What’s in a (2016) Budget?

So, we have been graced with the 2016 budget this week.  But what does it mean for those of us on the saving side of the equation?  (Don’t take anything I have written as advice, it’s just a man armed with a keyboard and his tiny thoughts.  Please, do your own research).  This isn’t comprehensive, just some thoughts.

The Budget itself is here.  It’s an obese document with a lot going on, I’ve pulled out a few things that caught my eye.

Let’s start with the changes to the ISA.

The ISA shakedown

It looks like there is to be no increase to the ISA limit this year, it will remain at £15,240 (which is pretty high as it is).  After which the budget is boosting the ISA limit in the Savings-Stratosphere, from £15,240 up to £20,000.  Looking at the trend of the annual ISA limit since 1987 when PEPs came into force (which were later re-branded as ISAs);

The annual ISA limit - streaking skywards

The annual ISA limit – streaking skywards

That’s a hell of a boost to tax sheltered savings on offer since 2009.  Since the ‘credit crunch’ we have been offered more and more of the attractive ISA to shelter our investments.  Sheltered firstly from tax itself and secondly from then having anything to do with tax-returns.  Happy days.  I like the ISA, in many ways it’s a better more flexible alternative to the personal pension, so I’ll happily carry on contributing to one.

The big shake up was the introduction of the “lifetime ISA“.   In Section 3.2 of the budget.  You can put up to £4,000 a year into this, and the government will top it up by 25%, providing you open account after April 2017 and are between the ages of 18 and 40.  And you can contribute until you are 50.  It’s being pushed as a vehicle to help you save for retirement or to buy your first home.  This rather handy diagram taken from the budget helps;

Figure_1_960x640

Let’s have a quick look at each use in turn.

Buying your first home with the lifetime ISA.  Let’s say you save the full £4,000 for 10 years into an account that has 2% interest.  This might come out at around £55k (assuming that the £4,000 you put in accrues interest throughout the year and the £1,000 from the government is only credited at the end of the year but earns interest after that).  The equivalent in a normal ISA yielding 2% would be around £44k, an increase of £11k or 25% ish.  Seems like a pretty sweet deal if you are saving for a house.  If you end up using it for another purpose other than your first home you’ll lose the government bonus and incur a 5% penalty.

With house price to earnings higher than the long term average (especially in London) do we really need another brace to help prop up the prices for longer?  As I understand it the mortgage payment to salary ratio isn’t high by historical averages, but that’s only because interest rates are so low.  Why keep propping house prices up until the day that interest rates will almost inevitably increase (and perhaps cause a flurry of defaults)?  There is a whole load of data here if you want to trawl through it 🙂

I’m just a bit sceptical that it’s the best thing to do, sure it will help first time buyers pull together a deposit…but at what cost in the long run?  Owning isn’t always the best option anyway.

You could use the lifetime ISA to save for retirement.  It offers the same 25% boost from the government as above.  So you could contribute to it from the age of 18 right through to you are 50 and then let it grow and take out the proceeds when you turn 60.

If you are in danger of breaching your annual allowance on your pension then this could prove a useful additional avenue to squirrel away money.  I assume they wouldn’t come under the same allowance, although I haven’t actually confirmed this.

If you aren’t close to the annual allowance limit or the Life Time Allowance, I’m struggling to see the point.  As a higher rate tax payer you would get more benefit from the tax savings on offer from a personal pension, i.e. the contributions are tax free and provide a 40% boost to your savings compared to the 25% here.

On the way into the LISA as a basic rate tax payer the net effect is the same, i.e. the 25% boost after tax is equivalent to a 20% pre-tax reduction (there might be some intricacies that alter this, e.g. if you are in a salary sacrifice scheme anyway).  *Thanks JS for picking this out 🙂

But on the way out the LISA might prove better as it will be tax free, where as a personal pension will incur tax.  If you are under the personal allowance then there won’t be any difference.  But above this and the LISA does become better, with the benefit being the marginal tax rate.  Thanks Rhino, for point this out 🙂

You won’t currently be able to access your lifetime ISA until you are 60, whereas you can currently get to your pension age 55.  That’s 5 potential years of purchasing Lamborghinis.  The pension age is due to increase, but who’s to say the lifetime ISA won’t change in the future either.

There is a tiny argument to put money into the lifetime ISA instead of a pension because if you did want access to your funds early the penalty is “only” the loss of the governments 25% contributions (and and gains / interest on this) plus a 5% penalty compared to the whopping 55% penalty for accessing your pension early.  You probably shouldn’t be raiding your retirement savings early anyway, so this should be of little consideration.  The government is considering making access to this a bit more flexible;

The government will also explore with the industry whether there should be the flexibility to borrow funds against the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid. In the US some retirement plans allow 50% to be borrowed up to a maximum of $50,000.

Only time will tell if they will actually look into this and if it would be helpful.  It might prove helpful it pulling together a deposit for a house early on but I can’t see many other situations.  And is this really a good idea?  How does it work anyway, repaying a debt to your own retirement savings?  What’s the time limit?  Are there any penalties?  Perhaps there should be, to account for the lost investment growth or interest.  What happens if you reach retirement and it’s not repaid?  It’s only a debt between yourself and yourself afterall, true at some point it’s a debt between your current self and your future self, but these soon converge.  Seems like potential over-complication to this Zombie.  I’m all for flexibility, but flexibility intertwined with simplicity.

