11 August 2015

What the new government means for your money

In the run up to May’s general election, very few commentators expected one party to win an overall majority in the House of Commons. However, that’s what happened – and as a result we now have a much clearer idea about the changes that could affect your personal finances over the next few years.

We’ve been through the most recent Budget, plus the changes announced by the last government, and the pledges made before the election, to pick out what we believe to be the most important ways in which managing your money could be different over the next parliament.

The government has pledged that personal taxes won't rise for five years but the minimum wage will

In their election manifesto, the Conservatives promised not to raise either income tax, National Insurance, or VAT during the next five years. In fact, the amount of your income that is exempt from income tax through the personal allowance is increasing. From April 2016, you won’t have to pay income tax on the first £11,000 that you earn, and it's only when you earn £43,000 of income in a year that you’ll start paying the higher rate of 40%. They have also pledged to increase this further to a personal allowance of £12,500 and higher rate threshold of £50,000 by the end of this parliament. Not all taxes will be unchanged, though. Household budgets might need to stretch a little further from November this year, after the Summer Budget increased insurance premium tax from 6% to 9.5%.

April will also see a surprise change to the minimum wage in the UK. In the Summer Budget, the chancellor announced a new National Living Wage, which applies to everyone aged 25 and over. This increases the minimum that people are entitled to be paid to £7.20 per hour from next April, with the aim of rising to £9 by 2020.

Some families could have less inheritance tax to pay

Many people have been concerned about the impact that passing on their home could have on their families’ inheritance tax (IHT) bill, since many homes would push the size of estates over the £325,000 IHT threshold. Another of the Summer Budget announcements was designed to ease these worries by giving each individual an additional IHT ‘residence nil rate band’ of £100,000, which will increase by £25,000 a year from April 2017 and each year to reach £175,000 in 2020. This applies where the main home goes to a direct descendant only, so will not benefit those without children as the standard nil rate band is frozen until 2020/21.

Because any unused IHT Allowance can be passed from one spouse/civil partner to another, inheritance tax exemptions for a married couple or registered civil partnership could total £650,000. With the family home allowance also being transferable, the addition of £175,000 per person by 2020/21 could result in total combined exemptions for each couple of up to £1 million. However, the additional allowance cannot be used against other assets if the value of the home is below that amount and the new allowance is tapered down for estates worth above £2 million. So whilst the announcements could benefit some families there is more complexity to this tax than ever before and it is important to understand how this affects you.

To find out more information on how IHT could impact your family and how Nationwide can help, contact our Financial Planning Service on 0800 328 7812.

First-time buyers will get more help

This autumn sees the launch of a Help to Buy ISA, which is designed to help boost the deposits of people saving towards their first home. First-time buyers with a Help to Buy ISA account will be able to save up to £200 a month, with the government then topping this up to the tune of 25% of the amount they save. You’re allowed to receive £3,000 of government top-ups in this way.

It’s not only the government who are able to offer help for first time buyers. At Nationwide, we are currently offering our Save to Buy 5% deposit mortgage scheme. Find out more about how we can help you onto the property ladder (terms and conditions apply).

Landlords will get less tax relief on their mortgage payments

Up to now, landlords have been able to deduct buy-to-let mortgage related costs (including mortgage interest) from their income when it comes to calculating how much income tax they need to pay, effectively giving full tax relief on these costs at the landlord’s highest income tax rate. In the Summer Budget though, the government announced that it will limit the amount of this tax relief to 20% for all individuals by April 2020. This doesn’t affect landlords who are basic rate tax payers, but it will mean that landlords who are higher and additional rate taxpayers will lose some of their tax advantage.

Savings will get lots more protection from tax – but less protection from bank failures

Before the election, it was announced that from April 2016 onwards, the first £1,000 of interest that savings earn each year will be tax-free for basic-rate taxpayers. If you are a higher rate income tax payer, then you will get your first £500 of savings interest protected this way. This change, which came in the July Budget, will still be going ahead – and applies to savings held outside of ISAs.

Savings will be getting more protection from tax, but from January 2016 onwards, they will have less protection in the event of financial institutions going bust. The Bank of England has announced that the maximum deposit that can be protected in the event that a bank or building society failing will drop from £85,000 to £75,000 per depositor and institution. If you have £75,000 or more saved in one institution, you may want to think about how this affects you.

There could be further big changes to pensions

In 2014 the government made accessing your defined contributions pension pots more flexible. In the July Budget, it was announced that the government was considering further fundamental changes to pensions. One suggestion that is currently being consulted on is the concept of a lifetime savings account to replace ISAs and pensions.

The July Budget also announced that people earning £150,000 or more, will see the tax relief they can claim on contributions reduced from the standard annual allowance of £40,000 down to £10,000 if they earn £210,000 or more per year, on a sliding scale. And the total allowable value of your pension funds when you take them will be reduced from £1.25 million to £1 million; anything above this amount will result in a tax charge.

In the Queen’s Speech it was promised that the state pension will continue to keep pace with earnings or inflation, whichever is the highest, and that as a minimum it will grow by 2.5% each year.

Dividends will be taxed differently

At the moment, dividends from the shares you hold in companies are taxed differently to other forms of income. If you are a basic rate taxpayer, you don’t pay any tax on dividends – and if you are a higher rate taxpayer you only pay tax on them at 25%, which is quite a bit less than the 40% you pay on other income. From April 2016 onwards, this will change. Everyone will get a tax-free dividend allowance of £5,000 in addition to their £11,000 personal allowance but with rates rising to 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively. This will be a significant change for some investors – and many small business owners who get a large proportion of their income through dividends.

Nationwide is not responsible for the content of external websites or apps. Reference to any organisation's websites or apps is not an endorsement of that website or app or the organisation's products or services.

Please note that this is our interpretation of the rules and relevant changes. Tax treatment depends on your individual circumstances and may be subject to change in the future.

Mortgages are available to UK residents aged 18 or over and are subject to underwriting and criteria.

The tax information provided is based on our current understanding of current law and HM Revenue & Customs practice which can change.

The value of your investment can go down as well as up so you may get back less than you originally invested.


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