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Spring Budget 2017 - Initial Reaction

Dividend allowance slashed

The key point for investors from this Budget was that Phillip Hammond has slashed the dividend allowance from £5,000 to £2,000, effective from April 2018.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"The Chancellor has taken an axe to the dividend allowance, which amply demonstrates why investors should make the most of their ISA and pension allowances, to protect as much of their wealth as possible from the taxman. Even when the government appears to relax its tax rules, its policies can turn on a sixpence, and end up costing you an awful lot of money if you’ve been complacent about using your tax shelters in the meantime."

The good news is that with the new higher ISA allowance, investors can actually offset a lot of the £3,000 reduction to the allowance. By using up their ISA allowance between now and 2018, investors can keep £55,240 out of the clutches of the taxman, which would mean £2,210 of dividends sheltered from tax on a typical income portfolio yielding 4%.

Even if investors don’t have any ready cash to take up their ISA allowance they can protect existing funds and shares from the tax hike by doing a Bed and ISA, or indeed a Bed and SIPP, which involves selling their holdings and buying them straight back within a tax shelter."

Higher National Insurance for the self-employed

The Chancellor has announced Class 4 NI rates for the self-employed are being increased to 11%, to bring them further into line with employees’ Class 1 rates.

We calculate that a self-employed worker earning £30,000 will pay £282 more National Insurance in 2019 than in 2016.

Tom McPhail, Head of retirement policy:

"Ever since the state pension changes of 2016, when self-employed workers’ state pensions were brought into line with employees’, this reform has been on the cards.

This tax hike won’t be popular with the self-employed, though it’s designed to balance out the long term windfall they received as a result of the new state pension scheme.

We would like to see the government continue to improve pension provision for the self-employed by bringing them into auto-enrolment, via the self-assessment tax system."

Economic forecasts

Ben Brettell, Senior Economist, Hargreaves Lansdown:

"Spreadsheet Phil lived up to his dull-sounding nickname today with a speech of cautious optimism.

Unsurprisingly his opening remarks stressed the positives, but emphasised there was still work to be done. Growth forecasts were upgraded for this year from 1.4% to 2.0%, but reduced to 1.6% next year, with the net result that GDP in 2021 is expected to be broadly the same as forecast in the Autumn Statement.

Inflation is forecast to remain largely under control, though peaking above the 2% target at 2.4%. Real wages rise in every year of the OBR forecast, which is good news for households who expected to have their budgets squeezed by rising inflation, and good news for sectors of the economy reliant on consumer spending, if you trust the accuracy of economic predictions of course.

A modest improvement in the public finances means borrowing will fall in 2016/17, but the Chancellor was keen to stress there would be no unfunded giveaways.

Productivity was once again an area of focus – this is to be welcomed as ultimately increased productivity is the route to better living standards.

The UK has fallen behind in productivity for too long, though it should be noted that promising to tackle the problem has always proved easier than finding a solution."

Money Purchase Annual Allowance reduction goes ahead

The government is pressing ahead with its planned reduction to the Money Purchase Annual Allowance, from £10,000 to £4,000 from April 2017, ignoring industry calls ahead of the Budget to revoke this change.

This restriction will hit investors who have used the new pension freedoms to dip into their retirement savings after the age of 55, by reducing their scope to make subsequent pension savings.

Tom McPhail, Head of retirement policy:

"Theresa May promised a government which would work for ordinary people, yet it is pressing ahead with a policy which undermines the retirement interests of millions of ordinary investors, for the sake of saving a sum which in the context of the overall Budget, amounts to no more than small change. This is a breach of trust which will undermine confidence in the whole pension freedom project launched by the previous Chancellor.

It also appears the DWP and the Treasury are pursuing mutually contradictory policy goals; that’s not going to end well. Anyone approaching retirement now needs to think very carefully about how and when they choose to access their pension savings."

NS&I Investment Bond

The Chancellor confirmed the new NS&I Investment Bond will pay 2.2% on deposits up to £3,000, and will be available from April. This compares with 2.2% from Atom Bank’s three-year bond (source: Moneyfacts).

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"The new NS&I bond will hardly raise a cheer from savers, because the interest earned won’t keep pace with the rise in inflation we are expecting, so money deposited in this account will in all likelihood lose its spending power. The Chancellor has done as little as he could in terms of the interest rate to meet his commitment to provide a market-leading rate; at 2.2% it just about earns that title.

Nonetheless we expect there will be considerable demand from cash savers given the measly returns offered elsewhere, and the security offered by NS&I as a government-backed product."

Overseas Pension Schemes Tax Loop Hole Closed

A new 25% tax charge will apply to transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) requested on or after 9 March 2017.

The charge will not apply in the following scenarios:

  • The member and their new pension are in the same country
  • Both the member and the new pension are in EEA countries (an EU member state, Norway, Ireland or Liechtenstein)
  • The new pension is linked to the member’s employment

A 5 year rule allows the Government to pursue the tax charge from anyone who initially meets one of the criteria above and then changes circumstances.

Nathan Long - Senior Pension Analyst:

"The 25% charge will crack down on those looking to exploit any loop holes in the tax system but should not impede anyone with genuine retirement planning aspirations. Those retiring abroad still have potential to transfer to an appropriate scheme if it meets certain criteria.

Even if they can’t, they have the ability to take their pension entirely in cash once they are over 55, which should ensure pension savings can be accessed easily irrespective of where they retire."