I couldn’t see anywhere what happens if you decide to perish halfway through saving into a lifetime ISA.  Presumably your heirs would inherit the sum including the bonuses from the government?  Afterall, you did hold the ISA for your lifetime.  Literally.

The new £20,000 ISA limit should offer more than enough alternative to the personal pension for me at the moment.  If I am ever in a position where I am maxing out my ISA and my annual allowance on my pension, I’ll first be really fucking grateful.  Then after wallowing in gratefulness I will consider the Lifetime ISA.  Until then it’s a ‘no thank you’ from me.  I suspect the first home buying power of the Lifetime ISA could prove popular.

Personal Tax changes

There’s an increase in the Personal Allowance to £11,000 (3.8% increase) in April 2016 and £11,500 (4.5% increase) in April 2017, up from £10,600 at the moment.  This seems to be generously above inflation, so it’s like a real payrise.  It means paying tax on £400 less earnings in the 2016 tax year and £500 in the 2017 tax year.  I’ll take it and save it 🙂  At basic rate that’s an extra £80 in your pocket in the coming tax year.  Oh shit yeah!

The limit at which you pay higher rate tax is due to increase a fair amount by 2017.  It will increase from £42,385 to £43,000 (1.5% increase) this April, and then get boosted to £45,000 (4.7% increase) in April 2017.  Not the most generous of rises for higher rate tax payers this year, but it looks to be an inflation beater in the following year.

And it looks like there could be more to come in future Budgets;

The government is determined to support those in work by continuing to cut taxes and has committed to raise the personal allowance to £12,500, and the higher rate threshold to £50,000 by the end of this parliament.

This is quite an interesting graph, buried deep within the Budget;

Chart_1.8_960x640

It’s only for people earning £20k (it’s in the tiny footnote), perhaps a little bit misleading as it would be better if it had been adjusted for inflation.  We’d expect the marginal tax rate on a fixed income to decrease over time, the earnings power decreases and so it is taxed less.  And the graph misses out National Insurance payments so doesn’t show the whole picture.  Interesting how a graph can seem appealing with a quick glance, but might be misleading after a little thought isn’t it?

Capital gains tax is taking a huge slash from April 2016, from 28% down to 20% for higher rate tax payers and from 18% down to 10% for basic rate tax payers.  This seems like a pretty big cut to me, although there are a couple of exceptions I don’t imagine they would catch too many of us.

This doesn’t impact my good self, but it offers some pretty substantial savings for anyone looking at incurring a Capital Gains Tax bill.

Buy-to-Cry?

Whilst the budget seemed to hand a gold plated gift first time buyers with the Lifetime ISA, it seems to have only offered Buy-to-Let landlords multiple Tax Suplexes.

This Guardian article covers it off pretty well.  As does the old Torygraph.

In short buy to let investors are seeing their tax relief on mortgage slashed in half, Tax Suplex 1.

As if one Tax Suplex wasn’t enough Mr Osborne has followed this up with a Tax Roundhouse Kick direct to the face of buy to let landlords with an increase in stamp duty of 3% (a levy) for purchases that aren’t your primary residence.

Further, the capital gains tax reduction offered earlier is not on the table when selling property, that isn’t your main residence.  Ouch.  “Have another suplex you buy-to-let bastards!”, Mr Osborne seems to cry as picked up their shattered bodies and delivered yet another Tax Suplex.

osborne_2592784b

Stay down BTL, stay down!

It does look like a bit of an assault on buy to let landlords, perhaps in an attempt to force some to sell and push house prices down a bit?  Or maybe it will only succeed in increasing the rent land lords charge.

Slowing growth?

There was a bit of down sizing of the forecast growth for GDP to 2% for 2016 (down from 2.4%) and to 2.2% and 2.1% for 2017 and 2018 (down from 2.4% and 2.5%).  With inflation predicted to be 0.7% in 2016 and 1.7% in 2017 that doesn’t leave much room for real growth.

Chart_1.1_960x640

Interesting to see where the UK sits compared to some other large economies, it has been and is forecast to be one of the quickest growing larger developed economies.

Could have an impact on the growth business sees, and perhaps our lovely investments, if it pans out that way, but I’d take these things with a pinch of salt.  Predictions of what the economy will be doing in three years time is a dark art indeed.  Enough of this predicting the future malarkey.

It’s good to share

From gov.co.uk;

From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.

People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.

In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.

Looks like this covers renting your property on AirBnB.  With a little bit of enthusiasm (and letting a stranger sleep in your spare room) that’s a potential £1,000 you can earn, completely tax free.  With the right property that could be only 10 weekends (or perhaps even just 10 nights) a year.  Really doesn’t seem like much and has got me inspired to have a look into it.

The tax free break on occasional jobs seems fairly open to interpretation, eBay businesses rejoice!  I wonder if this would include working part time for a company like Deliveroo or Uber…I could be up for that if the income was tax free 😉

Mr Z applauds this inclusion in the budget, very nice.

