MARCH 2016 BUDGET. The annual allowance for high earners will be reduced to between 10,000 and 40,000 - the tapered annual allowance (see below).

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1 MARCH 2016 BUDGET SUMMARY After months of press speculation about a possible fundamental change to the pension tax regime, no further significant changes were announced. However, there were some technical changes along with the introduction of new saving schemes and more generous rates and allowances for many savers. The details are outlined below. PENSIONS Pension tax relief reform The Government concluded that no changes would be made to pension tax relief. The Chancellor stated that after consulting widely there was no consensus on how the tax regime should be reformed. This means all the current tax advantages and allowances for pensions remain in place, along with the previously announced reductions to the lifetime allowance and annual allowance for high earners. Salary exchange Once again the Government raised concerns about the growth of salary exchange (or salary sacrifice) schemes. However, they noted that pension saving should continue to benefit from employer / employee national insurance and income tax savings when provided through these arrangements. Annual allowance The standard annual allowance in 2016/2017 will be 40,000. The money purchase annual allowance in 2016/2017 will be 10,000. It applies to those who have accessed their pensions flexibly and received any income. The annual allowance for high earners will be reduced to between 10,000 and 40,000 - the tapered annual allowance (see below). Higher earners tapered annual allowance As previously announced, a reduced annual allowance will apply to those with both 'adjusted income' of more than 150,000 and 'threshold income' of more than 110,000. Adjusted income includes taxable income plus employer pension contributions and employee contributions made by net pay arrangements. This means adjusted income doesn't, for example, include employee contributions to group personal pensions on the 'relief at source' basis. Threshold income excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July Where adjusted income and net income exceed the respective thresholds, the taxpayer's annual allowance will be reduced by 1 for every 2 of adjusted income in excess of 150,000. The maximum reduction is 30,000, which would result in an annual allowance of 10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is 210,000. Pension input periods All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period. Carry forward from the 3 previous tax years will be available as normal. However, when using carry forward from 2016/2017 onward, it will be based on the tapered annual allowance rather than the standard annual allowance. Lifetime allowance (LTA) As previously announced the LTA will reduce to 1 million for 2016/2017 and 2017/2018. Fixed Protection 2016 and Individual Protection 2016 are available. There will be an online application process from July There is an interim

2 process from 6 April for those wishing to benefit from either form of protection and take benefits before July. Those applying for Fixed Protection 2016 need to cease contributions/benefit accrual by 5 April Those applying for Individual Protection 2016 will need a fund value of more than 1 million as at 5 April The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019. As a reminder, Individual Protection 2014 is still available for those with funds valued at more than 1.25 million as at 5 April The application deadline is 5 April This protection is available following the previous reduction in the LTA from 1.5 million to 1.25 million. Pension information and advice To help people understand the value of their pension savings, the Government will ensure the pension industry introduces a pension dashboard by The dashboard will bring together details of all the individual's retirement savings in one place. The existing 150 income tax and national insurance relief for employer-arranged financial advice will increase to 500 from April Higher rate taxpayers will welcome the announcement that there are no fundamental changes to the pension tax regime. They will still benefit from higher rate relief rather than a reduced rate that would have been likely under a flat rate system. After the introduction of pension freedoms and further complexities such as the tapered annual allowance and the reduced lifetime allowance, many will welcome a period of stability in the pension taxation regime. The reduction in the Lifetime Allowance to 1 million from 6 April 2016 will greatly widen the scope of those within the restrictions. While the introduction of index-linking from April 2018 is welcome, it s far short of a return to the 1.8 million LTA in place in 2011/2012 which itself was originally intended to rise in line with inflation. The latest round of pension protection will help mitigate the impact for some people. Anyone with significant funds and no previous protection should consider applying for Fixed Protection 2016 and/or Individual Protection 2016 or Individual Protection They may need personal financial advice to help make a decision. Those applying for Fixed Protection 2016 must cease contributions/benefit accrual by 5 April Employers may receive some 'last minute' requests to end active pension scheme membership for employees intending to rely on Fixed Protection Anyone considering applying for either Fixed Protection 2016 or Individual Protection 2016 may want to maximise contributions before the end of the tax year including using any available carry forward allowance. For those applying for Fixed Protection 2016, this will be the last opportunity to contribute. For those applying for Individual Protection 2016, this is an opportunity to increase their fund values before the 5 April valuation date. For those subject to the tapered annual allowance from 2016/2017, carry forward is still available from previous tax years based on the standard allowances. This may reduce the impact in the short term. Employers may get requests from employees affected by the tapered annual allowance for a cash alternative to an employer pension contribution, net of the cost of the employer national insurance. 5 April 2016 will be the last date that individuals can make use of any available carry forward from 2012/2013. Due to the changes in Pension Input Periods, many individuals had some additional annual allowance for 2015/2016. They may want to maximise these before the end of the tax year. The increase to 500 in the tax exempt employer funded advice limit may encourage employers to fund more advice for their workforce. Higher earners who are subject to the tapered annual allowance and reduced lifetime allowance will be in particular need of specialist personalised advice.

