Wednesday’s Budget rolled out big reforms – of inheritance tax, the minimum wage and pensions. In this must-read special report, The Mail on Sunday’s awardwinning personal finance team identifies the winners and losers from the Budget, and shows how you can benefit.
Aspiring homeowners will be able to open a ‘help-to-buy’ Isa from December, allowing them to build a deposit for the purchase of a home.
Help-to-buy Isas add a Government top-up of up to £3,000 on £12,000 of savings for first-timers.
One person to welcome their introduction is accountant Jack Stevens, who lives with his girlfriend in North London. They are keen to buy, but must save a sizeable deposit.
Hard lesson: Student Noosa Khogali says grants are vital
Losing a grant will make it even tougher to keep up with studies
Student grants are being scrapped – to be replaced by loans that must be repaid after graduation. And students such as Noosa Khogali are unimpressed.
The means-tested maintenance grant currently provides £3,387 a year to students whose family income totals less than £25,000.
For households with an income of £30,000 it is £2,441, falling to £547 for those with income of £40,000. Households with a total income of more than £42,620 get nothing.
From autumn 2016 the grants will no longer be available for new students. They will have to take out a maintenance loan of up to £8,200 instead and start repaying it when they earn more than £21,000 a year – as with existing tuition fee loans.
Noosa, 19, has just completed the first year of a marketing degree at the University of Glasgow and says abolishing grants punishes poorer students unfairly.
She says: ‘As a Scottish student I am fortunate to have my tuition fees paid. But the £3,000-a-year maintenance grant I get is a vital boost to my finances.
‘Students like me who are not born with a silver spoon in their mouth need this extra cash.
‘I work both as a shop assistant and waitress in my spare time to keep a lid on my debts. My parents worry that this harms my studies.
‘Taking away grants from future students will only make it tougher for them to cope.’
Jack, 31, has already squirrelled away £8,000 in a cash Isa and continues to save a fifth of his income every month. He says: ‘I am saving like crazy to get my foot on to the property ladder. But it’s tough when you live in London and house prices are continually rising.
‘I’m not sure when I’ll buy a home, but I’m interested in the help-to-buy Isa as it will help me reach a position quicker where I can make offers for properties. Of course, it would be nice if I could earn a higher interest rate on my cash Isa.’
The new Isas can be opened with a maximum deposit of £1,000 and up to £200 can be paid in a month thereafter. Every £200 paid in is matched by £50 from the Government. The Isas are available on a per person basis so couples can gain up to £6,000 from the state. Most banks and building societies will offer them.
Existing homeowners willing to rent out a room will be able to generate extra tax-free income from April next year as a result of a big rise in the annual ‘rent-a-room’ allowance.
It will be raised for the first time in 18 years from £4,250 to £7,500 per household – or £144 a week. The extra allowance could help homeowners struggling with their mortgage. Matt Hutchinson, director of flat and house sharing website SpareRoom, says many homeowners should take advantage of the scheme if they are comfortable having a stranger in the house.
He says: ‘Taking in a lodger could help homeowners if interest rates rose sharply and meeting the monthly mortgage bill became difficult. Lodger landlords can earn, on average, £8,335 a year in London, and £6,071 elsewhere.’ Other rent-a-room websites include EasyRoommate, Weroom and mondaytofriday.
The rent-a-room allowance is per household. If the rent from the room is below £7,500 there is no need to declare it to the taxman. If it is more than the allowance, the income must be declared on your annual return, but you still pay tax only on the amount above £7,500.
Inheritance tax, once only paid by the super-rich, has become a middle-class plague as house prices have soared. But millions will now escape this unpopular death duty thanks to a chunky new allowance.
Dismayed: Wendy Nelson with Kieran, Bobby and Eddie
Childcare help is not enough – I still can’t afford to go out to work
Mother-of-three Wendy Nelson was initially pleased to learn that the number of hours of free childcare for three and four-year-olds would double to 30 a week.
But her joy turned to dismay when she learnt that her youngest child Eddie, 3, will be too old to qualify when the change comes into force in September 2017.
Single mum Wendy, 35, from Bellingham, Northumberland, who split from her partner two years ago, is looking after sons Kieran, 8, Bobby, 6 and Eddie full time.
