How Will The Budget Affect Me?
17 March 2016 09:20
A Budget of Surprises
Prior to the Budget, many experts had predicted a quiet affair. Cuts and tax increases were expected. Many were pleasantly surprised when the Chancellor announced both new initiatives and a number of tax cuts.
Whenever the Budget comes around, there’s always a lot to take in. We understand that it’s not always clear exactly what these things mean. So in this post we’ll summarise the changes, and let you know how they’ll affect you.
If you want to hear it more about the Budget directly from us, fill out our contact form or give us a ring on 01228 586790
Income Tax / National Insurance
With the ultimate aim of increasing personal allowance to £12,500, the government announced personal allowances will increase to £11,500 from 6 April 2017 (£11,000 from 6 April 2016).
In addition to this, the higher rate threshold will increase to £45,000 from 6 April 2017. This is up from the threshold of £43,000 in April 2016.
Those with earnings over £100,000 will continue to lose £1 of their personal allowance for every £2 of earnings over £100,000. This threshold of £100,000 will remain the same in 2016/17 and 2017/18.
The basic rate of tax remains at 20%, with higher rate tax being 40%.
The additional rate of 45% will still apply to your earnings in excess of £150,000.
Due to the loss in personal allowance, earnings from £100,000 - £122,000 for 2016/17 and between £100,000 - £123,000 for 2017/18, will effectively be taxed at 60%.
Property and Trading Allowance
From 6 April 2017, a new £1,000 allowance for both trading and property income was announced. If you have trading or property income below this amount you won’t need to declare this to HMRC, or pay tax on it.
If applicable you can claim the £1,000 allowance for both trading and property income (i.e. up to £2,000 per individual).
Class 2 National Insurance
Class 2 NIC will be abolished in April 2018. If you’re self-employed this will save you approximately £150 per annum.
One thing to bear in mind is that Class 4 NIC, which is payable by the self-employed, is to be reformed. It will be changed so that it builds up entitlements to contributory benefits, including State Pension. Although not announced, could the rate of Class 4 NIC increase?
Experts predicted that the government might tighten rules on salary sacrifice schemes. Although they have stated such sacrifice schemes including pension contributions, childcare, etc will continue to enjoy the tax and NIC advantage, these advantages may be limited in the future.
If you make use of a salary sacrifice scheme, it’s important to keep an eye on changes. Otherwise, you may end up getting less than you expect out of it.
From April 2018, the tax exemption on termination payments will be tightened to prevent manipulation.
In addition, termination payments in excess of £30,000 will also be subject to employer National Insurance contributions.
Capital Gains Tax
Perhaps one of the biggest surprises was the announcement that the higher rate of CGT will reduce from 28% to 20%. The basic rate will also fall from 18% to 10% from 6 April 2016.
However, in what is unfortunate news for landlords, the reduced rates will not apply to the disposal of residential properties. These will continue to be taxed at 28% and 18%.
Another welcome move was the extension to Entrepreneurs’ Relief.
If you’re a long term investor in an unlisted company, you’ll only pay 10% tax on gains on newly issued shares purchased after 17 March 2016.
This 10% rate will apply as long as you own the shares for at least 3 years from 6 April 2016. Also, a separate £10 million lifetime limit will apply to such investments.
Corporation tax will be reduced to 17% as from 1 April 2020. This is a pleasant surprise as it had previously been announced the rate from 1 April 2020 was going to be 18%.
Over recent years, the corporation tax rate has been cut from 28%, with the Chancellor aims to make Britain “open for business”.
Loans to Participators
As from 1 April 2016, the tax rate on loans to participators (essentially directors and shareholders) will increase from 25% to 32.5%, aligning it with the higher rate on dividends. The tax is paid on loans that are not repaid within 9 months of the accounting year end.
This tax is sometimes called a “temporary tax”. This is because it’s repaid to the company once the loan has been repaid.
Reform of Loss Relief
Changes were announced to increase the flexibility on tax relief on losses, incurred after 1 April 2017.
As a welcome reform, losses carried forward will be able to be offset against profits from other income streams, or from other companies within a group.
The government announced there will be a consultation document on the reform, so actual details will follow, and will be legislated from 2017.
The government are continuing their crackdown on “disguised remuneration”, with the aim to ensure those who have used such schemes pay their fair share of tax and NIC. One example of such schemes include the use of Employee Benefit Trusts (EBT’s), which you may have heard in the news as part of the Rangers FC tax case. In these type of schemes, the employee would be paid by way of a loan, with the loan being outside the scope of tax and NIC.
The government insist such schemes do not work, and over the Summer will be working on adding further legislation to mitigate those schemes designed to get around the existing anti-avoidance legislation. In addition, legislation will be introduced to treat and tax any loan unpaid as of 6 April 2019 from such a scheme.
