HMRC UK Summer Budget 2015 Summary
HMRC UK Budget News – George Osbourne reveals his summer budget for 2015 and the effect on QROPS is negligible. What is left of a pension pot on death after 75 in the UK will no longer be taxed at 45%. Instead, it will be taxed at the receiver’s highest marginal rate of income tax which could be 20% to 45% or nothing if it is below the receiver’s personal allowance for the year.
“George Osbourne’s plan is for a higher wage, lower tax, lower welfare society.”
It was not good news for Gibraltar QROPS though. They will have to keep the 30/70 rule which means that you can take a 30% tax-free lump sum, but the rest must provide you an income for life.
Full pension flexibility is available for QROPS in the EU though, which is good news for Malta.
The government is having a massive tax crackdown and can now seize money in your bank account at a stroke of a button. The government will also extend HMRC’s powers to acquire data from online intermediaries and electronic payment providers (think Visa, Mastercard and Paypal) to find those operating in the hidden economy.
Chancellor George Osborne said he was “open to further radical change” of pensions, while announcing a green paper to consult on further changes.
“Pensions could be taxed like Isas. You pay in from taxed income – and its tax free when you take it out – in-between it receives a top-up from the government.
“This idea, and others like it, need careful and public consideration before we take any steps,” he continued, adding that the goal is to move from an economy built on debt to an economy built on the more secure and productive foundations of saving and long term investment.
UK Pension Transfers to QROPS Capped at 1m GBP
The maximum amount you are allowed to transfer to a QROPS has been capped at 1m GBP. This will then be index linked from 2018. If you transfer more than a million pounds, you will have to pay UK income tax on the rest of the amount you transfer.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you. The tax rate is:
- 55% if you get it as a lump sum
- 25% if you get it any other way, e.g. pension payments or cash withdrawals
UK Taxes Locked Until 2020
A tax lock has been introduced to rule out increases in the main rates of income tax, VAT or National Insurance over the course of this Parliament. 8 out of 10 households will be better off and on average households will be £130 per year better off.
UK Pension Contribution Levels Cut
In bad news for the wealthy, the amount that can be contributed tax-free will be reduced for people with an income of more than £150,000.
Most people can contribute up to £40,000 a year to their pension tax-free. From April 2016, this amount will be reduced for individuals with incomes of over £150,000, including pension contributions. The maximum pension contribution will be only £10,000 per year from next April.
UK Personal Allowance Increased
The tax-free Personal Allowance is an allowance for the amount people earn before they have to start paying Income Tax.
The Personal Allowance has increased again. In 2010, Personal Allowance was a mere £6,475. Now, the personal allowance is 11,000 GBP which means that a typical taxpayer will be £905 a year better off next year.
The tax-free Personal Allowance will be increased by 400 GBP in April, 2016.
The government has an ambition to increase the Personal Allowance to £12,500 by 2020, and a law will be introduced so that once it reaches this level, people working 30 hours a week on the National Minimum Wage won’t pay Income Tax at all.
Income Tax Threshold Increased
The higher rate threshold will increase from to £43,000 in 2016-17.
The amount people will have to earn before they pay tax at 40% will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
Why Still Transfer a Pension to a QROPS?
- There is no tax on death in the UK
- 100% of your pension pot gets paid out to your named recipients with no UK tax deducted
- Often income tax can be severely reduced. If you move to the Middle East or tax havens in the Caribbean, income tax can be 2.5% or as low as zero. The highest rate of income tax in the UK is 45%, so this is a massive reduction of tax on your income
- You can transfer your pension into another currency. If you are moving to Europe, it makes sense to transfer your pension to EUR, so that currency fluctuations don’t affect your income. If you are moving elsewhere in the world, a transfer to US Dollars makes sense as 65% of world currency is in US Dollars and so many foreign governments hold US treasuries.
- You can collate all your pensions into one easily manageable place. Transfer all your pensions into one QROPS.
- QROPS are also flexible and portable. Often you can transfer between a QROPS in Malta to one in Gibraltar. You can also transfer out back into a UK scheme if necessary.
Click here for a free pension transfer analysis
Inheritance Tax Changes in the Summer Budget 2015
The biggest surprise was on inheritance tax or the lack of it. Now, a family home could be passed on to your children tax-free. Previously, there was a huge 40% tax hit on any cash, shares, property, pension and other assets above 325,000 GBP.
