IT was a revolutionary Budget for savers and investors and it is easy to be distracted by some of the headline announcements, such as the Lifetime Individual Savings Account (LISA) and the big increase to the main ISA allowance, which do not take effect until next year, says Brewin Dolphin's Oliver York.
So, what action should investors take more immediately, not only in light of last week’s Budget, but also the existing measures announced last year that are due to take effect next month?
Top up your pension
There is still time to make the most of the generous annual allowance for pension contributions of up to £40,000 before it is reduced for those earning more than £150,000 per annum.
From 6 April, anybody earning over £150,000 will see their annual allowance reduced by £1 for every £2 of additional income over the limit. The maximum impact is a £30,000 reduction in the annual allowance, meaning those earning £210,000 a year or more can only put £10,000 into their pension each year.
Protect your lifetime allowance
Another pension tax hit to be introduced next month is the cut to the lifetime allowance. This is the total amount you are allowed to accrue in your pension and it is due to fall from £1.25m to £1m from April 6.
Any savings above this level when you begin to draw your pension will be subject to a lifetime allowance charge. This is 55 per cent if the excess is taken as a capital sum.
If taken as income the charge will be 25 per cent and you will pay income tax at your marginal rate on the remaining income. For 40 per cent tax payers that works out as an overall tax charge of 55 per cent. If you are a 45 per cent tax payer when you take the benefits you would pay an effective tax rate of 58.75 per cent.
This year’s ISA.
There is still time to take out an ISA for the 2015/16 tax year, so if you have not done so already, take advantage of this year’s allowance of £15,240 before 6 April. Use it or lose it.
Open a Help-To-Buy ISA.
The new Lifetime ISA (LISA) will not be launched until April 2017, when it will begin offering generous tax breaks for those saving to buy their first home or investing for retirement.
However, any aspiring homeowners with a Help-to-Buy ISA can roll their savings into a LISA when it is launched. The Help-to-Buy ISA therefore effectively provides an early entrance into the LISA scheme. Help-to-Buy ISAs allow a maximum initial deposit of £1,200, then maximum monthly contributions of £200, and like the LISA, contributions will attract a 25 per cent boost from the government, up to a maximum of £3,000 (only open to savers under 40 next April).
Capital gains tax
Higher rate taxpayers will see their capital gains tax (CGT) rate fall from 28 per cent to 20 per cent, and basic-rate taxpayers will have their CGT rate reduced from 18 per cent to 10 per cent. This will apply to disposals made on or after April 6, (outside of the annual CGT allowance).
Reduce your income tax rate
Given that CGT will now be charged according to your income tax banding, it could pay to lower your taxable income for the purposes of taking advantage of the lower CGT rate. If you are able to reduce your taxable income from a higher-rate taxpayer to a basic-rate taxpayer, the CGT you will pay on disposals above the annual exemption will fall from 20 per cent to 10 per cent.
This can be done by several methods, including: transferring income-producing assets to a lower-earning spouse; deferring taking the state pension to keep your income down or reducing income withdrawals from a flexible drawdown pension. However, please speak to a financial advisor.
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