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Budget 2016 – find out all the changes that will affect your finances

By Gareth Shaw | Date 16 Mar 2016

The Budget is one of the most important days of the year, and the Chancellor’s announcements can have a significant impact on your finances. This year has been no different, with major changes announced to ISAs, tax on your investments and Income Tax thresholds. Here, Saga Investment Services explains what the changes mean for you, in plain English.

  1. Major changes to ISAs
  2. Capital gains tax halved
  3. Dividend tax changes confirmed
  4. Use your pension to pay for financial advice
  5. Earn more before you pay higher income tax

Another ISA revolution in the Budget – find out how you can benefit

ISAs should be the best friend of any saver. When you save into a cash ISA, the interest you earn is paid tax-free. When you invest in a stocks and shares ISA, you currently pay just 10% tax on the dividends you earn (which will fall to 0% from 6 April 2016) and no Capital Gains Tax if you sell your investments for a profit.

Over the past few years, the Chancellor George Osborne has sought to make ISAs even more attractive. First, he increased the ISA allowance – the amount you can contribute tax efficiently – to £15,000. Then he removed the limit on the amount you could hold in cash and made it easier to switch between cash and stocks and shares. Further changes have followed – your ISA savings, or the balance you’ve built up, can now be inherited by your spouse tax-free, and from 6 April you’ll be able to withdraw cash and replace it without it affecting your overall allowance.

You might think that the ISA revolution is over – but following today’s Budget you’d be wrong.

The Chancellor has announced another huge increase to the overall ISA allowance. It’s currently £15,240, and will remain at that level during the 2016/17 tax year. From April 2017, however, you’ll be able to invest a whopping £20,000 into your ISA, in addition to all the other flexible benefits that ISAs offer. That means you can earn more money without having to pay tax.

Find out more about our Investment ISA

The new ‘Lifetime ISA’

That’s not the only ISA news announced today. For people aged between 18 and 40, the Chancellor announced a new ‘Lifetime ISA,’ available from April 2017. This is designed to give younger savers a more flexible way to save for either a property, or retirement.

It works like this. You can save a maximum of £4,000 per year into the Lifetime ISA and the Government will add 25%, or an extra £1,000, as a bonus. Your savings will earn interest, and you can earn bonuses on savings into the Lifetime ISA each year until the age of 50.

After at least 12 months of saving, you could withdraw the money tax-free and use it to buy a property, up to the value of £450,000.

Alternatively, you could use the ISA to save up for retirement. If you don’t access the money until the age of 60, you’ll be able to withdraw the funds you’ve saved completely free of tax.

There is a catch. You can access the money at any time you like for other things, but doing so means losing the Government’s bonuses, and any interest earned on these bonuses. You’ll also be charged a 5% withdrawal fee.

While this ISA won't be available for anyone aged 41 or over, it could be a useful tool to help younger people save for the future and give families a way of helping each other financially without a big tax bill at the end.

Other changes to savings announced

There are more changes to come in the new tax year, which kicks off on 6 April 2016. The Government will introduce a new Personal Savings Allowance. This will allow you to earn up to £1,000 a year in interest tax-free, on savings outside of an ISA, if you’re a basic-rate (20%) taxpayer. If you’re a higher-rate (40%) taxpayer, you can earn £500 a year tax-free.

Keep more of your profits with changes to investment taxes

There are two ways to benefit when you invest your money. You can buy an investment at one price, and then sell it later down the line at a higher price to make a profit. This is known as a ‘capital gain’.

If you buy shares in a company, the company sometimes pays back a proportion of the profits it makes back to shareholders in the form of a ‘dividend’. These are often paid out twice a year, and can help you generate a regular income from your investments.

If you invest your money outside of an ISA, there’s tax to pay on dividends and profits you make when you sell your investments. But following on from the 2016 Budget, you’ll see the amount you pay reduced from 6 April this year. Here, we explain the changes.