Wendy, a child minder, is determined to return to work next year, but she says: ‘With just 15 hours of free childcare it will be harder for me to do much work while also managing the children.’
Wendy depends on income support and child tax credit, so she was worried about the cuts announced last week to these and other benefits. From April 2017, support provided to families through tax credits and its successor, universal credit, will be restricted to a maximum of two children, affecting hundreds of thousands of families.
Households who have a third child after April 2017 will not be eligible for further support – unless they have twins or triplets.
The good news for Wendy is that she has escaped the worst of the changes since those already receiving child tax credit, like her, are not affected. She says: ‘I got into debt after the split with my partner but I’m back on track with help from charity StepChange. But everything is a juggle.’
She is grateful the Chancellor left child benefit untouched so she receives the full weekly amount – £20.70 for Kieran and £13.70 for both Bobby and Eddie.
And she will not be affected by either a cut in the income threshold for tax credits from £6,420 to £3,850 or a cut in the annual benefits cap from £26,000 to £23,000 in London and £20,000 elsewhere.
Simon Markey, boss of mutual OneFamily, says it is vital families claim all the financial support they are entitled to.
For all bar the wealthiest, inheritance tax will no longer be a problem. The new rules mean family members will be able to inherit as much as £1million from 2020 without paying 40 per cent death tax – so long as the estate goes to children or grandchildren and includes a family home worth between £650,000 and £2m.
Where the value of the net estate of the deceased (not just the property concerned) exceeds £2 million, the additional band will be tapered away at a rate of £1 for every £2 that the value of the estate exceeds this limit, meaning there is no incremental additional band on estates worth £2.7m or more.
The change is being phased in over the next five years, but will eventually boost an individual’s tax-free allowance with an ‘additional main residence allowance’ of £175,000.
The changes are complex, but the following scenarios show how they will save certain families more tax.
Winner 1: A widow or widower dies, leaving his or her estate worth £1.5million, including a £750,000 family home, to their children. Currently the bill would be £340,000 – or 40 per cent of the value of assets above the couple’s allowance (known as a nil-rate band) of £325,000 each or £650,000. In 2020 the bill would be cut to £300,000, as the children can use £100,000 of ‘additional main residence allowance’ calculated by subtracting the nil-rate allowance from the value of the property.
Winner 2: If the above scenario is the same but £1million of the £1.5 million estate lies in the value of the home, the children could claim the maximum extra relief of £350,000 – or £175,000 per parent – cutting their tax bill to £200,000.
Jo Bateson at KPMG says: ‘The new allowance is a welcome relief for those with houses valued from £650,000 to £1million as they are now able to pass them on to the next generation without an inheritance tax charge. But for those with higher value properties, the relief tapers away to nothing after £2.7million.’
The Government has hinted that parents will be able to downsize without losing the extra allowance.
Bateson says: ‘These provisions have yet to be announced in detail but we hope it will spur families to release equity to let younger generations get on the property ladder.’
The threshold at which workers start paying higher rate tax will rise for the first time in five years – lifting 130,000 people out of the 40 per cent tax bracket. In April 2016 the amount workers can earn before being hit with higher rate tax will rise from £42,385 to £43,000 a year.
The Government aims to raise this to £50,000 by 2020, while the personal allowance – the amount everyone can earn tax-free – will also rise from £10,600 to £11,000. In April 2017 it will rise again to £11,200 and eventually to £12,500 by 2020.
Those on £43,000 will be £423 better off, while those earning £44,000 to £121,000 will gain £203. Even the highest earners on more than £122,000 will pocket an extra £43.
But not all taxpayers will be winners. Those on incomes between £5,000 and £30,000 will typically be worse off by about £1,000. This is due to restrictions in tax credits that come into effect over the next two years. The worst hit in this income group are those on £13,000, who will be £1,606 worse off. A family with three children and a household income of £30,000 will lose £1,519 due to the tax credit changes, says accountancy group KPMG.
Osborne plans to make it law for the personal allowance to rise in line with the minimum wage so the lowest earners do not pay income tax.
