The 2018 Budget: A Summary

Philip Hammond’s highly anticipated 2018 Budget delivered a number of expensive spending pledges and announced headline-grabbing Income Tax cuts a year early. In this special-edition Wellesley bulletin, we summarise the key changes, and how you will be affected.

Key takeaways:

  • The tax-free Personal Allowance will rise from £11,850 to £12,500.
  • The higher rate tax band threshold will rise from £46,350 to £50,000.
  • The Capital Gains Tax annual exemption will increase to £12,000.
  • The Lifetime Allowance for pensions savings will increase to £1,055,000.
  • Junior ISA and Child Trust Fund subscriptions will increase to £4,368 from April 2019.
  • The qualifying period of the tax break for entrepreneurs will be extended to two years.
  • The Budget depends on a good Brexit deal; a no-deal departure may result in a whole new budget in the spring.

Yesterday (Monday 29th October), Philip Hammond delivered his 2018 Budget in the House of Commons, setting out the Treasury’s stall for the coming year. The Chancellor of the Exchequer pledged that the “era of austerity is finally coming to an end”, and said the budget would pave the way for a “brighter future” for Britain. He also left himself room for manoeuvre in the event of the dreaded Brexit ‘no deal’, and set aside an extra £500m for preparations for leaving the EU.

Here at Wellesley we have looked at the autumn budget in detail, focusing specifically on how changes will impact our clients – and it was reassuring to see that there were no major taxation or pension surprises. Here, we review the key budget takeaways for investors:

Retirement planning

Despite concerns that tax-relievable retirement planning was under threat from the 2018 Budget, there were no changes to the rates of tax relief, Annual Allowance or tax-free cash. The only significant change to pensions was that the Lifetime Allowance for pension savings will increase in line with the CPI for 2019-20, rising to £1,055,000. The Chancellor has also committed to a consultation later this year on the implementation of the Pension Dashboard, and to the inclusion of state pension information in it.

Taxation

Mr Hammond told the Commons, “I didn’t come into politics to put taxes up” and announced “a tax cut for 32 million people”. The Budget delivered the government’s commitment to increasing the tax-free personal allowance and the higher-rate tax threshold a year earlier than planned. Personal Allowance, the minimum income someone can earn before paying tax, will increase to £12,500 from £11,850. This new threshold effectively means a £130 gain for workers earning more than £12,500 a year.

Meanwhile, the higher rate threshold (the income at which someone becomes liable to pay the 40% tax rate) will rise to £50,000 from £46,350. This excludes non-savings, non-dividend income in Scotland: the Scottish Budget is due to be published on 12 December 2018.

Other key takeaways for effective tax planning include the increase of the Capital Gains Tax annual exemption to £12,000, the announcement of a future consultation to better target Private Residence Relief at owner-occupiers from April 2020, plus a consultation in January 2019 on a Stamp Duty Land Tax surcharge of 1% for non-residents buying residential property in England and Northern Ireland.

Entrepreneurs’ relief

Despite Capital Gains Tax (CGT) remaining broadly unchanged, Hammond tweaked the rules on tax relief for entrepreneurs by extending the qualifying period of the tax break from one year to two years. Furthermore, in addition to the existing requirements to hold at least 5% of the share capital and voting rights in a trading company, shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief.

Savings and investments

There were no changes to ISA limits in the autumn budget, but Junior ISA and Child Trust Fund subscriptions will increase by CPI to £4,368 from 6 April 2019. With regards to tax-advantaged investment products (EIS/VCT/BR), there were no significant changes announced, which was widely expected following several changes in the 2017 Budget. This means that the generous tax reliefs remain in place to support investment in small growth businesses.

A new EIS fund

Hammond announced that a new “knowledge-intensive” Enterprise Investment Scheme (EIS) fund structure will be introduced from April 2020. The expected main features are that:

  • At least 80% of the funds raised will need to be invested in “knowledge-intensive” companies within two years.
  • At least 50% of the funds raised will need to be invested within 12 months of the fund closing.
  • Uninvested money must be held in cash.
  • Tax relief will not be provided at the point of subscription, but instead relief can be carried back to the tax year before the date the fund closes.

To qualify as a “knowledge-intensive” company, the business must have fewer than 500 full-time equivalent employees when the shares are issued, and must either be carrying out work to create intellectual property and expect the majority of the business to come from this within ten years, or have 20% of employees carrying out research for at least three years from the date of investment – these employees must be in a role that requires a relevant masters or higher degree.

Summary

Looking at the 2018 Budget as a whole, it is reassuring there have been no major taxation or pensions changes. As a result, our messages for retirement planning remain unchanged – we recommend you maximise tax-relievable contributions while they are available.

However, it is worth noting that if the economic outlook changes, or in the event of a Brexit no-deal departure, the Spring Statement may become a whole new budget.

If you have any questions about how the latest Budget affects you or your investments, please contact your adviser, who will be able to go through any changes in depth.

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