TaxSep 11 2017

What you must know about the Finance Bill

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What you must know about the Finance Bill

The government published its 2017 Finance Bill on Friday (8 September), which contains a range of measures that will impact investors and savers.

Many of the changes contained in the bill were expected in April but were postponed by the announcement of the snap general election. 

Financial Secretary to the Treasury Mel Stride said the new bill will “pick up where we left off and legislate for the provisions that were introduced and withdrawn due to time constraints”.

Here are the main measures that were in it:

Cut to money purchase annual allowance

The money purchase annual allowance for those who have already accessed their pensions flexibly has been cut from £10,000 to £4,000. 

Crucially, this measure is retrospective, for the current 2017 to 2018 tax year, meaning that some people who have already accessed their pension then paid more than £4,000 into it this tax year will face a tax bill.

The government has cited fears over pension recycling for this - the idea that people might take money out of their pension and then get a tax break from putting it back in.

“Those who have already used the pension freedoms since 2015 on the assumption they could still put £10,000 into their retirement pot each year will feel particularly hard done by, while the reduction also jars with the flexible working patterns that will become increasingly common in retirement,” said Tom Selby, senior analyst at AJ Bell.

Carolyn Jones, head of pensions at Fidelity, described the decision as “nonsensical”. 

She said: “The government had genuine concerns about recycling which it was right to examine carefully however, we have seen there is little evidence of behaviour driven by any dishonesty or urge to play the system.

"It appears that this change has been introduced to limit behaviours that do not exist,” she said.

“However, the impact of a cut in the MPAA will be felt in very real terms by consumers and employers alike.

"It is set to have a negative impact on employers who are already overburdened with red tape while younger and older consumers whose positive experience of the freedoms will now be coloured by what they may feel is retrospective barriers to getting their money.”

Cut in tax-free dividend allowance

A cut in the tax-free dividend allowance from £5,000 to £2,000 from April 2018 was contained in the bill.

This affects both those with dividends from shares and those who are self-employed through a limited company, who often pay themselves through dividends and a low salary to save on tax and National Insurance.

Experts said that investors should shift their dividend paying assets into tax-free wrappers such as Isas.

“Clearly a 60 per cent reduction in the dividend allowance will cause many investors to rethink the make-up of their portfolios from next year,” AJ Bell's Mr Selby said.

Mr Selby said: “The tax penalties on unwrapped dividend payments above £2,000 will be severe – 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." 

£500 advice allowance introduced

Savers can now access £500 from their pension savings tax-free up to three times before the age of 55 to pay for regulated financial advice.

The measure is one of a series of recommendations from the Financial Advice Market Review, an initiative aimed at improving access to advice following the introduction of the pension freedoms.

“While it is early days, the signs suggest demand for using the allowance is likely to be relatively low,” AJ Bell's Mr Selby said.

The government has also resurrected the increase in the employer tax-free exemption for providing advice in the workplace.

The £500 of pension advice for each employee will be tax-free, increased from £150. 

“By more than tripling the advice tax exemption we are hoping this will encourage more employers to provide access to advice for their employees, helping them to make more active and informed choices about saving for retirement,” said Kate Smith, head of pensions at Aegon

 Changes to the non-domiciled tax regime

The Finance Bill contained “significant reforms” to the non-domiciled tax status, according to law firm Harbottle & Lewis.

These changes were also expected before April as announced in the Summer Budget 2015 but delayed due to the general election.

The bill has reduced the threshold for UK resident status to someone who has lived here for 15 years out of the past 20, down from 17.

The Finance Bill 2.0 has also abolished permanent non-dom status, so that those who have lived here for years – and in some cases for their entire lives – pay tax in the same way as UK residents.

Gary Ashford, tax partner at Harbottle & Lewis, said that the Bill also changes the government’s attitude towards mixed funds for non-doms

“Non-domiciled tax payers with mixed funds and non-segregated bank accounts, that is, accounts fed by multiple sources – such as income and capital gains – have to-date had their savings and investment options impacted by complex remittance rules,” he said.

“The Finance Bill opens a two-year window for non-doms to cleanse these accounts and un-mix them, providing greater clarity over taxes, and potentially opening up investment options for new clean capital.

"This is an unsurprising move by the government, perhaps still fearful of post-Brexit capital flight and looking to stimulate inward UK investment.”

No legislation on cold-calling

There had been some speculation that the Bill would include a ban on pensions cold-calling, but this does not appear to be in the bill. 

“This always seemed fairly optimistic given the timescales involved and the fact the government has only committed to protecting savers ‘as soon as Parliamentary time allows,” AJ Bell's Mr Selby said.

He said: “The whole industry now needs to keep the pressure on policymakers to ensure this vital intervention doesn’t get crushed under the debris of the Brexit process.”

rosie.murray-west@ft.com