Any thoughts on the budget?  Let me know in the comments (or if you think I’ve got something wrong!)

MrZ

11 thoughts on “What’s in a (2016) Budget?

  1. ermine

    Nice rundown – thanks!

    > From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.

    I missed this totally. It puzzles me greatly, but then the difference between income and capital and personal taxation has always puzzled me.

    But as a pensioner/early retiree I like this allowance, if it allows me to create things and sell them without tax, because I have turned down quite a few small but potentially interesting jobs simply because I’m no longer prepared to work for the State. For sure, I could just charge 20% more, but it’s actually handing over the excess and the feeling of working for The Man I can’t get over. Totally First World Problem, true, but it kept me out of adding to the UK GDP in some small way, until perhaps next year. On the other hand I am not sure that the UK tax code needs yet more byzantine twists and turns and exceptions to add more pages of cruft.

    The housing stuff seems to be a strange form of pump and dump. The pension ISA is a bit like a help to buy ISA (can you do both?) putting money into inflating the housing market. But running Britain’s army of leveraged BTL ‘landlords’ out of town can’t happen soon enough IMO. Favouring people at a later stage of life’s better capacity to raise capital and sending them in to compete with people who actually need a house to, well, like live in rather than to featherbed their adult children was nasty and entrenches wealth disparity, along with last year’s nasty little IHT exception for the primary residence to favour dynastic wealth over Joe and Josephine public starting out in life with no ancestral capital trying to buy a rabbit-hutch in Britain.

    They really should have postponed this Budget out till after the 23 June if it was so hamstrung by not wanting to rock the boat!

    Reply
    1. Mr Zombie Post author

      The sharing economy tax relief is a bit of a curveball, and it doesn’t seem particularly well defined from I could see. Still, it’s a possible avenue for tax free income like you say.

      I think it looks like the help to buy will be phased out and you can transfer across into the new Lifetime ISA, but I’m not 100%.

      Completely agree on the housing and BTL front and hardly see the budget as an assault on private landlords like some publications have presented it as. Even with family members with their own BTL, it’s part of the risk to me, get on with it :). IHT is another discussion, but I’m all up for it pulling the primary residence back in and becoming a heavier tax too.

      Reply
  2. The Rhino

    when you are comparing the new LISA against the existing SIPP scenarios you don’t seem to be accounting for the fact that there is no tax to pay at the other end of the LISA whereas you pay tax in the normal way at the other end of the SIPP.

    i.e. for a BRT using a LISA is approximately equal to paying no tax on the way in *and* no tax on the way out, a BRT SIPP is no tax on way in and normal tax (minus 25%) on way out.

    a lot of commentators seem to be making this mistake, or have I missed something and its me making the mistake?

    Reply
    1. Mr Zombie Post author

      SIPP – Tax relief up front. Taxed on the way out.

      LISA – Taxed up front + 25% addition from government ~= tax relief on a SIPP. No tax on the way out.

      Very true! I completely missed that. It does depend on how much you take in income, under the Personal Allowance and it will be the same. Over that and the Marginal Rate will be your benefit of using old LISA.

      Will do a swift edit 🙂 Thanks.

      Reply
  3. David

    Nothing but gimmicks to support George Osborne’s bid to succeed Cameron as PM. More tax bungs for those lucky enough to come into some capital passed on by their parents. Hoping to live tax free off bloated ISA balances into retirement is a risky strategy when some future government will be tempted to target “unearned income” and introduce a lifetime allowance spanning combined pension and ISA balances.

    Reply
    1. Mr Zombie Post author

      David – at some point the ISA balances may become too tempting for the government to resist a swipe at…I hope not, but it seems prudent to at least consider this a possibility. Or reduce the state pension as a ‘tax’.

      Diversification is key! In asset classes, individual assets, banks, platform providers, tax vehicles.

      Reply
  4. JS

    Mr Z,
    Long time closet fan but I’ve not commented before.

    I should point out that the 25% bonus in the LISA is actually equivalent to Basic Rate Tax relief (calculated as 4k / 0.8 if you consider paying 4k into a instead) so even BR tSIPPBRpayers aren’t better off (although the tax free on the way out is a plus, but then offset by the later access).

    Keep up the great blogging!

    Reply
    1. Mr Zombie Post author

      JS,

      True! Serves me right for finishing the post off in the evening and the morning before work, haha! Will edit, thanks for the spot 🙂

      Reply
  5. JoeCrystal

    Great post Mr Z!

    I will take advantage of the Lifetime ISA because it is free money even though I already got a flat! Although I will keep on paying into the Pension and S&S ISA. But here is a thought, would the benefit system will exempt the Lifetime ISA or take it into account? After all, the devil is in the detail.

    Joe

    Reply
    1. Mr Zombie Post author

      JoeCrystal,
      I may have been a little hasty in saying no above as it is another type of diversification, admittedly under the ISA banner. It’s not for me, for now, but I may come back to it in a few years.

      Good point, there’s a lot of detail surrounding this budget that’s yet to emerge!

      Reply
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