Dropping out of the higher rate band can be a mixed blessing. It opens up the possibility of claiming marriage allowance – only available to couples where one is a basic rate taxpayer and the other a non-taxpayer. But it also means those paying into pensions will see their tax relief cut from 40 to 20 per cent.
Tax perks for landlords of residential properties are being cut, a move some experts say may bring the buy-to-let boom to a shuddering halt.
There are two cuts being applied. The first affects the so-called ‘wear and tear allowance’. Currently landlords of furnished properties can deduct 10 per cent of the rent they receive for income tax purposes. This is to account for the expense of replacing worn-out furnishings, but it is granted automatically regardless of whether a landlord incurs such costs. From April next year, landlords must provide the actual cost of replacing furnishings.
Unaffected: Tiana Tomic, left, and Mia Cupic are too young to benefit from the change
It’s important to treat staff fairly with pay we can live on
The Chancellor’s announcement of a new ‘national living wage’ was greeted with delight by Works and Pensions Secretary Iain Duncan Smith. But it got a mixed reaction from those basking in the sunshine on Friday in London.
The new wage, which will replace the national minimum wage for most workers, will start at £7.20 an hour next April, rising to £9 an hour by 2020.
Although it will mean improved pay for many workers, it will only apply to those aged 25 and over. Anyone over 21 but under 25 will still receive the national minimum wage, which is currently £6.50 an hour.
Mia Cupic, 22, from Earls Court, West London, welcomes the introduction of the national living wage, though she will not yet benefit from it because of her age.
Mia, who starts a masters degree in art history at the University of Sussex in September, says: ‘It is important that workers are treated fairly with a wage they can live on comfortably.’
Her friend Tiana Tomic, 21, from North Kensington, was not as impressed as Duncan Smith was.
A recent graduate in liberal arts and sciences, she says: ‘The cost of living seems to be increasing all the time.
‘So while the higher national living wage is welcome, I am sure many workers will not feel that much better off.’
The second reform is a squeeze on the tax relief that can be claimed for mortgage interest on buy-to-lets.
Currently, landlords can reclaim tax at their highest marginal rate – up to 45 per cent. From April 2017 this will be cut to 20 per cent – the basic rate of income tax. The restriction will be phased in over four years to allow landlords time to prepare and will not affect furnished properties used for holiday lets.
Adam Seale, head of fund platform Interactive Investor, says the move will ‘take the heat out of the buy-to-let market’ as some landlords desert the sector altogether. Genevieve Moore, at accountant Blick Rothenberg, warns there could be a ‘flood of buy-to-lets being sold’. And Alex Hammond of mortgage broker Kensington says the harsher tax regime should ‘focus the minds of anyone planning on becoming a landlord’.
The Chancellor’s cut to tax relief on landlords’ expenses is just part of the financial worries associated with owning a buy-to-let property.There are a multitude of costs – and regulations – to consider as well as potential void periods when a property remains empty.
Any existing or prospective buy-to-let investor worried about the impact of the changes should speak to an accountant or adviser. They are listed at the website unbiased.
Many tenants could face steep rent rises from April next year, when the first wave of cuts on tax relief for landlords’ expenses comes in. And their pain is unlikely to stop there as further restrictions hit buy-to-let property owners from April 2017.
‘The cut in tax relief on landlords’ mortgage interest payments will cause many landlords financial pain and some, if not all of it, will be passed on to tenants in the form of higher rents,’ says Jamie Morrison, of chartered accountant HW Fisher & Company. He adds that if some landlords pull out of the market altogether, a squeeze on supply could ‘ratchet up rents even further’.
Social housing tenants with household incomes in excess of £30,000 – or £40,000 in London – are also facing surprise rent rises.
HOW AND WHEN THE KEY CHANGES WILL AFFECT YOU
● FILL up the petrol tank worry-free. Scheduled Fuel Duty rise of 0.54p per litre will be scrapped.
● BOOST your state pension. Those reaching state pension age before April 6, 2016 will be able to pay extra National Insurance contributions to increase their state pension. Scheme will be open for 18 months.
● MORE money in your pocket. Adult national minimum wage to increase by 3.1 per cent to £6.70 an hour. The apprentice rate for ages 16 to 18 increases by 57p an hour to £3.30.
