Budget March 2016
The Budget took place in the shadow of the Euro-Referendum, so the Chancellor was probably less radical than he’d originally been planning. For example, there’d been some clear steers about a change in the pension tax system but he pulled back on these in the face of fierce opposition from the press. There were also proposals for various cuts to expenditure, particularly in help for disabled people, that may not get final approval.
Disregarding the cosmetics such as the new sugar tax and the comments about building an economy for the next generation, the main details are as follows. Further down you’ll find items on ISAs, Savings income and Dividends, CGT reductions, Micro-business allowances, Stamp Duty on commercial properties, Charity donations, Business rates and various other goodies.
As already announced, the basic personal allowance for 2016/17 will be £11,000. This Budget announced that this will increase to £11,500 for 2017/18 – which of course was another of those re-announcements of things to remind us of the Chancellor’s generosity. Remember that if your adjusted net income exceeds £100,000 the personal allowance is reduced by £1 for every £2 over £100,000 (until your PA’s all gone) giving an effective rate of 60% on income between £100,000 and £122,000 for 2016/17. Contact us for advice on planning to avoid this 60% rate.
INCOME TAX BANDS
The 20% basic rate band for 2016/17 will be £32,000 and it was announced that for 2017/18 this will be £33,500. This means that you will pay 40% tax if your taxable income exceeds £43,000 for 2016/17 and the threshold will be £45,000 for 2017/18. The 45% top rate continues to apply to taxable income over £150,000 for 2016/17.
FURTHER CHANGES TO ISAs
The current £15,240 ISA limit is frozen for 2016/17. The Junior ISA limit remains at £4,080 for 2016/17. A quick reminder for anyone who’s new to these Individual Savings Accounts: There’s an annual amount that you can invest in an ISA, including cash and stocks and shares, and any income or gains on that investment are tax free so long as the investment stays within that “wrapper” or when they are sold out of it. As from April 2015 the ISA continues to exist even after the death of the person in who’s name it was taken out.
The Budget changes are that from 6 April 2017 the annual ISA allowance will increase to £20,000 and from the same date there will be a new “Lifetime ISA” account (which we believe will be part of the £20,000) where investors aged between 18 and 40 who save up to £4,000 a year will have 25% (up to £1,000) added by the government. Funds can be used to buy a first home from 12 months after opening the account and can be withdrawn for other purposes from the age of 60 – so it’s a bit like an extra pension and may be used as a model for future pension changes. Those who have been saving in the new “Help to Buy” ISA will be able to transfer their savings to this new account and use the savings to help them buy their first home or use them to provide an additional pension.
PENSION ALLOWANCES REDUCED
There was much speculation about further major changes to pensions such as taxing the lump sum and limiting tax relief, but as I mentioned in my introduction these were dropped.
From 6 April 2016 the pension fund lifetime allowance (ie the maximum value of your pension fund – after which there are special tax charges) will be reduced from £1.25million to £1million. Transitional protection for pension rights already over £1million will be introduced alongside this reduction to ensure the change is not retrospective.
As already announced, those with income in excess of £150,000 will have the normal £40,000 annual allowance (ie the maximum that can be paid in each year) reduced by £1 for every £2 over £150,000.
£1,000 SAVINGS INCOME TAX FREE 2016/17
From April 2016, a tax-free allowance of £1,000 (or £500 for higher rate taxpayers) will be introduced for the interest that people earn on savings. If they are a basic rate taxpayer and have a total income up to £43,000 a year, they will be eligible for the £1,000 tax-free savings allowance.
If they are a higher rate taxpayer and earn between £43,000 and £150,000, they will be eligible for a £500 tax-free savings allowance, but those with income in excess of £150,000 a year will be taxed in full on their interest income.
As a result of these changes banks and building societies will pay interest gross from 6 April 2016 so taxpayers with substantial interest income will need to pay the related tax later via their tax returns or via their PAYE codes.
NEW DIVIDEND RULES START 6 APRIL 2016
It was announced in the Summer 2015 Budget that there would be a £5,000 tax free dividend allowance from 6 April 2016 and that once used the rate of tax on dividend income would increase by 7.5%. This means that basic rate taxpayers will pay 7.5% tax on dividend income, above the initial £5,000, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%.
Note that from 6 April 2016 dividends will no longer carry with them a 10% notional credit. This was the reason why dividends received by basic rate taxpayers were effectively tax free up to 5 April 2016, but it will no longer apply. I talked about this in my lJanuary and February newsletters – please ask me if you’d like me to send you a copy.
32.5% TAX ON LOANS TO SHAREHOLDERS FROM 6 APRIL 2016
Where a “close” company controlled by 5 or fewer shareholders (ie. most small companies) makes a loan to one of them, the company has long been required to pay tax to HM Revenue and Customs along with its corporation tax unless it’s repaid within 9 months of the accounts year end. The rate of tax increases from 25% to 32.5% from 6 April 2016 in line with the dividend rate for higher rate taxpayers. This tax will be repaid to the company if the loan is repaid or written off after the 9 month period (although there’s often a delay, so it’s best not to have to pay out in the first place.)
CAPITAL GAINS TAX
We were surprised to hear of a reduction in the rate of CGT from 6 April 2016 down from 18% to 10% for basic rate taxpayers and 28% down to 20% for higher rate taxpayers. However, the 18% and 28% rates remain for disposals of residential property. As I’ve previously suggested, the CGT regime was already generous – with an annual exemption for gains up to £11,100 (unchanged). And gains of above that amount are taxed at considerably lower rates than income tax. Financial advisors should be able to suggest investments that give capital growth rather than income to take advantage of this.