Employee Share Schemes
The very generous Capital Gains Tax regime for Employee Shareholder Status shares will be significantly reduced as from midnight 17 March 2016.
Any new ESS shares will only be exempt from CGT on the first £100,000 of gains, with the excess being subject to CGT at the normal rates.
As from 17 March 2016, the current system will be replaced by a fairer progressive rate system. This means that the rates that apply to each band of Stamp Duty Land Tax (SDLT) will apply to that portion of the purchase price.
So when purchasing a commercial property, the first £150,000 will be charged at 0%. The portion between £150,001 and £250,000 will be charged at 2%. Finally, the portion in excess of £250,001 charged at 5%.
Another change effective from 17 March 2016 is the increase in SDLT on new commercial leases where the Net Present Value (NPV) exceeds £5 million. The SDLT rate will be 2%, an increase from the existing 1% rate.
As previously announced, there is a 3% surcharge on “second homes”. It was confirmed the rules will apply to companies, and individuals who own two or more properties.
One welcome amendment is the increase to the “replacement rule”. Where an individual has a home but cannot sell before the purchase of the replacement home, it was previously announced the original home would need to be sold within 18 months in order to reclaim the 3% surcharge. The good news is that the 18 month timeframe has been increased to 36 months.
Excellent news for many small businesses, is that the doubling of Small Business Rate Relief (SBRR) will be permanently doubled, to 100%, as from 1 April 2017.
In addition, the thresholds for SBRR have been increased to ensure more small businesses pay lower business rates.
Businesses operating from a property with a rateable value of £12,000 or less will receive 100% relief from business rates. For those operating from properties with a rateable value between £12,001 and £15,000 will receive relief on a tapered basis.
Additionally, the main Business Rate multiplier will only apply to properties with a rateable value of over £50,000, with those below that benefiting from the lower rate multiplier.
You should be aware that although “small business rate relief”, the relief is based purely on the rateable value of the property. Business size has nothing to do with it. Furthermore, there are additional rules in force if a business operates from more than one property.
The VAT registration threshold will increase by £1,000 to £83,000 as from 1 April 2016. The deregistration limit will also increase by £1,000 to £82,000.
The other big announcement on VAT was the anti-avoidance provisions to ensure multi-national companies pay their fair share of VAT in the UK. This is clearly designed to target online retailers such as Amazon and eBay.
There were no new major changes to the current capital allowance regime.
One change was the extension of Enhanced Capital Allowances in Enterprise Zones. This was extended for an additional 3 years to 8 years from which the Enterprise Zone was announced.
This means that for example, Kingmoor Park in Carlisle will qualify for the Enhanced Capital Allowances up to November 2023 (announced in November 2015).
Lifetime ISA’s / ISA’s
A new Lifetime ISA will be available as from April 2017 if you’re aged between 18 and 40. You will be able to contribute up to £4,000 per annum, and receive a 25% bonus from the government. Funds from the Lifetime ISA can be used to purchase a first home, and be withdrawn from the age of 60 as part of retirement planning.
Any withdrawal for a reason other than first home or post aged 60, you will lose the government bonus, and be subject to a 5% charge.
The annual ISA limit will increase from £15,240 to £20,000 from 6 April 2017.
There were no new announcements in relation to IHT.
If IHT is of any concern to you, or you would like a reminder of the current regime, please do not hesitate to get in touch.
Duties / Insurance Premium Tax
Fuel / Alcohol Duty
Often the headline grabber, but the government announced a freeze on fuel duty for a further year. Surely welcome news to motorists everywhere. Many had anticipated a rise in fuel duty, particularly given the current low costs of oil.
Beer, spirit and most cider duties were also frozen. Duty on wine and strong sparkling cider has been increased inline with inflation.
In a move that will surely please Jamie Oliver, a new Soft Drinks Industry Levy will be introduced in 2018. The new levy, already known as the “sugar tax”, is designed to make soft drinks companies reduce the sugar content of their drinks.
A consultation document is to be undertaken to formalise how the new levy will be charged.
Insurance Premium Tax
The standard rate of Insurance Premium Tax will increase from 9.5% to 10%, as from 1 October 2016. The increase is designed to cover the cost allocated for flood defence projects, of which Cumbria will benefit.
Making Tax Digital
From April 2018, if you’re self-employed, a landlords or business and keep your records digitally with regular updates to HMRC you’ll be able to pay tax in a new ‘pay as you go’ method. This will break down tax payments and help you manage cash flow.
From April 2018, most businesses and individuals will update HMRC at least quarterly. This should make the tax system operate more closely to real time. It should, in effect, minimise the risk of errors.
Although this may be the end of the tax return as we know it, businesses will still certainly need help completing accounts, and carrying out tax planning.
Do you need a little bit of extra clarification? If you have any questions on how the Budget affects you, why not get in touch with one of our tax specialists? Fill out our contact form or give us a ring on 01228 586790