GDP, tax and pensions – key points of Philip Hammond’s Autumn Statement 2016
Financial and fiscal highlights from the Chancellor of the Exchequer’s Autumn Statement and the reaction from industry commentators
In his first and last Autumn Statement, the new Chancellor of the Exchequer Philip Hammond said the UK economy is forecast to be the fastest growing major economy in 2016, but the Office for Budget Responsibility (OBR) has forecast growth to slow and inflation to rise over the next two years.
The Chancellor said: “Today’s OBR forecast is for growth to be 2.1% in 2016; higher than forecast in March. In 2017 the OBR forecasts growth to slow to 1.4%, which they attribute to lower investment and weaker consumer demand, driven, respectively, by greater uncertainty and by higher inflation resulting from sterling depreciation.
“While the OBR is clear that it cannot predict the deal the UK will strike with the EU, its current view is that the referendum decision means that potential growth over the forecast period is 2.4 percentage points lower than would otherwise have been the case.”
The amount people can earn without paying income tax will rise to £11,500 in 2017/18 and to £12,500 by 2020.
Higher rate threshold will rise from £43,000 this year to £45,000 in 2017/18 and to £50,000 by 2020/21.
Hammond added that in 2020 those thresholds would rise in line with inflation and not in line with the minimum national wage as previously.
The national minimum wage is to raise to £7.50 from April 2017.
Many salary sacrifice items like gym membership and mobile phone subscriptions will no longer get tax breaks from April 2017 but pensions saving, child care, cycle to work, and ultra-low emission cars are not affected.
Announcing this change Hammond said: “The majority of employees pay tax on a cash salary. But some are able to sacrifice salary and pay much lower tax on benefits in kind.
“This is unfair, and so from April 2017 employers and employees who use these schemes will pay the same taxes as everyone else.”
However, all arrangements in place before April 2017 will be protected for up to a year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to 4 years.
Kate Smith, Head of Pensions at Aegon, commented: “Salary sacrifice arrangements are popular with both employers and employees, as they can currently reward workers while cutting the amount of income tax and NI payable. By restricting the range of tax and NI advantaged non-cash benefits permitted under salary sacrifice arrangements the Chancellor is targeting tax and NI breaks on benefits that do not have a beneficial nature for society such as a company paid for phone or car. For pensions which encourage people to prepare for the future or childcare vouchers which help people return to work its business as usual so will still benefit from tax and NI breaks.
“The good news is pensions contributions – where effectively employees agree to reduce their salary in return for their pension contribution to be paid by their employer – will continue to be allowable.
“Under salary sacrifice, pension contributions paid by the employer do not attract tax or NI. The employee’s salary reduces, meaning they pay less tax and NI. Employer’s pension contributions don’t attract national insurance, so it is cheaper for employers to pay a lower salary and a higher pension contribution. And the employee’s pension may be bolstered further if their employer pays part of the National Insurance saving into their pension.”
However, Rachel Vahey, product technical manager at Nucleus, added a note of concern. She said: “Although we’re glad pension savings have been excluded from these changes, the precedence the restrictions set is worrying and the concern must be pensions will get caught up in the next round of cuts. This may have the consequence of putting some employers off setting up salary sacrifice arrangements for their pension schemes.”
Tax charges on life insurance policies
The Government has confirmed that from 6 April 2017 it will allow HMRC to correct the inequitable tax position that can arise when someone withdraws money from their life policy (bond) in the wrong way. HMRC will correct the case on a ‘just and reasonable basis’.
Rachael Griffin, personal financial planning expert, Old Mutual Wealth, said: “The number of customers taking withdrawals from bonds in the wrong way is minimal so this feels like a pragmatic approach, and will allow for corrections to be made without impacting the general withdrawal rules on bonds for all other customers. My only reservation is around how the correction will be reflected in all future correspondence with the policyholder, and could lead to confusion.”
Cracking down on tax avoiders and those who help them
A new penalty is being introduced for those helping someone else to use a tax avoidance scheme. Tax avoiders are hit with significant bills when HMRC defeats their avoidance scheme, this new penalty will ensure that those who help them will also face the consequences.
Also tax avoiders will not be able to claim as a defence against penalties that relying on non-independent tax advice is taking reasonable care.
Support for savers
The Chancellor said that to support savers in the low interest rate environment, a new three-year NS&I Investment Bond available from spring 2017. The detail will be announced at the Budget, but it is expected to offer a rate of 2.2% and to will offer the flexibility to put away between £100 and £3,000 and be available to those aged 16 or over.
The Chancellor confirmed that Government has no plans to remove the triple lock ahead of 2020.
Steven Cameron, Pension Director at Aegon commented: “The state pension is the bedrock of many people’s retirement incomes and to give pensioners certainty, government should not make mid-term changes to state pension commitments.
“Nine years of ‘triple lock catch up’ by 2020 will be a very valuable boost to pensioners, but clearly, the more its value, the greater its cost to the government and taxpayers. Considerations around state pension increases should be reviewed every five years on affordability grounds, and to make sure the government is allocating finite resources fairly between generations.
“However, the Chancellor’s mention of growing longevity and the need to assess pensioner support for this growing elderly population did not go unnoticed. We await further details on ‘budget balancing’ plans to further increase state pension age, but we also need to give people flexibility to access their state pension earlier at a reduced level.
“Growing longevity with longer periods in poor health also need urgent government attention to avoid an impending care crisis. Pension policy needs to be reviewed to allow people to prepare to cover their long term care costs, however much they’d prefer not to think of this eventuality.”
Pensions were given some reprieve in the Autumn Statement, with few changes made.
