How the general election affects pensions, small businesses and expats

As the Government rushes to deal with the small matter of a snap general election, huge changes to financial legislation are being swiftly stripped away in a desperate bid to get everything wrapped up before Parliament rises on Wednesday.

That’s when the weird, no-man’s-land period of purdah begins, during which central and local Government is prevented from making announcements or changes that could benefit or hinder specific candidates or parties. And that includes finance and taxation plans.

The speed of next month’s vote means the window of opportunity is very, very short – a fact not lost on policymakers.

“The snap election has given the UK Government an excuse to pick and choose which bits of legislation it would prefer to defer to a later date,” says David Truman, tax partner at accountancy firm, Menzies LLP.

“It is vital that all draft legislation receives proper parliamentary scrutiny before it is implemented and if there is not going to be time for this, the Government is right to defer it.

“However, the Government should make it clear whether the legislation is genuinely being deferred to allow more time for debate and amendments, or whether it is being abandoned altogether.

“Deferring legislation without any information about time-scales is adding to the current climate of uncertainty.”

And that’s precisely the problem.

Some estimates suggest that up to 50 per cent of the upcoming finance bill has been culled in the blink of an eye for example, some of which had, theoretically already come into effect.

With little indication of when or if it will be reinstated, for some consumers caught out by shifting sands, the consequences could last a lifetime.

Pensions

A particularly controversial plan, the most prominent casualty of the tight timetable is the change to the amount of money anyone over 55 who has accessed their pension fund as part of recent “pensions freedoms” can invest in their retirement fund each year.

Because of fears that policyholders could withdraw and reinvest funds to secure a double hit of tax relief, the Money Purchase Annual Allowance (MPAA) had – in theory at least – already been cut from £10,000 a year to just £4,000 from this month.

The move has been met with fierce, but ignored, objections from the entire pensions industry which warns that many of those who have taken advantage of easier, tax-free access to their cash as part of the freedoms are still working.

Carry on building up your pension pot as the Government has encouraged you to do, and you risk heavy taxation, they say.

The good news is that the reduction is part of the changes that have been axed.

But Richard Parkin, head of pensions policy at Fidelity International, warns this is not likely to be a change of heart.

"I’d love to believe that the Government has changed its mind on the MPAA reduction but it seems that it’s just a temporary casualty of the pre-election wash up period,” he says.

“However, because Parliament is being dissolved the bill can’t carry over and a new bill will need to be introduced after the election.

“That at least gives the opportunity for Government to rethink this policy which we believe will have a negative impact on those saving responsibly for their retirement. Indeed, HM Treasury has since confirmed that they have no evidence of the abuse that this measure was intended to curtail.”

But that’s not all.

“Simultaneously, the Government has shelved one anti-saving policy by delaying the reduction in the Money Purchase Annual Allowance, while also pulling the rug from under employers and their employees hoping to take advantage of up to £500 of funded advice in the workplace,” says Kate Smith, head of pensions at Aegon.

“This blocks access to much needed financial advice to help employees make more informed retirement plans and seems inconsistent with other initiatives to encourage pension saving and retirement planning in the workplace.”

Government has also shelved the Pensions Schemes Bill, which would have given the Pensions Regulator extra powers to manage master trusts, as well as its response to the review of the workplace auto-enrolment scheme and its formal and highly contentious response to a review of the state-pension age, due next month.

Though it is unlikely to have any immediate impact as it will really only affect savers under 40, who are still a couple of decades from retirement, Ms Smith adds that it proposes that the state-pension age should rise faster than currently planned, rising to 66 by 2020, 67 by 2028 and 68 by 2046.

Family

The cuts to legislation are not solely around pensions. Plans that would have meant an increase in probate fees of to up to £20,000 from as little as £155 have also been put on hold.

“A grant of probate gives the people dealing with your estate the authority to deal with your assets. It is the same regardless of the size of the estate so by linking the fee to the size of estate the Government was introducing a new tax,” notes Jeannie Boyle, chartered financial planner at wealth manager EQ Investors.

“The fees need to be paid upfront. Where the estate has cash available it this is relatively simple, but in cases where the estate has little cash but valuable property, the executors or beneficiaries will need to pay the fees themselves.

“The election delay means the people dealing with your estate won’t be faced with a much bigger upfront bill. Even fairly simple estates with only a family home as the main asset could have seen a sharp rise in probate fees.”

Small businesses

For small firms and one-man bands there has also been a welcome temporary reprieve.

“Small business owners have now dodged not one but two bullets from the Budget,” says Alistair Bambridge, partner at Bambridge Accountants.

“Last month the Chancellor announced two measures that would have hit entrepreneurs hard – an increase in their National Insurance contributions and a change to the way they are taxed on dividends.

“Within days, the Chancellor’s National Insurance plan was dropped in an embarrassing U-turn. Now the snap election has come to business owners’ aid by knocking into the long grass the planned change in the tax on dividends.

“Many of Britain’s army of small business owners choose to pay themselves through dividends rather than salary as it can be much more tax efficient to do so. At present the first £5,000 of dividends are free of tax, but under the Chancellor’s plan this would have been slashed to £2,000 from next April.

“With this measure set to be shelved as Parliament is dissolved to make way for the election, small business owners across Britain will be breathing another big sigh of relief.”

They’ll also be pleased that deadlines for moving all small businesses and individuals to online tax recording under the catchy title “Making Tax Digital”, which have caused endless confusion, not least in the way records and declarations need to be submitted, has become another casualty of time pressures. For now.

Expats

Then there are a whole host of changes to the way assets are taxed depending on residency that too have fallen by the wayside. Important for those living overseas, they included changes to the length of time required to be deemed a resident or non-resident for tax purposes and the treatment of UK property when it comes to inheritance tax.

“There have been many twists and turns to this point and the decision to defer the enactment of the legislation is likely to be viewed as more of the same,” Mr Truman adds.

“We will be advising non-domiciled individuals to continue to plan for the rule changes and the introduction of the new ‘15-year rule’ on the basis that the draft legislation is still likely to be implemented at some stage this year.”