● HIGHER insurance premiums hit households. Insurance premium tax will rise from a standard 6 per cent to 9.5 per cent.
● BUILD a home deposit with Government help. Help-to-buy Isas for first-time property buyers can be opened from December 1. This provides a maximum Government bonus of £3,000 on savings
● TAKE your children abroad for less. Air Passenger Duty on flight tickets will be scrapped for children up to the age of 16 travelling in economy class.
● MORE take-home pay for millions of workers. Tax-free personal allowance rises to £11,000 – earlier than originally timetabled. Higher-rate taxpaying threshold will also increase to £43,000.
● A FAIRER state pension to be introduced, worth about £148.40 a week.
● A HIT for pension savers. The lifetime allowance for pension savings will be reduced from £1.25 million to £1 million. Taxpayers earning more than £150,000 a year will see tax relief on pension contributions restricted further, with a tapering away of the annual allowance to a minimum of £10,000.
● A TAX break for savers. A new personal savings allowance is being introduced, exempting the first £1,000 of savings interest from tax for basic-rate taxpayers and the first £500 for higher-rate taxpayers. It does not apply to additional-rate taxpayers.
● GREATER Isa choice. An innovative Finance Isa to be introduced to allow the inclusion of profit from loans arranged via peer-to-peer platforms. Isas will also be made more flexible, so money can be withdrawn and replaced without this affecting the annual allowance.
● A FAIRER deal for the elderly. A new system to cap the costs of long-term care comes in. The State will contribute to personal care costs once someone has spent £72,000 of their own funds.
● RENT a room for cash. How much homeowners can earn from letting a furnished room before having to tell the taxman is to rise from £4,250 to £7,500 per household.
● LANDLORDS squeezed. Wear and tear accounting rules for landlords of residential property will be reformed. Deductions from profit before tax can be made only for costs incurred, rather than the current 10 per cent of rental income, regardless of expenditure.
● LESS tax on your pension when you die. Lump-sum payments from a pension bequeathed by an individual who died over the age of 75 will be taxed at the beneficiary’s marginal rate of income tax, rather than at 45 per cent.
● BOOST for low paid workers. A new national living wage of £7.20 an hour will be introduced for workers aged 25 and over.
● MORE debt for students. Maintenance grants for university students will be replaced with loans, which will start to be repaid when earnings exceed £21,000 a year.
● EVEN more left in your pocket. Personal allowance to rise to £11,200. Higher-rate taxpayer threshold increases to £43,600.
● A FAIRER deal on inheritance. New tax rules will come into play. A ‘main residence nil-rate band’ of £100,000 for homeowners will be added to the £325,000 for total wealth when property is passed on to direct descendants after death. Both of these nil-rate bands are transferable to a surviving spouse or civil partner. The main residence nil-rate band will taper off for estates with a net value of more than £2 million.
● A TOUGHER regime for landlords. Restriction on relief on finance costs will be introduced and set at the basic rate of tax. The new rules will be phased in over four years.
● TAX changes for motorists. Vehicle Excise Duty bands are to be reformed for cars registered after April 1, 2017.
● CHILDCARE boost for working families. Those with three and four-year-olds will see free childcare double to 30 hours a week.
● HIGHER limit on pension savings. The lifetime allowance will be indexed to increase annually by the Consumer Prices Index measure of inflation.
● A FURTHER increase in the nil-rate band for inheritance tax on residences. This jumps to £125,000.
They will have to ‘pay to stay’, by paying market rates for their accommodation. It is not yet known when this will be introduced. By law tenants should be forewarned of any proposed increase in rent.
Rules vary according to the type of tenancy agreement, but if you pay rent weekly or monthly you should be given at least one month’s notice of any rise. If you pay yearly you should get six months’ notice.
Tenants can read up on their rights at the website shelter.org.uk – they may find an imminent rent rise encourages them to buy their own home. As well as making use of the new help-to-buy Isas, they can turn to the Government’s help to buy scheme offering loans and guarantees to those with small deposits. To learn more visit helptobuy.org.uk.
