How does the 2017 budget affect your money?

The 2017 UK spring budget, the last one before we move to a once-a-year autumn budget, threw up some potential surprises for investors around dividends and offshore pension transfer charges. We look at how they are impacted.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
2017 UK budget

The 2017 spring budget wasn’t expected to provide too many surprises, given the government needs to keep its powder dry for the economic and fiscal challenges that could follow Brexit. But it ended up generating a large amount of negative coverage for the chancellor of the exchequer, Philip Hammond, who was forced to make an embarrassing U-turn over his plans to charge some of the self-employed more national insurance.

The budget also included a number of measures that will affect investors and pension savers. IG went through the document to analyse the impact.

Income tax

The government pledged to continue to gradually implement its election pledge of raising the personal tax allowance to £12,500 and the higher rate band to £50,000 by 2020. As of 6 April 2017, the state of play for income tax is as follows:

  • Personal allowance: £11,500 (£11,000)*
  • Basic rate band (20%): up to £33,500 (£32,000)
  • Higher rate band (40%): between £33,500 - £150,000 (£32,000 - £150,000)
  • Additional rate taxpayers (45%): over £150,000

*Brackets represent values for the 2016/17 tax year

Dividend allowance quickly slashed

Hammond announced that the tax-free allowance on dividends, only introduced at the start of the 2016/17 tax year, will be reduced to £2,000 from £5,000 as of April 2018.

The measure was part of the chancellor’s attempt to make the tax system fairer. It is intended to make it far less attractive for a self-employed person to operate through a company in order to reduce their tax liability by paying themselves dividends.

However, it also impacts some investors holding shares outside tax wrappers like individual savings accounts (ISAs) or self-invested pension plans (SIPPs). Only those with over £50,000 worth of shares outside an ISA or SIPP wrapper are likely to be impacted by the change.

ISAs

The changes to dividend taxation add to the list of reasons why investors should utilise their ISA allowance, which increases to £20,000 for the 2017/18 tax year.

What’s more, the introduction of the Lifetime ISA (LISA) will allow under 40s to save up to £4,000 each year until their 50th birthday and receive a 25% bonus on their contributions from the government.

The LISA therefore offers a larger maximum bonus (£32,000) than the Help-to-Buy ISA (HISA), which comes in at just £3,000. LISA funds are supposed to be withdrawn to put towards a deposit for a first home or for retirement, and investors should be wary of withdrawal penalties that apply to the LISA if funds are used for any other purposes.

We believe a key benefit of investing in a LISA over the HISA is the ability to invest in stocks and shares rather than leaving contributions in cash. The gap between low cash savings interest rates and inflation is continuing to widen rapidly, meaning that cash savings are worth less in everyday terms.

Pensions

The Treasury continued to close tax loopholes in the budget, springing a surprise 25% charge on offshore pension transfers.

The anti-tax avoidance measure is designed to prevent individuals, who have benefited from UK tax relief on their pension contributions, from gaining a tax advantage by transferring their pension scheme to a different tax regime.

The tax charge will apply to individuals transferring their pension into a qualifying recognised overseas pension schemes (Qrops), unless they are transferring the pension within the European Economic Area (EEA) or into a new scheme provided by their employer.

The government estimates that only a minority of Qrops will be affected but that the new charge will bring in £65 million in tax revenue.

Get your free beginner's guide to investing

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Get your free beginner's guide to investing

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Open an account now

Ready to invest? Set up your bespoke fund in minutes and become fully invested in your goals