The key remit of George Osborne’s job as Chancellor of the Exchequer is to eliminate the deficit on public finances by 2020. Achievement of this target would clearly not harm our ambitious Chancellor’s aspirations to become the next Prime Minister.
Decisions made in relation to public finances affect the entire population, from public sector workers, to business owners, to the unemployed. And, of course, so much in the financial advice sector depends on how the government handles Budget decisions. The Chancellor clearly has his work cut out to bring in desperately needed revenue while simultaneously retaining his popularity among voters, the majority of whom will undoubtedly vote according to their individual circumstances.
The general election on 7 May 2015 saw the UK move away from a Coalition Government, to a full-blooded Conservative one. The new Government called for an emergency Budget based solely on its own Conservative policies. The resulting changes which were announced were enough to send the world of financial advice into a spin, with advisers having to respond by ensuring their clients make the best of the options available to them.
Non-domiciled tax status and dividend taxation were revised, the lifetime allowance faced further tinkering and a Green paper was published on proposals for 'a radical change' to the pension saving system. In short, this was a Budget that presented many financial planning challenges and opportunities for advisers.
The permanent non-dom status is a tax loophole that has allowed thousands of wealthy families to live in Britain without paying tax on their overseas income. It will be abolished in April 2017 and could raise £1.5bn over the course of this parliament giving non-doms one year in which to overhaul their financial plans.
Additionally, from April 2016, owner-managers of limited companies are likely to see a significant rise in the amount of income tax payable on dividends. The current rule of grossing-up of dividends by a 10% tax credit is to be abolished and a new Dividend Allowance will effectively tax the first £5,000 of dividends at 0%. Dividends after that will be treated as taxable income. These new rules have paved the way for numerous financial reviews relating to pensions and ISA contributions.
It is clear that the Government has always seen pension tax relief as a soft target for increasing short-term tax revenues. The freedoms introduced in April this year were expected to be the only tax raid on pensions for some time. However, the emergency Budget proved otherwise, suggesting that moving pensions “to an ISA-like system” was on the cards. But, with no decision made in the Autumn Statement, we remain hanging in the balance until the April 2016 Budget. The upside of the delay for some individuals has been that they have had more time in which to place increased amounts of cash into their pension pots, legitimately excusing them from paying tax on the way in.
Financial advice will continue to evolve and adjust in line with government decisions. While the Chancellor cuts public spending and continues its smart tax raids, the financial advice sector persists in navigating the rule changes to ensure its clients’ wealth is working efficiently.