The 2016 Budget explained

What the Chancellor’s Budget means for you

Learn more about the 2016 Budget announcement, including a summary of the key points and an expert analysis of how you might be affected.

What does the Budget mean for savers?

The government announced that it will introduce a hefty rise in the annual ISA allowance, to £20,000, in April 2017 – it’s currently £15,240.

Younger generations will also be offered a new Lifetime ISA, available to anyone aged between 18 and 39. It’s designed to help those who are building up cash towards their first home or their retirement and is expected to be available in the 2017/18 tax year.

  • Under the proposals, savers can pay up to £4,000 a year into a Lifetime ISA and the government will add a bonus worth 25%, or £1 for every £4 saved. These top-ups will be available until savers reach the age of 50. Contributions into a Lifetime ISA will count towards their annual ISA allowance.
  • The savings and bonus payments could be used to buy your first property worth up to £450,000, a minimum of 12 months after opening an account. Those already saving into a Help to Buy: ISA will be able to transfer these savings into the Lifetime ISA, or save into both. However, only the government bonus paid into one of these accounts can be used to buy a home.
  • It will be possible to access the savings and government bonus payments tax-free and penalty-free for retirement after the age of 60.
  • If savers want to withdraw cash from their Lifetime ISA to pay for something other than their first home or retirement, a 25% charge applies to the amount being withdrawn. This returns the bonus element of the money being used to the government with a small additional charge applied. The individual will still have access to their savings, and any interest earned on those savings minus the charge.

For more information on the Lifetime ISA, read Gov.uk’s page.

Clare Francis, Barclays Savings and Investing expert, says: ‘Savers received good news in the Budget with the announcement that the annual ISA allowance will rise to £20,000 from 6 April 2017 and the introduction of the new Lifetime ISA. It’s good to see individuals being given greater incentives to save for their futures in a tax-efficient way.’

How will your income be affected?

The Chancellor made further increases to income tax thresholds. The changes due in 2017 will only apply in Scotland if they are adopted by the Scottish government.

Income tax thresholds were also affected. The personal allowance increased from £10,600 to £11,000. In April 2017, this will rise to £11,500. The 40% tax threshold increased from £42,385 to £43,000 on 6 April 2016 and this will also rise again in April 2017, jumping to £45,000.

Someone earning between £45,000 and £100,000 will be £500 a year better off in 2017/18 compared to 2016/17 as a result of the latest changes to income tax thresholds.

Patricia Mock, Tax Director at accountancy firm Deloitte, says: ‘As widely expected, the Chancellor has taken the opportunity to accelerate the move towards the [Conservative manifesto] commitment of a personal allowance of £12,500 and a higher-rate threshold of £50,000 by 2020.’

From April 2017, there will also be two new tax-free allowances worth £1,000 a year, relating to the sharing economy. One is designed to cover selling goods or providing services, such as profits from the sale of items on auction websites. The other is designed for income you make from your property, such as renting a room online.

What does the Budget mean for investors?

There were a number of measures in the Budget that may affect investors.

  • The government confirmed its intention to complete the Lloyds Banking Group share sale to the public in the 2016/17 tax year, after delaying the sale earlier this year due to volatility in financial markets.
  • The Chancellor announced that capital gains tax (CGT) rates would be reduced from 6 April 2016, providing a boost for investors holding assets outside ISAs and pensions.
  • The CGT rate for higher and top-rate taxpayers fell from 28% to 20%, while the rate for basic-rate taxpayers was reduced from 18% to 10%. But the rate cuts did not apply to residential properties or carried interest, so buy-to-let investors didn’t benefit. If a property is your main residence, CGT does not apply.
  • The government confirmed that buy-to-let investors with larger portfolios of more than 15 properties will be covered by the new additional stamp duty land tax rates, which came into effect on 1 April 2016.

Lucian Cook, UK Head of Residential Research at property company Savills, says: ‘Keeping the old rates of CGT on residential property will make it more difficult for existing buy-to-let investors (who already face a cut in income tax relief on mortgage interest payments) to reorganise their portfolios towards better performing property.’

There was a mixed reaction in the UK stock market to the Budget announcement. Shares in oil companies jumped after the government announced tax cuts for North Sea oil producers. However, shares in British soft drinks companies fell following the announcement of a new sugar tax.

Bear in mind when planning that tax rules might change again in the future and that their effects on you will depend on your individual circumstances. Barclays does not give tax advice. If you are unsure of your tax position, you should seek independent advice.

What does the Budget mean for your pension?

The Chancellor revealed plans for a consultation on a new Pensions Advice Allowance, proposing to allow savers to access up to £500 from their defined contribution pension – before the age of 55 – to pay for financial advice. There were no further significant tax changes to existing pension rules.

The Lifetime Allowance (LTA) on pensions, the total amount that can be drawn from pension schemes without incurring an extra tax charge, fell from £1.25m to £1m.

The amount that can be paid into a high earner’s pension with tax relief each year was also reduced. It applies if your ‘annual adjusted income’, which includes income from all sources, as well as your employer’s and your own pension contributions, is more than £150,000 a year. However, if you actually earn less than £110,000 (even though your adjusted annual income is more than £150,000), you will not be affected.

What else did the Chancellor announce?

  • Insurance 
    The standard rate of insurance premium tax increased from 9.5% to 10% from 1 October 2016.
  • Fuel duty
    Fuel duty was frozen again in 2016/17, saving the average motorist £75 a year.
  • Small businesses
    The Chancellor announced a series of major changes affecting small businesses.

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