Many drivers who buy vehicles that are kinder to the environment will from 2017 face paying ‘road tax’ for the first time. The popularity of greener vehicles – which account for two-thirds of new car purchases – means the Government is missing out on valuable income. So from April 2017, it is reforming road tax – usually called vehicle excise duty – on new purchases. A special rate will apply in the first year of ownership, ranging from zero up to £2,000, depending on the engine’s green credentials.
After that, most owners of green cars will pay a flat rate of £140 a year. So a driver buying a hybrid car after April 2017, such as a plug-in Toyota Prius, which uses electricity and petrol and so is currently exempt from road tax, will pay £10 in year one and £140 a year thereafter. New cars costing more than £40,000 will attract an extra fee of £310 a year for the first five years.
Cars bought before the scheme is introduced will continue to pay duty based on the current system, where rates range from zero to £1,100 a year. Experts say when the changes come into effect drivers should consider a second hand car.
On the plus side, the number of years a new car can be owned before it must have an MOT check may be extended from three to four years subject to the results of a consultation. The Chancellor was also keen to remind drivers that fuel duty has been frozen for another year.
But what he gave with one hand he took with another – insurance premium tax will rise from 6 per cent to 9.5 per cent on November 1, raising the cost of motor cover. The average policy costs £530 a year, so drivers can expect to pay £20 more in tax.
AA president Edmund Kind, says: ‘This is an outrageous hike which could well backfire by leading to an increase in uninsured drivers.’
The British Insurance Brokers’ Association says it will affect young drivers most as they pay as much as £2,000 a year for cover.
Household cover will also be hit by the rise in insurance premium tax – increasing the average combined buildings and contents premium by £10 to £291 a year.
Travel insurance already attracts tax at 20 per cent while there is no tax on life insurance premiums.
Pension saving could undergo a revolution following the Chancellor’s decision to launch a consultation on tax relief on contributions. Currently, investors enjoy a big tax break when they pay into a pension, with high earners getting the greatest perk.
A basic rate taxpayer, for example, gets 20 per cent relief turning an £80 contribution into £100. But a higher rate taxpayer gets 40 per cent relief, turning £60 into £100 and an additional rate taxpayer 45 per cent. But the review could result in tax relief being scrapped or replaced with a flat rate – say 20 or 30 per cent. Indeed, pension saving could be put on the same footing as Isas with contributions made out of net pay, funds building up tax-free and then withdrawals being tax-free.
Adam Seale applauds the forthcoming review. He says: ‘We welcome the prospect of further radical pension changes if the outcome leads to more people being incentivised to fund their financial future.’
But he advises those able to afford it to maximise their contributions while tax relief is still available.
In particular, those with taxable income in excess of £110,000 should act fast. This is because from April 2016, their ability to fund a pension will be curtailed by new rules confirmed in the Budget. The rules will result in the loss of part of their annual pension allowance – the maximum amount that can be invested tax-free in their fund.
The limit is currently £40,000 but, according to fund broker Hargreaves Lansdown, someone earning over £210,000 will see a £30,000 cut in their annual allowance, effective losing £13,500 in tax relief.
Tom McPhail, the firm’s head of pensions research, says 45 per cent taxpayers can still claim up to £81,000 in higher rate tax relief on pension contributions this tax year.
‘Make the most of the tax breaks while you still can,’ he urges.
Other changes announced or confirmed in the Budget include a new £5,000 annual dividend allowance. From April next year the first £5,000 of dividends investors receive will be free of tax – irrespective of the tax band they fall in.
The Chancellor also confirmed that from April 2016 savers will be able to use Isas to receive interest from loans they have made through a peer-to-peer lender. Such lending attracts good rates of interest, although some borrowers go bust.
Retired maths teacher Bob Ford, 62, from Watnall, Nottinghamshire, welcomes the extension of Isas to peer-to-peer lending. He earns interest on money he has lent via online peer-to-peer lending service Zopa.
Bob says: ‘I got rid of my cash Isa as interest rates were so dismal. So to be given the chance to hold peer-to-peer funds tax-free is attractive.’
Bob and his wife Angela, 59, an administrator at a nursery, get regular advice from a financial consultant employed by insurer Wesleyan. He says: ‘I calculate the Budget has made me £176 a year better off. I will celebrate with a lovely walk in the Nottinghamshire countryside.’