What Items in the Recent Budget Will Have an Impact on SSAS?
It’s just over a month since the budget of March 8th, 2017. This article looks at some of the changes announced in the budget that are likely to have an impact on SSAS – Small Self Administered Schemes – and why. It also looks at one area – pension scamming – that wasn’t part of the budget, but which is expected to be introduced soon.
The Tapered Annual Allowance
This was introduced in the Finance Act 2015, and was effective from April 2016 for high earners.
What was introduced in the 2017 Budget was a new reduced Annual Allowance for those taking drawdown out of a Money Purchase (DC) pension scheme using the new Flexible Pension legislation introduced in April 2015. The allowance has gone down from £10,000 per tax year to £4,000 per tax year from 6 April 2017.
This amount is applicable in the first full tax year after one takes money from a pension pot. It is called the Money Purchase Annual Allowance (MPAA) and cannot be topped up by the carry forward rules. It is designed to stop members taking drawdown then immediately paying back in contributions and obtaining tax relief. In our opinion this is discouraging savings.
Tax on Transfers to Qualifying Recognised Overseas Pension Schemes (QROPS)
After 9th March 2017, transfers to non-European Economic Area (EAA) based Qualifying Recognised Overseas Pension Schemes will be hit with a 25% tax charge for any transfer requested. The tax will not apply where the individual genuinely moves to the country where the QROPS is based or where the QROPS is an occupational pension scheme sponsored by the individual’s employer. In addition, any payments made from funds transferred to a QROPS on or after the 6 th April 2017 will be subject to UK tax rules for five tax years after the date of transfer.
It is likely that this measure will reduce the number of QROPS transfers. As a result, we anticipate that more funds will remain in UK pensions schemes, especially flexible ones such as Small Self Administered Schemes.
The Reduction in Corporation Tax to 19%
Corporation tax was cut to 19% on 6th April, with tax relief on company pension contributions falling to the same figure. Tax relief on personal contributions remains unchanged and still applies at the individual’s marginal rate of income tax.
This means that pension contributions are still a significant tax-saving measure for both companies and individuals.
With SSAS’, which are Occupational Pension Schemes, immediate tax relief is given when the employer contributes. If an employee or Director personally contributes, the tax relief is claimed back in the following year’s self-assessment paperwork. Therefore, it is more tax efficient if considering personal contributions to a SSAS to use the Salary Sacrifice legislation where one sacrifices part of one’s salary in lieu of employer contributions.
The Reduction in the tax-free Dividend Allowance
The current tax-free Dividend Allowance of £5,000 will be cut to £2,000 from April 2018. It is likely, therefore, that ownership of shares in tax exempt schemes such as pensions and ISAs will grow in popularity, especially for SSASs, which are designed for business owners.
As SSASs are designed for business owners, their popularity may increase.
The Phasing in of the Landlord Tax
The Landlord Tax restricts income tax relief for expenses on residential property, such as mortgage interest, to the basic rate. It is expected that this will lead to more limited companies being used to hold property portfolios. This is because Mortgage interest will be treated as an allowable expense for limited companies, which will reduce profits and therefore corporation tax, making it a tax efficient decision.
What are the implications of the Landlord Tax for SSASs? A SSAS can only buy commercial property, so if someone is looking to invest in the property market, instead of investing in residential property and being subject to the reduction in tax relief as a result of the Landlord Tax, particularly for 40% tax payers, why not invest in commercial property within a Small Self-Administered Scheme, whereby the rental income into the scheme is not taxed and on sale there is no Capital Gains tax?
Anti-Pension Scam Measures – No Announcement Yet
This issue is very current, and although the Government’s consultation period on how to combat pensions’ scams and frauds finished in February 2017, there was not enough time to introduce any new measures in the budget. That said, we look forward to the introduction of tough new measures to prevent pension fraud. The current system is slow and has led to long delays for new SSAS registrations, while the due diligence process to prevent transfers to scam and fraudulent arrangements has seen pension transfers taking several months.
We are also of the opinion that compulsory Independent Trustees (originally known as Pensioneer Trustees) should be reintroduced to the SSAS market.
Contact us for more on the Budget and SSAS
If you would like more detail on how the budget changes will affect SSASs, please contact us or call us on 0121 693 0690.