Now, this will disappear. Currently, Inheritance Tax is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another.
From April 2017, each individual will be offered a family home allowance, so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18.
The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21.
The inheritance allowance will be gradually withdrawn for estates worth more than £2 million.
The allowance will be £325,000 plus £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. This creates an effective £500,000 inheritance tax threshold for estates in 2020-21. As with the current nil-rate band, any unused main residence nil-rate band will be transferred to a surviving spouse or civil partner and means the effective inheritance tax threshold will rise to £1 million in 2020-21.
You Can Now Sell Your Annuity
The government wants existing annuity holders to have the freedom to sell their annuity income. The government will set out plans for a secondary annuities market in the autumn and will be implemented in 2017.
Other Summer Budget Changes in July, 2015
It wasn’t good news for the poorest elements of society as benefits will be frozen for 4 years, whilst the price of food will be rising.
The deficit will be cut by 1% GDP per year until the government runs a surplus in 2019-20. The cuts will come through welfare reforms which will be cut by £12 billion next year and £5 billion will be raised from measures to tackle tax avoidance, planning, evasion, compliance, and imbalances in the tax system.
After reading the entire budget, it is obvious Osbourne is cutting debt to prepare the economy for another financial crash, which would mean a 20% extra debt to GDP from the QE that would be needed.
Corporation Tax will be cut to 19% in 2017 and 18% in 2020 which will spur more businesses to start up in the UK.
We already have the lowest rate in the G20.
Only Albania, Bosnia, Bulgaria, Ireland, Lithuania, Lichtenstein, Montenegro, Romania, Slovenia, Serbia and Gibraltar have lower corporation taxes. Good luck setting up businesses in some of these countries.
The other big news is that non-dom status will be no more. Rich Russians living in London will now have to pay their taxes like everyone else. Wealthy landlords will also be targeted. Their tax relief will be halved from 40% to 20%. The “wear and tear” allowance also gets the boot with tax relief only on furnishings replacement.
Great news for workers. In a boost for employment and those at the lower end of the pay scale, the minimum wage will be raised to 7.20 GBP per hour next year and rising to 9 GBP per hour by 2020.
This is 70 pence per hour increase or another 28 GBP per week or 1,456 GBP per year. That is an extra 3 iPhones or TV’s that could be bought every year.
There will also be 3 million new apprenticeships created by 2020, funded by a levy on large employers.
A stealth tax has snuck in. The standard rate of Insurance Premium Tax will increase to 9.5% from 6%. Seeing as every family who owns a home needs this, this will raise a lot of money.
The dividend tax credit, which reduces the amount of tax paid on income from shares, will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Tax rates on dividend income will be increased.
The government will set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The new, simpler system will mean that only the wealthy will get hit up for dividends tax. Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe.
It was good news for SME’s (Small to Medium Enterprises). Small businesses can now write off 200,000 GBP of investment per year. There will be tax relief on the full amount.
Employment allowance has been increased meaning small businesses will pay less national insurance contributions.
This means, next year, businesses will be able to employ 4 people full time on the National Living Wage and pay no National Insurance at all.
In an attempt to get the unemployed into work, those aged 18 to 21 who are on Universal Credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement 6 months after the start of their claim
The budget is also tackling tax evaders like Amazon and Google. HMRC have much greater powers and can now directly take money from your UK bank account immediately if you evade taxes. They are also going to “name and shame” serial tax evaders.
There is an 8% tax on bank profits being introduced. This is a punishment for the global financial crisis in 2008. It also recognises that moral hasard is built into the capitalist system.
He is also tackling productivity. The UK is lagging Germany and France in labour productivity. If the UK matched the productivity of the US, GDP would be 31% higher, equating to an extra £21,000 for each household.
Its great news for single mums as the government has doubled the amount of free child care. There will now be 30 hours of free childcare for 3 and 4 year olds. Also, the government has said that from April 2017, anyone having more than two children won’t receive child benefits for the extra kids. This should get rid of those mums who pop out babies for income.
In bad news for poor students, grants will be replaced by loans. It is also bad news for the poor as welfare is cut and for public sector workers whose pay will increase only 1% per year for the next four years which is less than inflation (the increase in the cost of living).HMRC UK Summer Budget 2015 and its Effect on QROPS by Richard Malpass