The Chancellor, George Osborne, gave his Budget report on 16 March 2016. In delivering his third Budget in 12 months, you might think George Osborne had little left to change that would affect your finances. You'd be wrong. Following the Budgets last March and July, and the Autumn Statement in November, the Chancellor was back on his feet announcing major plans.
Here is a summary of the key points. These matters need to be formally enacted to become law and most should be included in the Finance Bill 2016. Some will have immediate effect from 6 April 2016 and others a few years in the future.
Personal Allowance increase
The Government will increase the income tax personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18. This will bring the Conservative’s closer to their manifesto pledge to raise the personal allowance to £12,500.
The personal allowance is the amount of income, e.g. from salary, self-employment, dividends and rent, that can be earned before paying income tax.
The main rates of tax were unchanged at 20% basic rate, 40% higher rate and 45% additional rate.
National Insurance Contributions
The Lower Earnings Limit remains at £112 pw. Similarly, the Primary and Secondary threshold remain at £155 and £156 pw. The Upper secondary threshold increases from £815 pw to £827 pw.
High Rate Threshold increases
The Government will increase the Higher Rate Threshold from £42,385 in 2015-16 to £43,000 in 2016-17 and to £45,000 in 2017-18. The National Insurance Upper Earnings Limit will also increase to remain aligned with the higher rate threshold. The Conservative’s pledged in their manifesto to raise the Higher Rate Threshold to £50,000 by 2020.
Personal Savings Allowance
At present, banks and building societies deduct 20% tax from the interest earned on non-ISA savings before paying the interest to the account holder.
From 6 April 2016, banks and building societies will no longer automatically deduct 20% tax from interest received, so all interest will be paid or credited to the savings accounts gross.
From 6 April 2016, a personal savings allowances is being introduced to remove tax on up to £1,000 of savings income for basic rate taxpayers (20%) and up to £500 for higher rate (40%) taxpayers. Additional rate (45%) taxpayers will not receive an allowance.
A taxpayer with savings interest over the £1,000 or £500 limits will need to pay tax on the surplus at their marginal rates of tax.
For taxpayers under the PAYE regime (e.g. employees and pensioners), in general, they will have their tax codes adjusted to collect the extra tax due on interest received in excess of their personal savings allowance. Other individuals may need to complete a Self-Assessment Tax Return.
Corporation Tax rates
The Government will reduce the Corporation Tax rate from 20% to 19% with effect from 1 April 2017 and 17% by 2020.
Capital Allowances – Annual Investment Allowance
The Annual Investment Allowance allows small and medium-sized firms to make tax-deductible investment in equipment, plant and machinery and receive full tax relief in the year of purchase.
The present temporary rate of the annual investment allowance is £500,000 pa. With effect from 1 January 2016, the permanent level will be reduced to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
Employment Allowance
Currently, a sole director-shareholder could pay themselves £22,553 and reclaim the entire employer’s National Insurance of £2,000 i.e. (£22,553 - £8,060) x 13.8%.
From April 2016, the Government will increase the annual Employment Allowance from £2,000 to £3,000. From 6 April 2016, the Employment Allowance will no longer be available for companies where the sole director is the only employee.
Commentators say that this rule is ease to circumvent by employing a spouse or close friend in the business. This appears to be the case. However, any wages or salaries paid to such employees must be for genuine work done and paid at a commercial rate.
Employers pay National Insurance at 13.8% on salaries above £8,064 pa. Most small employers can currently reclaim the first £2,000 of this National Insurance. It does not apply to the National Insurance paid and deducted from employees’ salaries.
Self-employed National Insurance contributions
Class 2 contributions, payable by the self-employed, will be abolished with effect from 6 April 2018.
Currently about 3.4 million people pay this at a rate of £2.80 a week, which contributes to their state pension entitlement and other benefits.
The self-employed pay Class 2 NICs if they earn a profit of £5,965 or more a year. They also have to pay Class 4 NICs if their annual profit is more than £8,060 a year. Voluntary contributions may be paid by the self-employed to preserve the State Pension.
For the 2015/16 tax year onwards, both Class 2 and Class 4 NIC will be paid together, with the income tax liability, through the Self-Assessment system.
From April 2018 only Class 4 NICs will still be payable. However, the Government explained that the system of paying these contributions would be changed to ensure the self-employed could continue to build up their entitlement to some contributory benefits, such as the state pension.
Tax on dividends
The Government will abolish the dividend tax credit system from 6 April 2016 and introduce a new Dividend Allowance of £5,000 pa. The new dividend tax will result in additional tax on dividend income above £5,000.
The tax will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. An individual will be able to receive the first £5,000 of their dividend income in the tax year completely free of tax.
