2016 Budget Summary

Here’s our summary of the proposed changes with links to Treasury or HM Revenue and Customs documents if you would like more detail.

Income tax

1.83 and 1.85 of HM Treasury - Budget 2016

The personal allowance will increase to £11,000 from 6 April 2016 and £11,500 from 6 April 2017. The point at which the higher rate of income tax will apply will increase to £43,000 from 6 April 2016 and £45,000 from 6 April 2017.

Lifetime ISA

1.107 of HM Treasury - Budget 2016, HM Treasury - Lifetime ISA and HM Treasury Lifetime ISA factsheet

From April 2017, those over 18 and under 40 will be able to open a new Lifetime ISA. This will allow up to £4,000 of savings each year to which the Government will add a 25% bonus. Contributions will be made with the individual’s own cash. This additional bonus will be payable up to a maximum of £1,000 for each year between the ages of 18 and 50. The money in a Lifetime ISA can be used to: 

• Supplement retirement income from age 60, unlike a pension where it is age 55, or
• accessed before then to help first time buyers buy a home worth up to £450,000 at any time from 12 months after opening the account.

Individuals will be able to withdraw money before age 60 for other purposes however the Government’s element of the fund, including any interest or growth on the bonus will be returned to the Government. In addition there will be a 5% charge.

The maximum that can be paid into a Lifetime ISA will therefore be £128,000 with a maximum bonus of £32,000. 

ISAs

1.104 of HM Treasury - Budget 2016

From 6 April 2016 the maximum that can be paid into an ISA is £15,240. From 6 April 2017 this will increase to £20,000.

Any contributions to a Lifetime ISA will form part of the overall £20,000 limit from 6 April 2017.

Help to Save

1.113 of HM Treasury - Budget 2016

The Government is to introduce a new Help to Save scheme for individuals on low incomes. The scheme will be open to individuals in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage, or those in receipt of Working Tax Credit. It will work by providing a 50% government bonus on up to £50 of monthly savings. The bonus will be paid after two years with an option to save for a further two years, meaning individuals can save up to £2,400 and benefit from government bonuses worth up to £1,200. Individuals will be able to use the funds in any way they wish.

Annual allowance

There were no changes announced to the annual allowance. This will remain at £40,000 for tax year 2016/17 with the introduction of the tapered annual allowance from 6 April 2016 for higher earners. The money purchase annual allowance also remains at £10,000.

Lifetime allowance

2.55 of HM Treasury - Budget 2016

As expected, the lifetime allowance will reduce from £1.25 million to £1 million from 6 April 2016. 

Technical amendments to support pensions flexibility

2.53 of HM Treasury - Budget 2016

HMRC - Pension flexibility 2016

There were a number of smaller announcements made to support the April 2015 pension changes.

These are:

• Bringing the tax treatment of serious ill-health lump sums in to line with lump sum death benefits, so they can be paid tax free when someone aged under 75 has less than a year to live but has already accessed their pension.
• Making serious ill health lump sums taxable at an individual’s marginal rate when paid in respect of individuals aged 75 and over.
• Legislating to convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%.
• Legislating to allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000.
• For cash balance schemes where the scheme must top up the remaining funds to meet the entitlement of the individual’s beneficiaries to an uncrystallised funds lump sum death benefit under the scheme rules, the full amount will be classed as an authorised payment.
• A charity lump sum death benefit payable on death before age 75 will receive the same tax treatment whether paid from drawdown pension funds or uncrystallised funds.
• The need to pay an uncrystallised funds lump sum death benefit within two years when it is paid to a charity is also removed.

These changes will be effective when the Finance Bill 2016 receives Royal Assent.

Dependant scheme pensions

2.59 of HM Treasury - Budget 2016

As announced in the Autumn Statement 2015, from 6 April 2016 the Government will reduce significantly the number of calculations that need to take place to determine whether a dependant’s scheme pension exceeds the authorised limit. Following consultation there are further reductions to the number of calculations that need to be carried out. 

Bridging pensions

2.60 of HM Treasury - Budget 2016

The pensions tax rules on bridging pensions will be aligned with DWP legislation following the introduction of the single tier state pension from 6 April 2016.

Pension dashboard

2.61 of HM Treasury - Budget 2016

The Government will ensure the industry designs, funds and launches a pensions dashboard (a digital interface where an individual can view all their retirement savings in one place) by 2019.

Pensions and Inheritance Tax (IHT)

2.63 of HM Treasury - Budget 2016

As announced in the Autumn Statement 2015, the Government will legislate to ensure a charge to IHT does not arise when a pension scheme member designates funds for drawdown but does not draw all of their funds before death. This will be backdated to apply to deaths on or after 6 April 2011.

Financial Advice Market Review 

2.227 of HM Treasury - Budget 2016

It is proposed that from 6 April 2017 the tax and National Insurance relief for employer arranged pensions advice will increase from £150 to £500 for each employee.

The Government will consult on introducing a pensions advice allowance over summer 2016. This will allow individuals to withdraw £500 tax free before the age of 55 from their defined contribution pension to help with the cost of financial advice. A consultation to decide the exact age at which individuals can do this will take place.

The Government will also consult on amending the definition of regulated advice to bring it in line with that of the Markets in Financial Instruments Directive – this would mean that regulated advice is based upon a personal recommendation.

Salary exchange

1.147 of HM Treasury - Budget 2016

The Government is considering what range of benefits salary exchange can be used for. It is intended though that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and National Insurance relief when provided through salary exchange.

Class 2 National Insurance contributions

1.166 of HM Treasury - Budget 2016

From April 2018, Class 2 National Insurance contributions are to be abolished. This will allow millions of self-employed individuals to keep more of their money and invest it back into growing their business.

Strengthening the incentive to save

HM Treasury - Strengthening the incentive to save: consultation on pensions tax relief

As previously trailed in the press no changes were announced to pensions tax relief. A summary of responses to the consultation on pensions tax relief has been published. 

Published 16 March 2016

The information provided is based on our current understanding of the Budget 2016 and associated documents and may be subject to alteration as a result of changes in legislation or practice.