In the year before a general election, the UK Budget tends to include an element of political spin, to ensure the party (or parties under the current coalition government) in power keep any swaying voters on their side. This year was no different and after announcing that the UK economy growth forecast has continued to improve beyond previous predictions, the main thrust of George Osborne’s 2014 Budget was aimed at “the makers, the doers and the savers”. This included significant reforms to the UK tax-free savings and pension rules.
More interesting from our blog: UK Self Employed Tax Deductions
As well as explaining the headline-making changes mentioned above, we have put together a summary of the 2014 Budget and what it means for the UK tax payer.
• The personal allowance for the 2015/2016 tax year will increase to £10,500 (from £10,000 for the 2014/2015 tax year). This means that an individual can earn up to £10,500 from 6 April 2015, without paying a penny of UK income tax. According to the Government this will exclude an additional 300,000 workers from paying any tax. In addition, the increase in the personal allowance will mean that UK taxpayers will on average be just over £200 per year better off than they are at present.
• The higher rate tax threshold (40%) will rise to £41,865 on 6th April 2014 and then to £42,285 from 6 April 2015. This will save taxpayers with income that exceeds this threshold £83 and a further £92 for the 2014/2015 and 2015/2016 tax years respectively.
• In the biggest shake-up of the UK pension rules in nearly 100 years, the Chancellor has significantly relaxed the rules on the withdrawal of cash from private pension schemes upon retirement. Under the previous rules, it was only possible to withdraw 25% of your pension pot tax free. In order to withdraw the remainder as cash you would be taxed at a whopping 55%.
If you didn’t want to pay this tax your only option was to use the remaining 75% balance to buy annuity from an insurance company which would subsequently pay out an annual income for the rest of your life. Annuities used to be considered a good deal, but as they were the only realistic option available, annuity providers had complete control of the market. This lead to increasing fees and falling amounts of annuities being paid out making the annuity regime increasingly unpopular.
To address the issue, the Chancellor announced that from April 2015, the 55% tax charge will be abolished. Instead you will only be taxable at your normal marginal rate of income tax, be that 20%, 40% or 45% on any drawdown that is made. This effectively treats the amounts held in pension pots as normal investment income.
This change offers greater flexibility and freedom to individuals on deciding on whether or not to buy an annuity from an insurer and will force annuity providers to make the purchase of annuity more attractive than they are at present.
• Another incentive to encourage savings was the increase to the annual tax-free savings ISA allowance to £11,880 on 6 April 2014, and then to £15,000 on 1 July 2014. In addition to the increase in the ISA threshold, from 1 July 2014 an ISA can comprise entirely of cash or shares or a combination of the two. This is a significant change as under current rules, the amount of cash that can be paid into an ISA prior to 1 July is £5,940, with the remainder of your annual allowance being used up by shares.
• The 10p starting rate for income from saving has been abolished and the band extended for tax-free income from £2,800 to £5,000, meaning low-income households will pay less tax on their savings income.
Other Budget News
• There was good news for motorists as the rise in UK fuel duty planned for September 2014 has now been cancelled, which should help ease the seemingly ever-increasing UK fuel prices.
• There is also a reduction in the level of air passenger duty on all long haul flights.
• Good news for drinkers in that duty on spirits and ordinary cider was frozen and beer duty has been cut by 1p a pint. But once again bad news for smokers as tobacco duty will rise by 2 per cent above inflation.
• Duty on fixed-odds betting terminals (casino-style gaming machines in Bookmakers) will be increased to 25 per cent. This is an attempt to cull the reported growth in gambling addition, as a result of the introduction of fixed odds betting machines in betting shops. However, all is not bad for gamblers as bingo duty was halved to 10 per cent.
• There will be Government support to build 200,000 homes.
• An additional £140 million has been made available for repairs and maintenance to flood defenses, following the damage caused by the recent storms in the UK.
• £200 million will be made available to fix potholes in UK roads, which cause heartache in the life of all UK motorists.
• The Research and Development tax credit for loss-making small businesses was raised from 11 per cent to 14.5 per cent
• Annual investment allowance was doubled to £500,000 and extended to the end of 2015, which will incentivise UK businesses to invest in capital expenditure, such as plants and machinery.