Page 5 - Finnies_(21486)_[FB]17

Tax on savings income
Savings income is income such as bank and building society interest.
The Savings Allowance (SA) was first introduced for the 2016/17 tax year and applies to savings income. The available
SA in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an
SA of £1,000. For higher rate taxpayers, the SA is £500 whilst no SA is due to additional rate taxpayers.
Individual Savings Accounts (ISAs)
The overall ISA savings limit is £15,240 for 2016/17 but will jump to £20,000 in 2017/18.
Lifetime ISA
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year, between ages 18 and 50, and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy
a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax free.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) will be reduced from £10,000 to £4,000 from
6 April 2017.
The MPAA counters an individual using the flexibilities around accessing a money purchase pension arrangement as a means to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25%
tax free. It also restricts the extent to which individuals can gain a second round of tax relief by withdrawing savings and reinvesting them into their pension. The MPAA is currently £10,000 and applies to individuals who have flexibly accessed their money purchase pension savings.
Comment
The increase in the overall ISA limit to £20,000 for 2017/18 is partly due to the introduction of the Lifetime ISA. There will therefore be four types of ISAs for many adults from April 2017 - cash ISAs, stocks and shares ISAs, Innovative Finance ISAs (allowing investment into peer to peer loans) and the Lifetime ISA. Money can be placed into one of each kind of ISA each tax year.
There is a fifth type of ISA – a Help to Buy ISA. Help to Buy ISAs are a type of cash ISA and potentially provide a bonus to savers
if the funds are used to help to buy a first home.
Comment
The 'annual allowance' sets the
maximum amount of tax efficient pension contributions. The normal annual allowance is £40,000. The Money Purchase Annual Allowance was introduced in 2015, to restrict the annual allowance to £10,000 when an individual has taken income from a pension scheme.
Budget Summary 2017
Personal Tax 3