Capital Gains Tax halved

If you sell your investments and make a profit, you could pay Capital Gains Tax. If the amount of profit you make exceeds your annual Capital Gains Tax allowance – currently £11,100 – you’ll pay one of two tax rates. If you’re a basic-rate (20%) taxpayer, you’ll pay 18% of the profits you make above the allowance. If you’re a higher-rate (40%) taxpayer, you’ll pay 28%.

If you’re a basic-rate taxpayer, but the profits you make when you sell your investment push you into the higher-rate tax bracket, you’ll pay the higher rate of Capital Gains Tax.

Capital Gains Tax rates are being halved from 6 April this year. The Capital Gains Tax rate is being reduced to 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers. This won’t apply when you sell a property that’s not your main home, where Capital Gains Tax will be kept at the current rates.

Dividend tax – winners and losers

Also confirmed in the Budget were changes to Dividend Income Tax. From April 6, every investor will be handed a new £5,000 tax-free dividend allowance. That means you can earn up to £5,000 a year from dividends completely free of Dividend Income Tax.

At the moment, you would need a chunky amount invested in shares to earn £5,000 a year. The dividend yield on the FTSE 100 index – which measures the performance of the shares of the biggest companies in the UK – is currently around 4%. You’d need £125,000 worth of shares to generate £5,000 in dividend income.

If you do earn more than the tax-free allowance, the amount of tax you pay is going up. For basic-rate taxpayers (those who earn between £11,000 and £43,000), you’ll pay an extra 7.5% on any dividend income earned above £5,000.

Higher-rate taxpayers (those earning between £43,000 and £150,000) will pay 32.5%, an increase from 25% under the old rules. You’ll start paying more tax than you used to when you earn dividends above around £21,600, with the new tax-free allowance included. For additional-rate taxpayers, the tax rate is increasing from 30.6% to 38.1%, and you’ll pay more tax once you earn more than £25,400 worth of dividends.

New ways to pay for financial advice with your pension

One of the measures announced in the Budget was helping people meet the cost of financial advice at an earlier age by using savings in their pension.

The Government has suggested that you will be able to withdraw £500 to use towards the cost of financial advice. It needs to consult with the pensions industry about this. It will also allow employers to pay up to £500 towards financial advice and gain tax relief on the contribution from April 2017.

Finally, the Government has set out a timetable to create a ‘pensions dashboard’. This would enable you to see all of your pensions in one place online. The Government wants to see this become a reality by 2019.

Earn more, pay less tax

Each year, the Government reviews how much people can earn before they pay different rates of Income Tax, and the Chancellor announced further changes in the Budget.

The Personal Allowance is the amount you can earn before you pay any Income Tax. You then pay Income Tax at 20% of your earnings up to the basic-rate limit, 40% up to the higher-rate limit and 45% on earnings above £150,000.

The table below shows what’s changing.

Year

Personal Allowance

Basic-rate tax limit

Higher-rate tax limit

Additional-rate tax limit

2015/16

£10,600

£42,385

£150,000

Over £150,000

2016/17

£11,000

£43,000

£150,000

Over £150,000

2017/18

£11,500

£45,000

£150,000

Over £150,000

You should note that people earning £100,000 or more begin to lose the Personal Allowance at a rate of £1 for every £2 they earn over £100,000.

Want to discuss the Budget changes?

Planning your investments and making the most of tax-free allowances can be complex. Saga Investment Services has a team of friendly experts that can discuss your options and help you make the most of your money. Give them a call on 0800 033 4000.

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About the author

Gareth Shaw

Gareth is the former Editor of Which? Money and before that he was a senior staff writer at the Financial Times. He holds a degree in Multimedia Journalism from Bournemouth University.

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Important information

The above article is based on our interpretation of the Budget 2016 and related legislation; it is not intended as advice, and the impact of any changes to tax rates or allowances will depend on your personal circumstances.

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