How does the 2020 Budget impact you and your finances?

There were a number of big announcements in Chancellor Rishi Sunak’s first Budget, which was also the first Budget of the new Parliament following December 2019’s General Election.

Not all of the announced changes will have an impact on individuals, but we’ve lifted some of the key points that might impact you and your finances from the Budget so you can see them all in one place.

National Insurance Threshold Raised…

The threshold at which you start paying National Insurance Contributions (NICs) has been raised to £9,500 from £8,424, a measure the Chancellor said would save the average employee around £85 per year.

This was an expected move (it was announced as an election pledge) and will mean 50,000 of the lowest-paid workers will no longer have to pay National Insurance Contributions.

The aim is to increase the National Insurance threshold to £12,500 by the end of this Parliament, which will put around an extra £500 per year in people’s pockets.

But Income Tax Thresholds Frozen

In England, Wales and Northern Ireland (the Scottish government has powers to set income tax rates and so they differ from the rest of the UK), the income tax thresholds will remain static.

This means the amount you can earn before paying basic rate 20% tax will be fixed at £12,500 and the amount you can earn before paying higher rate tax at 40% will stay at £50,000.

National Living Wage Up

The National Living Wage was hiked in the Budget, another pre-election pledge. It rose by 6.2% to £8.72 for those aged 25+, with younger workers also seeing an increase.

New and Basic State Pensions Increased

The full new state pension will rise by 3.9% following the Budget, from £168.60 to around £175.20 in April.

Most current pensioners in receipt of the state pension, however, receive the old basic state pension. This will also rise by 3.9%, from £129.20 to £134.25 per week. These pensioners may also be entitled to a pension credit top-up.

Annual Allowance Taper Threshold Up by £90,000

High earners have a reduced annual pension allowance to contend with known as the tapered annual allowance.

The tapered annual allowance means that if your adjusted income — total taxable income, so salary, dividends, rental income, savings interest etc., plus employer pension contributions — is above a certain threshold, your annual allowance reduces, or ‘tapers’ down by £1 for every £2 your income exceeds the threshold.

Currently, the taper applies to individuals who have an adjusted income of £150,000 or more, or a threshold income (gross income minus any tax relievable contributions such as pension contributions) of £110,000.

The maximum tapering for the annual allowance is £30,000, taking your annual pension allowance from £40,000 to £10,000.

Although what would have been more popular is abolishing the taper entirely, the Chancellor instead increased the threshold at which the taper kicks in by £90,000 to £200,000 on a threshold income basis or £240,000 on an adjusted income basis.

At the same time, he announced measures to reduce the minimum annual figure your annual allowance can be tapered to will be reduced from £10,000 to £4,000 for those earning in excess of £300,000.

This move will be particularly popular among our clients who are doctors, as well as other high earners.

Many people have faced curtailing their pension contributions, reducing their hours / earnings or even leaving their pension scheme entirely as a result of the tapered annual allowance.

John Spink
Head of Financial Planning at Drewberry

Rise in the Pension Lifetime Allowance

In the 2020/21 tax year, the pension lifetime allowance will increase by September’s inflation figure of 1.7%, from £1,055,000 to £1,073,100.

The lifetime allowance is how much you can save into a pension over the course of your life; exceeding this figure can result in a steep tax charge.

While this is the lowest amount the government could have increased the lifetime allowance, it’s nonetheless welcome to see it rise. Savers can now invest an additional £18,100 in their pensions over their lives as a result of this change.

Reduction in Entrepreneur’s Relief

It wasn’t all increases in the 2020 Budget, however; the Chancellor took an axe to entrepreneur’s relief, a tax relief for those selling their businesses.

While it was thought that he might abolish it entirely, he instead reduced the total lifetime allowance from £10 million to £1 million.

Entrepreneur’s relief allow business owners who’ve owned their business for at least 2 years to pay less capital gains tax when they sell.

Previously you could sell businesses over your lifetime for up to £10 million and you could claim entrepreneur’s relief which cut in half your capital gains tax liability on the sale from 20% to 10%. However, this will now be reduced to a £1 million lifetime limit.

Those who exceed this will be subject to capital gains tax at the full 20%.

The changes to entrepreneurs’ relief will increase the amount of capital gains tax paid by businesses sold at a profit of over £1m.

There are potential ways to defer capital gains tax with investments such as enterprise investment schemes (EISs), although these are high-risk and not right for everyone and should be discussed with an expert adviser.

Neil Adams
Pensions & Investments Expert at Drewberry

IR35 Tax Changes for Private Sector Contractors

Another item we knew was on the agenda before the Chancellor stood at the dispatch box was the changes to the ‘off-payroll working rules’, commonly known as IR35.

The IR35 rules are designed to tackled so-called ‘disguised’ employment, where an individual performs the same or similar job to an employee but is paid as a contractor, thus lowering their tax and National Insurance liability compared to an employee.

Consider the ‘Friday-to-Monday’ test, where an employee leaves employment on Friday and returns to the office in an identical role as a self-employed contractor on the Monday employed via an intermediary, such as a personal services company (PSC) or their own limited company.

They’d therefore pays less tax and National Insurance, even though they were carrying out identical work under identical terms as previously, thanks to the PSC.

The IR35 rules were introduced to enforce the worker being treated like an employee for tax purposes if they’re an employee for all intents and purposes except for the personal services company.

These rules were first introduced in 2000 to tackle the issue, but until now they’ve only been focused on the public sector, meaning those working in the private sector have been largely unscathed.

Now, thanks to the March 2020 Budget, this has changed and the whole economy will be bound up by the IR35 rules.

This might mean, if you’re deemed to no longer be a contractor and instead wind up your business to return to the workforce as an employee, you may need to shift any insurances you have run through the business, such as Income Protection or Relevant Life Insurance, to personal plans.

If you’re caught up in changes to IR35 and have a policy such as Executive Income Protection or Relevant Life Insurance run through your business, it’s vital you get in touch with your adviser to ensure the policy can be converted to a personal plan as soon as possible. This is simple to do — get in touch to find out more.

Robert Harvey
Head of Protection Advice at Drewberry

Key Takeaways for Your Personal Finances from the 2020 Budget

• You can earn more before having to pay National Insurance Contributions
• The lifetime pension allowance is up by 1.7%, meaning you can save more into your pension across your working life
• A £90,000 increase to the threshold at which your annual pension allowance begins tapering down means fewer higher earners will face difficulties when paying into their pension
• Pensioners will receive a higher state pension from April
• Lifetime entrepreneur’s tax relief cut from £10 million to £1 million, meaning potential higher tax bills for those looking to sell their businesses
• IR35 extended to the private sector, which means some contractors and company directors may no longer be able to operate through their limited companies.