Dividends will be treated as the very top slice of income after salary, self-employed profits, rental income etc. Therefore, an individual with income just over the higher rate tax band, of £43,000 for 2016-17, may pay some dividend tax at 7.5% up to the higher rate tax band and 32.5% on dividend income over £43,000 income band. There will no longer be a ‘grossing-up’ of dividends, for a tax credit of 1/9th, before working out the taxable gross dividend.
The changes are aimed at small limited companies that pay a small salary designed to preserve entitlement to the State Pension, together with a much larger dividend payment in order to reduce National Insurance costs. We have produced a special publication on the new dividend tax.
The changes do not affect dividends received in pension schemes or ISAs.
Allowances for property and trading income
The Chancellor announced new ‘allowances’ for property and trading income which will apply from 2017/18. The allowances are targeted at micro-entrepreneurs. The first £1,000 of gross income, before expenses, will be exempt from tax and it will apply regardless of the taxpayer’s marginal rate of tax.
Those with property or trading income above £1,000 can either (i) deduct the £1,000 from their gross income and be taxable on the excess, or (ii) deduct allowable expenses in the normal way.
These will be of most benefit to the micro-entrepreneur, such as those with secondary incomes e.g. from letting property through sites such as Airbnb.
Directors’ overdrawn loan account tax increase
The rate of tax charged on loans made to directors and shareholders in small family companies will increase. A tax is due on overdrawn director's current accounts that are not repaid within 9 months of the company’s year end. From 6 April 2016, the rate of tax charged on such loans, which is currently 25%, will increase to 32.5%.
This aims to prevent small company shareholders from drawing funds by way of loans and other benefits etc from the company, which would prior to the introduction of this measure have given an attractive tax rate in comparison with the new dividend tax rate.
The current law is contained in section 455 of Corporation Tax Act 2010 and is known as section 455 tax (or even the ‘old’ section 419 tax).
Capital Gains Tax
In a surprise move, from 6 April 2016, the rate of Capital Gains Tax (GCT) will be cut from 28% to 20%, for higher rate taxpayers, and from 18% to 10%, for basic rate taxpayers.
CGT is charged on the profit made from the sale of assets, such as a business, a second home or shares, if the total profits are greater than an individual's current CGT allowance. The allowance stands at £11,100 and will remain the same in 2016-17.
The rate reduction will not apply to gains on residential property. This is not surprising. The Government has introduced a number of measures designed to discourage residential property investment in the last year, including the restriction to income tax relief for finance costs, a 3% SDLT surcharge on extra residential property purchases.
Business Rates
From April 2017, small businesses occupying property with a rateable value of £12,000 or less will pay no business rates. This represents a doubling of the current rateable value amount on which 100% relief is available of £6,000 or less. In addition, for properties worth up to £15,000, tapered relief from business rates will be available.
VAT registration and deregistration thresholds
From 1 April 2016 the VAT registration threshold will increase by £1,000 to £83,000 and the VAT deregistration threshold will increase by £1,000 to £81,000.
Pensions
The Government had been consulting on pension’s tax relief. It was reported in advance of the Budget that the Chancellor had decided against introducing any of the options in that consultation. He said in his speech that there was no consensus on the best way forward. Specifically, tax relief on pension contributions will not be reduced.
The consultation suggested radical reform of the pensions tax regime; abolishing initial income tax relief when contributions are made, but allowing pensions savings to be withdrawn tax-free. In other words, pensions would be treated like an ISA. Although this proposal will not be implemented, he has adapted the idea to incentivise young people to save (see Lifetime ISAs).
Finance Bill 2016 will include the previously announced changes to the lifetime allowance, which will be reduced from £1.25 million to £1 million.
The Government will restrict the benefits of pension tax relief for those with incomes, including pension contributions above £150,000, by tapering away their Annual Allowance to a minimum of £10,000. This policy will come into effect from 6 April 2016.
Transferable Main Residence Allowance
Everyone in the 2016/17 tax year has a tax-free inheritance tax (IHT) allowance of £325,000. The allowance has remained the same since 2010/11, and will stay frozen until the end of 2020/21.
The Chancellor previously announced a new transferable main residence allowance, which will gradually increase from £100,000 in April 2017 to £175,000 per person by 2020/21. This is in addition to the main nil-rate band. It will effectively raise the IHT-free allowance to £500,000 per person.
The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band. The maximum amount will be phased in so that it is:
£100,000 for 2017/18
£125,000 for 2018/19
£150,000 for 2019/20
£175,000 for 2020/21.
A married couple jointly owning their family home, and leaving it to their children, will have a total IHT exemption of £1m.
The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify, if there is more than one in the estate. A property that was never a residence of the deceased, such as a buy-to-let property, will not qualify.
