Yesterday George Osborne delivered his sixth and final budget before the general election. He highlighted how the economy grew by 2.6% in 2014 (faster than any other advanced economy), but also outlined a list of proposals that will affect the average taxpayer.
Personal Income Tax
The personal allowance will increase to £10,600 in April 2015, followed by rises to £10,800 in 2016/17 and £11,000 in 2017/18. In 2015/16, this represents a tax reduction of £120 for a basic rate taxpayer.
The level at which people start paying 40% income tax will also increase from £42,385 in 2014/15 to £43,300 in 2017/18.
For the first time in 2015/16, married couples or registered civil partners will be allowed to transfer up to one-tenth (£1,060) of their personal allowances to their spouse or partner, if the transferee only pays basic rate tax. This enables a couple to save up to £212 if one partner is not able to use the full allowance.
Savings
From 6 April 2016, the first £1,000 of interest on savings will not be taxable for a basic rate taxpayer. A 40% taxpayer will receive the same benefit on an allowance of £500. It is estimated that 95% of taxpayers will not have to pay any tax on their savings under this new system so banks and building societies will stop deducting tax at source.
The government has also announced the introduction of a "Help to Buy" ISA where they will contribute 25% to the value of the account on savings of up to £12,000. A major caveat to this new initiative is that only £200 per month can be deposited so it will take 5 years before people see the full benefit.
The annual limit for new ISAs will increase to £15,240 in 2015/16 and there has been a significant relaxation of the rules regarding withdrawing money from the account. At present, any money withdrawn from an ISA can only be reintroduced within the annual limits. In future, savers will be able to withdraw money and then replace it within the same tax year without penalty.
Pensions
Another cut in the lifetime allowance for pension savings has been announced for 6 April 2016. The limit will now be set at £1m (down from £1.25m) saving the Treasury £600m annually. However, pensioners will be able to trade in their annuities for cash pots without incurring the current 55% charge.
Self Employed
The Chancellor announced that annual paper tax returns will be abolished and replaced with digital accounts. There was also the welcome news that class two national insurance contributions will be abolished in the next Parliament.