3 CORPORATE NEWS CORPORATION TAX A further reduction to the corporation tax rate to 17% rather than the previously announced rate of 18% will apply from The current rate of 20% is due to reduce to 19% in The loans to participators rules aim to prevent owners of close companies avoiding income tax and NICs by remunerating themselves through loans/advances that remain unpaid rather than salary or dividends. The Budget announced an increase in the rate of tax payable under these rules from 25% to 32.5% so it continues to mirror the higher rate of dividend tax. This applies to new arrangements from 6 April Companies may consider making employer pension contributions before the lower rates of corporation tax reduce the effective rate of tax relief available. DIVIDENDS As announced in Summer Budget 2015, the current 10% dividend tax credit will be abolished from April It will be replaced with a new 5,000 a year dividend allowance. The new rates of tax on dividend income above the allowance will be: 7.5% for basic rate taxpayers 32.5% for higher rate taxpayers 38.1% for additional rate taxpayers. Shareholding directors with the ability to determine their own remuneration strategies will need to consider how the new rules impact them. A strategy comprising mainly dividends is likely to be less effective than currently, but could still be more effective than one focused on salary. Their adviser and accountant will be able to help them find their optimum mix of salary/dividend/employer pension contribution. CAPITAL GAINS TAX Capital gains tax rates The capital gains tax annual exempt amount will remain at 11,100 in 2016/2017. The capital gains tax rates will decrease to 10% and 20% for basic and higher rate taxpayers respectively from 6 April These rates will not apply to disposals of residential properties that do not qualify for private residence relief, which will continue to be taxed at 18% and/or 28%. Entrepreneurs' relief The Government will extend entrepreneurs relief to external investors in unlisted trading companies. This will apply to newly issued shares purchased on or after 17 March 2016, providing they are held for a minimum of 3 years from 6 April 2016, and subject to a separate lifetime limit of 10 million.

4 There will be various technical changes to entrepreneurs' relief; affecting those who dispose of a private asset used by the business at the same time they withdraw from that business; and also on the gains on goodwill when a business is transferred to a company controlled by its directors, or five or fewer participators. A 100,000 limit will be placed on the capital gains tax exemption, applying to disposals of shares acquired under employee shareholder agreements entered into after 16 March NATIONAL INSURANCE From April 2018, Class 2 national insurance contributions (NICs) will be abolished. The Government will reform Class 4 NICs so that the self-employed can continue to build entitlement to the state pension and other contributory benefits. From April 2018, termination payments above 30,000 will become subject to employer NICs but will remain exempt from employee NICs. The national insurance employment allowance, which reduces the overall cost of employer national insurance contributions (NICs) increases from 2,000 to 3,000 from April While the Government is known to be monitoring the use of salary exchange (also known as salary sacrifice) to gain NICs and income tax advantages, the Budget specifically mentioned that arrangements providing pension saving should continue to benefit from relief. Salary sacrifice arrangements, where an employee opts to give up salary in exchange for a higher employer pension contribution, still offer NICs savings for both employees and employers. Special consideration on their use is needed for those high earners potentially affected by the tapered annual allowance rules. NATIONAL LIVING WAGE AND NATIONAL MINIMUM WAGE The new National Living Wage (NLW) comes into effect from 1 April 2016 for workers aged 25 and above at a rate of 7.20 per hour. The Government will increase the National Minimum Wage (NMW) rates from October 2016 as follows. The previous rate is displayed in brackets ( 6.70) per hour - main rate for workers aged 21 to ( 5.30) per hour - for workers aged 18 to ( 3.87) per hour - workers aged ( 3.30) per hour - apprentices aged under 19 or first year apprentices aged 19+. The Government will align the dates the NLW and NMW are reviewed so that both are amended in April each year, commencing April Remember the NMW/NLW when planning with salary dividend/pension profit extraction and salary exchange/sacrifice.

