Budget 2020: Dramatic increases to JISA allowance and annual allowance taper thresholds

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The Budget brought some eye-catching announcements. Tom Selby, AJ Bell's Senior Analyst, and Laura Suter, AJ Bell's Personal Finance Analyst, pick out the key changes and discuss what they mean for you and your finances.

  • Significant increase in the point the pension tax annual allowance taper kicks in
  • Pension lifetime allowance increases to £1,073,100
  • Review of net pay scandal
  • Junior ISA subscription limit increased to £9,000
  • CGT allowance increased to £12,300
  • NS&I net financing requirement slashed from £10.1bn to £6bn
  • Fuel duty frozen
  • National insurance threshold increased to £9,500
  • Stamp duty surcharge for overseas buyers
  • Review of UK funds industry
  • Cryptocurrencies to comply with financial promotion rules

Pensions annual allowance tax taper

  • 2019/20: threshold income = £110,000; adjusted income = £150,000; minimum annual allowance = £10,000
  • 2020/21: threshold income = £200,000; adjusted income = £240,000; minimum annual allowance = £4,000

With the NHS already straining under the weight of an ageing population and braced to come under more pressure from the Coronavirus outbreak, the Chancellor simply had to do something to address the pension tax problem causing thousands of senior doctors to turn down extra shifts.

At the moment, the pension tax taper kicks in when someone’s ‘threshold’ income is above £110,000 and ‘adjusted’ income is above £150,000. Threshold income is broadly taxable earnings minus personal pension contributions, while adjusted income is taxable earnings plus employer contributions.

Where both limits are breached, the annual allowance reduces by £1 for every £2 of adjusted income earned above £150,000.

This has caused a particular problem for the NHS because thousands of doctors face being hit with swingeing annual allowance tax charges if they take on extra shifts. By raising the point at which the taper takes effect by £90,000, the Chancellor is hoping to ensure the Health Service has the people it needs to deal with the current crisis.

The price for this shift is being borne by those higher up the income scale with adjusted income above £300,000, who could see their annual allowance dip as low as £4,000.

While this is a necessary and welcome intervention which will at least reduce the number of people affected by the annual allowance taper, it is disappointing the Government has decided against scrapping this hideously complicated part of the pension tax system altogether.

Lifetime allowance

  • 2019/20: £1,055,000
  • 2020/21: £1,073,100 (1.7%, in line with September’s inflation figure)

The Government’s decision to peg the lifetime allowance to inflation in 2016 at least put a stop to years of cuts in retirement savings incentives by successive administrations.

As a result, savers will benefit from an £18,000 boost in the lifetime allowance in 2020/21, allowing up to £4,525 in extra tax-free cash to be generated.

Call for evidence on pension tax administration

There are well over 1 million people paying into net pay pension schemes who do not automatically receive the tax relief they are due because they earn below the £12,500 personal allowance. It is a scandal that this injustice has been allowed to fester for years, depriving those in most need of a valuable retirement savings boost.

Any review of the pension tax system should go much broader than this single issue, however, and instead aim to radically simplify the rules facing savers. This review should consider moving to a single annual allowance for defined contribution pensions, with defined benefit tax relief costs controlled by the lifetime allowance only.

In addition, the tax treatment of pension freedoms withdrawals – which sees thousands of hard-working savers clobbered by ‘emergency tax’ on their first withdrawal – should be addressed as a matter of urgency.

Junior ISA subscription limit increased to £9,000

Parents will see a massive jump in the amount they can put away in a Junior ISA each year from next month, with the limit more than doubling from the current £4,368 to £9,000. It’s the biggest jump in the allowance since the Junior ISA launched in 2011, but with the average subscription per account being less than £1,000 it’s unlikely to be a boost many households will use. The move to hike the Junior ISA allowance but keep the main ISA and Lifetime ISA rates the same means it only benefits a smaller group of people – making the move cheaper for the Government.

The increase in allowance means a parent starting next month for a newborn child could build a tax-free pot of more than £240,000 by the time their child reaches 18, assuming they put the maximum in each year and it grows by 4% every year after charges.
CGT allowance increased to £12,300.

The amount you can make each year in capital gains before you pay tax has increased from the current £12,000 to £12,300 from next month, broadly in-line with the CPI measure of inflation. The move will save higher and additional-rate taxpayers with gains above the limit £60 a year and basic-rate taxpayers £30 a year, on non-property assets.

NS&I net financing requirement slashed from £10.1bn to £6bn

A big hit to savers is hidden in the policy costings, with the amount that the NS&I is targeted to raise being slashed from £10.1bn this tax year to £6bn for 2020-21. This means that rates offered by NS&I are likely to become less competitive, meaning that the series of rate cuts savers have already been subjected to are likely to continue next year.

Fuel duty frozen

Continuing its decade-long run the fuel duty freeze has stayed put, despite lots of rumours that this Budget would be when the freeze thawed and an extra 2p was added to each litre of fuel. It appears that worries about piling more tax on individuals and businesses who are going to face tough times due to Coronavirus would be ill-timed and not well received by voters or MPs.

National insurance threshold increased to £9,500

One of the big manifesto pledges was giving most earners a handout by raising the threshold at which you pay National Insurance from the current £8,632 to £9,500. This change will kick in next month, meaning workers will see an almost immediate benefit with around 31 million set to benefit – based on Government estimates. Mr Sunak also reiterated the pledge to ultimately raise this threshold to £12,500 in the future.

Stamp duty surcharge for overseas buyers

The plans for a tax on property wealth went down like a lead balloon so it’s no surprise they were ditched from the Budget. But what’s more surprising is there is no clear detail on the Conservative manifesto promises to offer more long-term mortgages in order to cut to ‘slash the cost of deposits’ for first-time buyers. The information was vague at the time and the Chancellor hasn’t put any more flesh on the bones to show how the Government would push the mortgage market to offer these products.

A manifesto promise that has materialised is the plan to charge a higher rate of stamp duty for overseas buyers, who will now face an extra 2 percentage point charge, on top of the current surcharge for second homes. This is a scaling back from the 3 percentage point rate originally suggested by the Government.

The Chancellor also announced a raising of the Budget for affordable housing to £12bn. Presumably this money will partly be used to fulfil the manifesto of discounted homes to local families, with the cost of homes cut by 30% for the lifetime of the property – intended to offer a more affordable way for key workers like police officers and teachers to buy a first home in their local area. The plan is for developers to foot the bill, as part of rules that will mean those building new estates will have to offer these ‘affordable’ homes.

Review of UK funds industry

The Government has also announced plans to review how to make the UK more attractive as a place for asset managers to set up business and base their funds. The review will take place this year and look at aspects like changing the tax regime, regulation and VAT treatment of funds in order to make sure the UK doesn’t lose out to its European neighbours post-Brexit as a place to base funds.

Cryptocurrencies to comply with financial promotion rules

The Government and regulators have been trying to crackdown on the cryptocurrency industry, and have announced a further consultation that will mean certain cryptoassets have to comply with financial promotions rules. The industry has already been pinpointed as one rife with scammers and rip-off merchants and anything more that can help to limit the exposure of these products to inexperienced investors should be welcomed.

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Laura Suter

Laura Suter is Personal Finance Analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.