However, the Government did make a change to the Money Purchase Annual Allowance (MPAA). The MPAA restricts the tax efficient pension contributions that can be made by or on behalf of an individual who has flexibly accessed their pension savings. The Government has stated it expects to save £70m a year from this change.
The MPAA will be reduced to £4,000 from April 2017 – from the current £10,000. For example, anyone who has taken a taxable income from a flexi-access drawdown contract but wants to continue to make payments to their pension will be restricted in future to £4,000 a year. The government will consult on the detail.
Andrew Tully, Pensions Technical director at Retirement Advantage, commented on this, saying: ”The wide scale pension changes introduced from April 2015 were designed to give people much more freedom over how and when they can withdraw their pension pot. This restriction to the Money Purchase Annual Allowance is a significant restriction to that freedom. People will need to carefully consider before they take benefits if there is a possibility they or their employer may want to make future pension contributions above a relatively low limit of £4,000 a year. However people’s circumstances change so it isn’t always possible to know what the future may hold, and this change greatly restricts that ability to alter plans as you move through retirement.”
Sara Wilson, head of Platform Proposition at Alliance Trust Savings, said reduction in the Money Purchase Annual Allowance for pensions in drawdown may present challenges for some.
“The planned reduction from £10,000 to £4,000 in the Money Purchase Annual Allowance could limit the ability of those still in work and, for numerous good reasons (for example to fund a divorce or manage a gradual wind down to full retirement), drawing down pension funds, to rebuild their pots in the longer term. So we are pleased to see the Government plans to consult on this particular issue.
“We do still believe tax relief for higher earners will be reduced in time. If you are a higher earner you may want to think about maximising pensions contributions whilst higher rate relief is still available. Who knows what will happen in the Budget next year.”
Commenting on the relative lack of pension changes, Andy Bell, chief executive of AJ Bell, said while the Chancellor “resisted the lure of the tax relief honey pot” it is clear that the public finances “are not in good shape and the £21 billion net spend on pensions tax relief will not have gone unnoticed by the new Chancellor.
“This £21 billion should not be viewed as a cost to the Exchequer but an investment in the future of our country. People not saving enough for their retirement is one of the biggest social crises we face and the Chancellor needs to ensure the investment is commensurate with the reality that private pension savings are still woefully inadequate.
“Now is the ideal time to appoint an independent pensions tax relief commission with the remit to review the levels of private pension savings in the UK and the incentives that encourage those savings. This review should be conducted behind closed doors, rather than in the public glare, and have the freedom to recommend a long term pensions tax relief strategy without being encumbered by short term political pressures.”
Andrew Tully, Pensions Technical director at Retirement Advantage, added:
“The wide scale pension changes introduced from April 2015 were designed to give people much more freedom over how and when they can withdraw their pension pot. This restriction to the Money Purchase Annual Allowance is a significant restriction to that freedom. People will need to carefully consider before they take benefits if there is a possibility they or their employer may want to make future pension contributions above a relatively low limit of £4,000 a year. However people’s circumstances change so it isn’t always possible to know what the future may hold, and this change greatly restricts that ability to alter plans as [they] move through retirement.”
The Government has taken steps to ensure ‘Foreign Pensions’ often referred to as QROPS (Qualifying Recognised Overseas Pension Schemes) are more closely aligned with UK pension schemes for individuals who do not intend to leave the UK long-term. This is to prevent QROPS being misused by anyone looking for a more favourable tax position. The changes will mean the income from a QROPS will be taxed in the same way as a UK pension for anyone returning to the UK – currently only 90% of income from a QROPS is subject to income tax rather than 100% in a UK pensions scheme.
Rachael Griffin, personal financial planning expert, Old Mutual Wealth, said: “The Autumn Statement is suggesting the member payment provisions will extend from 5 to 10 years, which is likely to impact the pension commencement lump-sum, limiting it to 25% of the UK tax relieved funds for 10 years instead of 5. The Statement also suggests a further review will be carried out on the eligibility criteria for foreign schemes, suggesting some schemes may lose the ‘recognised’ status by HMRC. We look forward to the detail being released on this.”
Action on pension scams
The industry has applauded the Chancellor’s statement that a consultation before Christmas will look at ways to tackle pensions scams, including banning businesses from cold calling someone about their pension. This will include scammers targeting people who inadvertently ‘opt-in’ to receiving third party communications.
Stephen Lowe, group communications director at Just Retirement, said: “The Government’s decision to introduce a ban on pensions cold calling – backed by stiff penalties – is to be welcomed. Almost half of over-65s have taken no steps to determine how retirement ready they are so receiving what seems to be a ‘perfectly’ timed call from a scammer offering to help can have disastrous consequences for their long term financial wellbeing.”
Insurance Premium Tax
Insurance Premium Tax (IPT) will increase from 10% to 12% from 1 June 2017. IPT is a tax on insurers and it is up to them whether and how to pass on costs to customers.
Corporation tax and business investment
Corporation tax will fall to 17% by 2020.
The Government will give £400 million through the British Business Bank to invest in growing innovative firms.
Autumn Statement becomes Autumn Budget
The Chancellor concluded his speech by announcing the abolition of the Autumn Statement. He said: “No other major economy makes hundreds of tax changes twice a year, and neither should we. So the spring Budget in a few months will be the final spring Budget. Starting in autumn 2017, Britain will have an autumn Budget, announcing tax changes well in advance of the start of the tax year.”
He added that from 2018 there would be a Spring Statement, specifically to respond to the forecast from the OBR, “but no major fiscal event”.