5 INDIVIDUAL NEWS TAX EFFICIENT INVESTMENTS Lifetime ISA The Lifetime ISA aims to address the dilemma for younger savers in deciding whether to save to get onto the property ladder or into a pension. The tax treatment is the same as for other ISAs, but with the offer of a 25% Government bonus to top up savings, equating to 20% basic rate tax relief. Similar to an ISA, only member contributions are permitted. Adults aged under 40 will be able to open a Lifetime ISA from April They'll be able to save up to 4,000 a year from age 18 to 50, and receive a 25% Government bonus added at the end of the tax year. So over a lifetime it will be possible to contribute a maximum of 128,000 and benefit from a maximum bonus of 32,000. Contributions to a Lifetime ISA will count towards the increased 20,000 ISA limit for 2017/2018. Savers will be able to withdraw funds including a Government bonus after 12 months to use towards the purchase of a first home valued at up to 450,000. They'll also be able to withdraw funds including the bonus for any reason from age 60. Savers will also be able to access their funds at any time for other purposes, but will have to return the bonus with any interest or growth on the bonus to the Government and pay a 5% charge. The Government will consult on whether to allow penalty free loans, using an approach drawn from the US 401K system. It will be possible to access the funds penalty free in the event of terminal ill health. The inheritance tax treatment will be the same as for ISAs. Help to Buy ISAs Help to Buy ISAs, available since December 2015, will remain open to new savers up to 30 November 2019 and for new contributions until This product enables first time buyers to save up to 200 per month towards a first home, with an initial one-off deposit of 1,000. The Government boosts savings by 25% up to a maximum of 3,000, which will be paid when a property is purchased. While it will be possible to open both types of ISA, it will only be possible to use the Government bonus from one account towards buying a first home. It will be possible to transfer Help to Buy ISA funds into a Lifetime ISA during the 2017/2018 tax year only. ISAs The main ISA limit will remain at 15,240 for 2016/2017, but will now increase to 20,000 for 2017/2018. The limit for Junior ISAs and Child Trust Funds will remain at 4,080 for 2016/2017. New flexible ISA rules come into effect from 6 April The rules allow investors to pay withdrawals from a Cash ISA back into the account before the end of the tax year, without reducing their subscription limit further. Offering this flexibility is optional for ISA providers. This also covers: cash held in stocks and shares innovative finance ISAs and withdrawals from Help to Buy ISAs if an intended house purchase didn't proceed. Personal savings allowance As previously announced, a tax-free savings allowance of 1,000 is available from 6 April 2016 to those with taxable income of less than 43,000, i.e. basic rate tax payers and below. Higher rate taxpayers benefit from a 500 tax-free allowance. Those earning over 150,000 are not entitled to an allowance.

6 The Lifetime ISA concept has the public appeal of simplicity compared with the complex tax treatment of pension savings. But the price could be that members lose out on employer contributions, higher rate tax relief and the opportunity of further boosting the value of contributions via the national insurance savings available from salary sacrifice. They'll normally have to wait until 60, not 55, to get full freedom to access their funds. Lifetime ISAs may appeal to self-employed individuals, who often have to wait until preparing their accounts to calculate the amount of relevant UK earnings available to support tax relieved pension contributions. In terms of the maximum contributions and bonuses available, it's unlikely that most 18 year olds will have 4,000 available to save. Generous parents and grandparents might want to make efficient use of inheritance tax exemptions such as the 3,000 annual allowance and normal expenditure out of income to provide a helping hand. Savers and investors generally will be pleased with a further generous increase to the overall ISA allowance. The personal savings allowance provides more incentive for savers with even higher rate taxpayers benefiting from an allowance. However, it s most generous for low earners who will potentially pay no tax on their savings where total taxable income is less than 17,000 in 2016/2017, after taking into account the 5,000 savings band. The flexible ISA rules allowing cash withdrawals to be returned to an ISA by the end of the tax year will help to maximise the benefits by removing an effective penalty on those who are forced to access their savings temporarily. INCOME TAX Personal allowance and higher rate threshold In 2016/2017 the income tax personal allowance will increase by 400 to 11,000. A further 500 increase in the income tax personal allowance to 11,500 was announced from 2017/2018. The basic rate income tax band increases to 32,000 from 2016/2017. Those entitled to the full standard personal allowance will, therefore, pay 40% tax on income above 43,000. This amounts to a 615 increase in the higher rate income tax threshold. The basic rate band will increase to 33,500 from 2017/2018. Together with the planned increases in the personal allowance, this means the higher rate income tax threshold will be 45,000 from 2017/2018. These are the next steps in the Chancellor's stated aim of increasing the personal allowance to 12,500 and the higher rate income tax threshold to 50,000. Higher rate taxpayers will welcome the further increases in the higher rate threshold. Pension contributions benefiting from higher rate tax relief remain an attractive savings option, but must be contrasted with the Lifetime ISA option from April 2017, if the individual is eligible. A further substantial increase in the personal income tax allowance means that higher earners can achieve even greater benefit by using pension contributions to reduce adjusted net income above 100,000. For an individual with taxable income of 122,000 a pension contribution of 22,000 will cost just 8,800 in 2016/2017, attracting tax relief of 60%. These increases will ensure that anyone working a 30 hour week on an hourly rate equal to the national minimum wage will pay no income tax from 2017/2018.

