

There is also a strong suggestion that incentivising and supplementing savings is more motivational than tax relief. There are some big issues here and it will be interesting to hear more.

So there is plenty for advisers to discuss with clients ahead of 2016. Meaningful action on dividend and pension planning is certain to be required for some between now and the end of the tax year. Being fully informed on what all these changes could mean for your clients is not an option, but a necessity.

Tony Wickenden is joint managing director at Technical Connection