A direct descendant will be a child (including a stepchild, adopted child or foster child) of the deceased and their lineal descendants.
A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2m, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
Lifetime ISA
The Lifetime ISA is a new provision to be introduced from 6 April 2017 to encourage people aged under 40 to save. The Chancellor announced that millions of adults aged under 40 will be able to use a new ISA to buy a home or a pension.
Having abandoned the idea of a ‘Pensions ISA’, it has been reincarnated as a savings vehicle with a double identity. A Lifetime ISA may be opened by individuals between the ages of 18 and 40.
Under the new plan, those aged under 40 in April 2017 will be able to save up to £4,000 each year into the Lifetime ISA, and receive an extra 25% bonus contribution from the Government each year. So for every £4 you save, the Government will add an extra £1. The bonus will be limited to £1,000 pa.
Savers will be able to make Lifetime ISA contributions and receive a bonus from the age of 18 up to the age of 50. The ISA can be put into any mixture of cash or investments and the growth will be tax-free.
There will be conditions on how this is spent. Tax free funds, including the Government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. The funds, including the Government’s bonus, can be withdrawn from the Lifetime ISA from age 60 for any other purpose. Tax free withdrawals will also be allowed where people are diagnosed with terminal ill health. Non-qualifying withdrawals before the age of 60 are possible but the Government’s bonus will be clawed back.
So, the Lifetime ISA will have a dual role. It will provide assistance to first time buyers, and if the funds are not used for a house purchase, it will provide funds for retirement. Although the bonus is limited in both amount and availability, it will operate in exactly the same way as standard rate tax relief on pension contributions.
It also means that, for many young people, there will be a calculation to make on whether they want to save in this kind of ISA, with a Government top-up, or stick with a traditional pension, with an employer top-up, or both.
The introduction of the ‘pension ISA’ for the under 40s won’t make a huge difference to the system and may well encourage more people to save. The danger is that he will use this in the future to replace the existing system.
If the Lifetime ISA is popular, we can envisage a gradual increase in the limits and an eventual shift away from traditional pension savings.
Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA.
The Help to Buy ISA (see below) will be open for new savers until 30 November 2019, and open to new contributions until 2029. Savers will be able to save into both a Help to Buy ISA and a Lifetime ISA, but will only be able to use the Government bonus from one of their accounts to buy their first home.
ISA limits
From April 2017, the total amount that can be saved each year into all ISAs will increase from £15,240 to £20,000 from April 2017. Therefore, if someone saves £4,000 in a Lifetime ISA in 2017/18 that person will also be able to save up to £16,000 in other ISAs in that year.
Re-investing withdrawals back into ISAs
For the year ended 5 April 2016, the annual amount which can be paid into an ISA is £15,240. This can be in a cash ISA, a stocks and shares ISA or any mix of both types of ISA. Withdrawn funds cannot be replaced by paying more into an ISA unless still within the £15,240 annual allowance. For example, if during the year to 5 April 2016 £14,000 was paid into an ISA then £5,000 was withdrawn only a further £1,240 would be able to be paid into the ISA (i.e. £15,240 less £14,000).
Changes from 6 April 2016
From 6 April 2016, savers will effectively be able to re-invest withdrawals into their ISAs within the same tax year. For example, if during the year to 5 April 2017 £14,000 was paid into an ISA, then £5,000 was withdrawn, a further £6,240 would be able to be paid into the ISA (i.e. £15,240 less (£14,000 less £5,000)). Each tax year will be considered in isolation so for the following year to 5 April 2017 withdrawals and contributions in the previous tax year will be ignored.
Not all banks and building societies may be able to offer this additional flexibility, even though they are allowed to under the new regulations.
Help to Buy ISAs
These were introduced from 1 December 2015 and are available to first-time residential property buyers. Such savers, when saving for a deposit, receive a £50 contribution from the Government for every £200 the individual contributes subject to a maximum Government contribution of £3,000.
Savers can pay up to £200 per calendar month into a help to buy ISA except for the first month the account is opened when an extra £1,000 can be paid in making £1,200 in total for that month. These are only available to first time home buyers, so are not available to people who already own a property or have done in the past.
The Government’s bonus is only paid when the property is purchased so will not be paid if the money is used for another purpose. It is not limited to newly built homes although the property should cost no more than £250,000, or £450,000 if buying in London.
If purchasing a property with other first time buyers, each first time buyer is entitled to this account and the Government’s bonus. So if two first time buyers purchasing a home together, each would be entitled to a bonus of up to £3,000 making £6,000 in total.
National Living Wage
From April 2016, a working individual aged 25 or over and not in the first year of an apprenticeship, will be legally entitled to at least £7.20 per hour.