2014 Budget Changes
Forget budget bingo and beer – the 1p a pint reduction means you have to sink around 300 pub pints to get one free.
But beyond beer money, the 2014 Budget has potentially revolutionised savings with the biggest shake-up and largest increase to Isas - the Individual Savings Accounts, plus the most significant change in pensions for nearly a century. These have still to come into force leaving time to plan.
The nicer Isa
Isas have moved on since they started in 1999. Many complications have been scrapped but there are still rules restricting cash Isas.
The New Isa – the Nisa – is simplicity. From July 1, everyone will have a £15,000 allowance (£30,000 for a couple) with a free choice of where it goes – cash, stocks and shares, or the two in any combination.
Savers will have a new flexibility in moving from cash to stocks and back again at will – current rules only allow transfer from cash to stocks.
The 2014 Budget has potentially revolutionised savings with the biggest shake-up... for nearly a century.
The £15,000 per person is more than most can afford to save. But this high level gives new retirement savings options.
The Isa/Nisa takes taxed income in lets it grow tax free, and gives tax free income while a pension offers tax relief on contributions paid in, lets it grow tax free, but taxes what you take out in retirement.
Pension freedom – at a tax price
Tax could be the sticking point for those taking advantage of the biggest budget surprise – freedom to take personal pension pots in cash from next April. There will be no need to buy an annuity or indulge in income drawdown complexities. It sounds brilliant. One government minister said you could blow the lot on a Lamborghini. That's around £300,000 so the typical £30,000 pension pot would just about buy the wheels. More down to earth, you could buy an investment property.
As now, the first 25% will be tax free. But there's a catch. The balance will be added to your earnings and taxed as income at your “highest marginal rate”. For most, adding on a pension to an income brings them well into higher tax rates.
In round figure terms, someone on £52,000 a year with a £200,000 pension could take the first £50,000 tax free but the next £100,000 would be taxed at 40% - £40,000 – while the £50,000 balance would be at 45% (£22,500).
The finance industry has a year to come up with solutions. Some might opt for schemes that eke out the money each year to avoid a big tax take. Others will look at a flexible income for life, but for many, the annuity could remain the best arrangement.
Income tax free slice hits £10,000
The good income tax news is the first £10,000 for those earning less than £100,000 is tax free, rising next year to £10,500.
But – bad news - someone under state retirement age still pays 12% National Insurance on earnings over £153 a week - £7956 a year. And more people are paying 40% tax. It starts at £41,866 – just one% more than last year's £41,451.
More chances for a million
The maximum premium bond purchase goes up from £30,000 to £40,000 this June, and to £50,000 a year later. There will be two £1 million winners a month instead of one. A far from massive 1.3% of the total goes into the prize fund each year. So the odds against a big prize are remote.
And from next January, National Savings & Investments will have two bonds for those aged 65 or over. Likely rates will be 2.8% on a one-year bond and 4% on a three-year bond with an annual investment limit set at £10,000 per bond.
Better deals for long distance fliers
For those flying long haul, Air Passenger Duty will fall by up to £23 (economy) and £46 (first) next April. There will be two rates – up to and over 2,000 miles (based on capital cities) – instead of four, cutting duty on flights to Japan or Australia or China and ending the anomaly where Hawaii (based on Washington DC) was cheaper than Trinidad and Tobago (based on Port of Spain), some 2,500 miles nearer. It will effectively be Europe and the rest of the world.