Finance Bill 2017: Key takeaways for savers and investors

With the Brexit negotiations taking centre stage and Theresa May’s decision to hold a snap general election throwing the usual business of Government into disarray, it was little surprise to see few fireworks following the unveiling of the Finance Bill 2017 earlier this month.

That said there were a couple of key changes introduced which could significantly impact how you save and invest for the future.

Money Purchase Annual Allowance cut from £10,000 to £4,000 for the 2017/18 tax year

The UK’s pension tax relief system has unfortunately become increasingly complicated as successive Chancellors have attempted to raise revenue by paring back savings incentives for higher earners.

While the lifetime allowance (£1 million), annual allowance (£40,000) and tapered annual allowance (affecting those with total income above £150,000) remain unchanged by the latest Finance Bill, the Money Purchase Annual Allowance (MPAA) has been severely cut back.

To recap, the MPAA was introduced in April 2015 amid fears the pensions freedoms could be exploited by savers to ‘recycle’ their retirement pots and claim extra tax relief – costing the Government money.

The MPAA limits the amount anyone who has accessed their pension flexibly from age 55 can save into their pension each year. When the allowance was introduced in 2015 it was set at £10,000, but in the March 2017 Budget Chancellor Philip Hammond decided it should fall 60% to just £4,000.

The Finance Bill 2017, which enacts the legislation, confirms the cut will effectively be applied retrospectively from April 2017 – before the rules have actually been written into law.

Anyone who pays more than the £4,000 limit will have to pay tax on their excess contributions. Withdrawals can still be made in the same way as normal – so 25% will be tax-free and the rest taxed at the saver’s marginal rate of income tax.

It’s worth noting that middle-income earners could be caught by the lower MPAA, particularly if they are being automatically enrolled into a workplace pension scheme. If you are earning over £40,000 and are being auto-enrolled into a scheme with total contributions of 10% or more, you might want to check you aren’t in danger of breaching the limit.

If you’re affected by this, it’s worth considering using other tax wrappers such as ISAs for savings over and above £4,000, where you can still pay in up to £20,000 in 2017/18 and withdrawals are free of tax.

Tax-free dividend allowance cut from £5,000 to £2,000 from April 2018

The tax-free dividend allowance was introduced by former Chancellor George Osborne in the 2015 Budget and set at £5,000. This meant someone with £100,000 in unwrapped investments could receive dividends worth up to 5% of the fund without paying any tax at all.

However, the current Government has decided the allowance is too generous and so from April 2018 it will be sliced to just £2,000. On the above example, that means the same £100,000 investment outside of a tax wrapper can only generate dividends 2% before being subject to tax charges.

And those charges are not insignificant. Basic-rate taxpayers are hit with a 7.5% penalty, higher-rate taxpayers a 32.5% charge and additional-rate taxpayers a whopping 38.1% charge.

In our original example, where in 2017/18 £5,000 in dividends attracts a tax charge of precisely nothing, in the following tax year (2018/19) an investor receiving the same £5,000 in unwrapped dividends would pay tax of:

• £225 (basic-rate taxpayer)
• £975 (higher-rate taxpayer)
• £1,143 (additional-rate taxpayer)

This is because while the first £2,000 remains free of tax in 2018/19, the next £3,000 is not.

Any investors potentially affected by this should consider shifting their investments into tax wrappers like pensions or ISAs, where investment growth and dividend payments remain tax-free.

Tom Selby, AJ Bell Senior Analyst