7 Property letting From 1 April 2016, higher rates of stamp duty will be charged on further purchases of residential property, i.e. second homes or buy to let properties. The additional rate will be 3% above the standard rate and will apply to properties worth 40,000 or more. The higher rates will apply to corporate investors as well as individuals. The tax relief on mortgage interest for landlords will be restricted to basic rate for mortgages on 'buy to let' residential properties. The restriction will be phased in over 4 years from April Rent a room relief will be increased from 4,250 to 7,500 from 2016/2017. The relief had been frozen since This is a further blow to the buy to let market. The 3% increase in stamp duty coupled with the reduction in the tax relief on mortgage interest will significantly increase the costs, along with bringing forward the CGT payment date by up to 21 months. It may also prove difficult to work out the correct taxable gain and the amount payable within 30 days of completion, particularly where valuations and complex calculations are required. DIVIDENDS As announced in Summer Budget 2015, the current 10% dividend tax credit will be abolished from April It will be replaced with a new 5,000 a year dividend allowance. The new rates of tax on dividend income above the allowance will be: 7.5% for basic rate taxpayers 32.5% for higher rate taxpayers 38.1% for additional rate taxpayers. Higher and additional rate taxpayers with modest dividend income from share/oeic portfolios will pay less tax under the new rules. CAPITAL GAINS TAX Capital gains tax rates The capital gains tax annual exempt amount will remain at 11,100 in 2016/2017. The capital gains tax rates will decrease to 10% and 20% for basic and higher rate taxpayers respectively from 6 April These rates will not apply to disposals of residential properties that do not qualify for private residence relief, which will continue to be taxed at 18% and/or 28%. A significant reduction in the capital gains tax rates should encourage investment in shares and other assets subject to the capital gains tax regime. Individuals can continue to use the unused income tax basic rate band in the most tax-efficient way.

8 INHERITANCE TAX (IHT) As previously announced, the Government aims to reduce the number of estates paying IHT by introducing a residence nil-rate band from April This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to 100,000 in 2017/2018, 125,000 in 2018/2019, 150,000 in 2019/2020 and 175,000 in 2020/2021 and will then increase in line with CPI indexation. As with the existing nil-rate band, executors will be able to claim any unused residence nil-rate band on the death of a surviving spouse or civil partner, provided the second spouse dies on or after 6 April Those with net estates worth more than 2 million will see the additional nil-rate band scaled back by 1 for every 2 over this threshold. Draft legislation was published in December 2015 for inclusion in Finance Bill 2016, covering additional provisions applying where someone downsizes or ceases to own a home on or after 8 July The IHT nil-rate band is currently frozen at 325,000 until 5 April Drawdown funds and IHT As previously announced, the Government will introduce legislation in Finance Bill 2016 to clarify that no IHT applies on unused drawdown funds remaining on death. The legislation will be backdated to cover deaths on or after 6 April The changes to IHT remove the family home from the IHT net for all but the wealthiest homeowners although the maximum benefit of 1m won't be available until tax year 2020/2021 due to phasing-in of the allowance. Those with larger estates will still need advice on steps they can take to mitigate IHT. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the March 2016 Budget which may change before becoming law. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number

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