A note of caution: when we say that the 18%, or now 10% rate applies to basic rate taxpayers, this is only to the extent that the capital gain doesn’t take them into higher rates. If part of the gain overflows beyond the basic rate band, that part will be taxed at 28% or now 20%.
FURTHER CHANGES TO CGT ENTREPRENEURS’ RELIEF
Entrepreneurs’ relief (ER) will be extended to external investors in unlisted trading companies. This new investors’ relief will apply a 10% rate of CGT to gains accruing on the disposal of ordinary shares held by individuals. These shares must be subscribed for by the claimant and acquired for new consideration on or after 17 March 2016. The shares must have been held for a period of at least three years starting from 6 April 2016 and there will be a lifetime cap of £10 million.
In the 2014 Autumn Statement it was announced that it is no longer possible to claim CGT entrepreneurs’ relief against the gains arising on the sale on or after 3 December 2014 of goodwill by a sole trader or partnership to a limited company in which they have a controlling interest. That restriction was then legislated in Finance Act 2015. It has now been announced that the relief will still be available provided that the transferor does not receive more than 5% of share capital or voting rights in the acquiring company.
There has been no change in the inheritance tax rate of 40% nor in the nil rate band. This is to remain at £325,000 per spouse (which is normally transferrable if unused on the first death) until at least 2020, although an additional nil band will be available from 6 April 2017 where the main residence or assets of an equivalent value are left to direct descendants. This additional relief will be protected where the person downsizes to a less valuable property from 8 July 2015 onwards. Please contact us if you would like to discuss inheritance tax planning.
LOWER CORPORATION TAX RATES
Since 1 April 2015 there’s been a single corporation tax rate of 20% for any size of company – previously companies with large profits had to pay more.. In the Summer 2015 Budget it was announced that this would reduce to 19% in April 2017 and the Chancellor has now announced that this will now be reduced to 17% from 1 April 2020 – which will again help to persuade people to run their businesses through a company. .
£1,000 TAX FREE FOR “MICRO -ENTREPRENEURS”
From April 2017, the government will introduce new allowances for the first £1,000 of trading income and the first £1,000 of property income. Those with income below this level will no longer need to declare or pay income tax on that income. Those with income above the allowance will also benefit by deducting the relevant allowance from their gross income.
This appears to be aimed at people starting small businesses on E-Bay or dipping their toe in the water of a new small venture – because they’re not daunted by the obligations of a tax return until the business is more established. On the other hand, if they’re making an initial loss, they may still wish to show this on a tax return so that it can be offset against future taxable profits.
NEW CORPORATE TAX LOSS RULES
There will be fundamental changes to the rules for setting off corporate tax losses starting on 1 April 2017. For losses incurred on or after 1 April 2017, companies will be able to use carried forward losses against profits from other income streams or from other companies within a group. However, large companies with profits in excess of £5m will only be allowed to offset brought forward losses against 50% of the amount of profit in each future period.
INTEREST RELIEF RESTRICTED FOR MULTI- NATIONAL COMPANIES
It’s well beyond what we get involved in, but from 1 April 2017, to restrict profit shifting by multi-nationals, the UK will be introducing a Fixed Ratio Rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK earnings before interest, tax, depreciation and amortisation (EBITDA). This is in line with the rules that exist in several other countries However, this restriction will not apply where the net UK interest expense is less than £2 million.
The rules for calculating the Stamp Duty Land Tax (SDLT) charged on purchases of non-residential properties and transactions involving a mixture of residential and non-residential properties changed with effect from Budget Day to bring them more into line with the mechanism for charging SDLT on residential property. On and after 17 March 2016, SDLT will be charged at each rate on the portion of the purchase price which falls within each rate band. The new rates and thresholds for freehold purchases and leases premiums are:
Purchase price SDLT rate, cumulative
Up to £150,000 NIL NIL
£150,001 – £250,000 2% £2,000
£250,001 and over 5% (no maximum)
Note also that the additional 3% SDLT charge on additional residences commences on 1 April 2016.
TAX RELIEF ON SMALL DONATIONS TO CHARITY INCREASED TO £8,000
The Gift Aid Small Donations Scheme (GASDS) allows charities to treat small donations such as those in collecting boxes as if Gift Aided.
With effect from 6 April 2016 the maximum annual donation amount which can be claimed through GASDS will be increased from £5,000 to £8,000 allowing charities and Community Amateur Sports Clubs to claim Gift Aid style top-up payments of up to £2,000 a year.
VAT REGISTRATION LIMIT £83,000
The VAT registration limit has been increased by £1,000 to £83,000 from 1 April 2016. The de-registration limit also increased by £1,000 to £81,000.
Reductions in these were apparently the largest tax handout in the Budget – at a cost of £6.7bn over the next 5 years. From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates, double the current exemption of £6,000.
After this, there will be a tapered rate of relief on properties worth up to £15,000. This supposedly means that 250,000 businesses will pay less business rates.
If the property has had a rateable value below £18,000 (£25,500 in Greater London) the business is considered to be still small and business rates have been calculated using the small business multiplier instead of the standard one. This is rising from £18,000 to £51,000. It’s considered that these concessions will go some way to compensating for the increasing costs of the “living wage”.
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