BUDGET March 2016
Last week, the Chancellor, Mr Osbourne, outlined his Conservative Budget for the coming year and beyond. In this email, we have summarised the main points that we believe would be of interest to both business owners and individuals with personal tax requirements:
Main points for individuals
- Tax-free allowance: The personal tax allowance will increase from £11,000 in 2016/17 to £11,500 from April 2017. The higher rate threshold will increase in April 2017 to £45,000 from £43,000.
- Class 2 and 4 National Insurance: From April 2018, Class 2 NICs will be abolished. This announcement will affect many sole traders and partners in private partnerships. In order to compensate, Class 4 NICs will be reformed so that self-employed individuals are able to continue to accrue their “qualifying years” for the State Pension and other benefits. In the meantime, please remember that Class 2 NICs will continue for another two years, and will now be taxed via self-assessment tax returns from this year until they are abolished.
- Property and Trading Income Allowances: From April 2017, a new £1,000 ‘sharing economy’ tax allowance will be introduced on both property income and trading income respectively. This means that individuals with rental income or trading turnover below £1,000 will no longer need to pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. The Chancellor has set this up so that Airbnb hosts and eBay traders will benefit from £2,000 ‘sharing economy’ tax allowance.
- Capital Gains tax: From 6 April 2016, the basic rate of CGT will reduce from 18% to 10%, and higher rate from 28% to 20%. Unfortunately the new CGT rates will not apply to the disposal of residential, second properties (by virtue of an 8% residential surcharge). It is, however, still the case that an individual’s main home is not subject to CGT.
- Goodwill: Contrary to a previous budget announcement, individuals incorporating their sole trade or partnership into a limited company will still be able to qualify, under certain conditions, for Entrepreneur’s Relief. Meaning that the sale of goodwill to a connected, limited company will still be taxed at the favourable rate of 10%.
Main points for business
- Dividends: The changes to the way dividends are taxed will continue to go ahead as announced last July.
As we reported in a circular last year, the current dividend tax credit of 10% will be abolished and a tax-free dividend allowance of £5,000 brought in from 6 April 2016. Dividends received above the allowance will then be taxed at 7.5%, 32.5% and 38.1% respectively for each tax band that the shareholder falls into. This means that remuneration through a limited company using the traditional low salary/dividends combination will be less tax efficient than at present. In other words, for anyone drawing more than £5,000 in dividends, they may end up paying more tax.
This is a major change to the tax rules and, as suggested in our previous circulars, clients may want to contact us to discuss these changes and how they may affect you.
- Overdrawn director’s loan accounts: As many directors of small companies will already know, current tax rules impose a ‘temporary’ tax charge of 25% of the value of an “overdrawn” director’s loan account until the loans are repaid. This 25% rate treats the loan to the director as if it were a dividend. The Budget has now set out that for loans and advances to directors made from 6 April 2016, that the tax rate will increase to 32.5%, which is to reflect the changes in the way dividends are taxed as reported above.
- Corporation tax: The corporation tax rate is set to be reduced from 20% to 19% in 2017, and 17% by 2020.
- Trading Losses: Businesses with losses arising have always had options to carry them forward into the next trading period. It has always been the case that such loses carried forward may only be relieved against profits realised from the same trade. It was therefore a surprise that the Chancellor announced an amendment to that rule from April 2017, which will allow losses arising, when carried forward, to be available for offset against profits from other income streams, or even against profits arising in other companies within a group. This should create some interesting tax planning opportunities.
- Tax Reliefs on R&D: It is worth reminding clients that the Government continue to offer significant tax breaks for companies involved in Research & Development. The Budget has continued to support innovation, however, it should be noted that slight changes will be made to the way in which the relief works.
- Stamp Duty Land Tax (SDLT) on Commercial Property: Following the successful changes to the calculation of SDLT for residential properties, the operation of this tax for commercial properties is being changed from a slab system (with one tax rate applied to the whole transaction value depending on the band this value falls into) to a slice system, effective from tomorrow. SDLT will be payable on the proportion of the transaction value falling within each slice, at 0% up to £150,000; 2% between £150,001 and £250,000; and 5% above £250,000. All freehold and lease premium transactions below £1.05m will pay the same as under the current system, or less in SDLT. Please note that queries relating to SDLT changes should be put to your conveyancer or property solicitor.
- Loss-of-office Payments: Currently, genuine ex-gratia loss-of-office payments up to £30,000 are paid free of income tax and employers’ NICs. From April 2018, legislation will be brought in so that employer’s NICs will be payable on the amount over £30,000, which is in addition to the usual income tax.
This is not an exhaustive list of all the budgetary announcements, but just a summary of the key changes that we believe are of most relevance to our clients.
