A guide to the 2016 Budget
This is a basic guide prepared to give you an overview of the main budget tax proposals and related matters.
It should not be used as a definitive guide, we have focused our summary on the issues likely to affect our clients and their families. These may be subject to amendment in a Finance Act. You should contact us before taking any action as result of this summary.
|Income Tax Rates and Bands||2016/17||2017/18|
|20% basic rate tax||11,000 to 43,000||11,500 to 45,000|
|40% higher rate tax||43,001-150,000||45,001-150,000|
|45% additional rate tax||Over 150,000||Over 150,000|
Note: The Personal allowance is withdrawn at £1 for every £2 above £100,000.
Therefore, no personal allowance is given over £122,000.
This was introduced in the 2015/16 tax year, Individuals who were eligible for the Marriage Allowance but have not yet claimed it can backdate a claim to 6 April 2015 within four years.
For 2016/17 £1,100 of a Personal Allowance can be transferred to a husband, wife or civil partner as long as neither is a higher rate taxpayer. This benefits couples where, the transferor’s income is less than their partner and usually £11,000 or less. This can save tax of up to £220 every tax year. To find out more or apply click here.
Couples who do not claim Marriage Allowance and were born before 6 April 1935, may be able to claim Married Couple’s Allowance.
Tax on Dividends
The tax regime for dividends has changed from 6 April 2016. The dividend tax credit has been abolished so dividend income will no longer be grossed up.
A new Dividend Tax Allowances charges the first £5,000 of dividends received the tax year at 0%
Above this allowance the tax rate will depend on the taxpayers income tax band.
|Tax Band||Tax Rate on Dividends over £5,000|
|Basic rate (and non-taxpayers)||7.5%|
|Higher rate taxpayers||32.5%|
|Additional rate taxpayers||38.1%|
Tax on Savings Income
From 6 April 2016 the new Personal Savings Allowance will exempt most people from paying tax on their savings. Alongside the introduction of the savings allowance, banks and building societies will cease to deduct tax from account interest they paid to customers.
|Income tax Band||Tax-free savings income|
|Basic rate tax||1,000|
|Higher rate tax||500|
|Additional rate tax||0|
From 6 April 2015 some individuals qualified for a 0% starting rate of tax on savings income up to £5,000. This remains the same for 2016/17. However, the rate is not available if taxable non-savings income exceeds the starting rate limit.
Note: Neither of these allowances are available against dividend income.
Individual Savings Accounts (ISAs)
The overall ISA savings limit remains at £15,240 for 2016/17. It will be increased to £20,000 from April 2017.
From 6 April, for the first time, Flexible cash ISAs have been introduced. This means cash can be withdrawn and replaced in the same tax year without it using up the year's ISA limit. However, it is up to different ISA providers to decide whether they will let you do this.
Also from 6 April, the Innovative Finance ISA has been introduced for loans arranged via a peer to peer (P2P) platform. More information can be found here.
A new Lifetime ISA was announced for adults under the age of 40. This will be available from April 2017. More details can be read here.
Help to Save
The government also announced a new type of savings account aimed at low income working families. Details can be read on their website.
The main rate of corporation tax will continue to be 20% from April 2016. This rate will be cut to 19% from 1 April 2017 and to 17% from 1 April 2020.
From April 2017 two reforms to corporate tax losses will be introduced.
First, losses incurred on or after 1 April 2017, companies will be permitted free use of carried forward losses against any type of income and brought forward losses will also be available for group relief. Losses arising before that date will continue to have restricted offset.
Second, from 1 April 2017, there will be a restriction on the use of carried forward losses so that companies can only offset losses against 50% of their taxable profits.
This restriction will only apply to profits in excess of £5 million, so smaller companies will not be affected.
Capital Allowances on business cars
The current 100% first year allowance (FYA) on new low emission cars has been extended to April 2021. A low emission car is defined as one where CO2 emissions do not exceed 75 gm/km, this will fall to 50 gm/km from April 2018.
The emissions for main rate capital allowances of 18% on cars will reduce from 130gm/km to 110gm/km from April 2018.
Loans to Participators
The rate of tax charged on loans to participators and other arrangements by close companies was increased from 25% to 32.5% from 6 April 2016. The measure is to ensure that the rate of tax chargeable under the loans to participator rules continues to mirror the dividend upper rate. The rule is designed to prevent individuals gaining an unfair tax advantage by taking loans (or making other arrangements to extract value) from their companies rather than remuneration or dividends.
Large Company Tax Payments
In the 2015 budget it was announced a company with profits in excess of £20 million will be required to pay tax instalments in the third, sixth, ninth and 12th months of their accounting period instead of the current month seven requirement. This has been deferred until April 2019.
Repeal of the Renewals Allowance
From April 2016 the government withdrew the statutory renewals allowance, which provided businesses with tax relief for the cost of replacing tools. The changes ensure that tax relief for expenditure incurred on the replacement of tools will be obtained under the same rules as those which apply to other capital equipment. Businesses will be able to claim tax relief under the normal capital allowance regime or, in the case of residential landlords, for the cost of replacing domestic items such as furnishings and appliances. The Policy Paper can be read here.
Class 2 & 4 National Insurance Contributions
This budget included a final announcement that Class 2 NIC will be abolished from April 2018.
Class 4 will be restructured to allow the self employed to acquire pension rights class 4 contributions, but there are no details at present.
Micro Enterprise Allowance
To simplify tax for the smallest businesses, from April 2017 individuals with self employed income or property income of no more than £1,000 will be exempt from tax on that income.
Those with income above the allowance can choose to either calculate their taxable profits by deducting actual expenses in the usual way or they can simply deduct the £1,000 allowance.
It is proposed that from 6 April 2016 distributions made by a company on a winding up will be taxed as income where the conditions of a targeted anti avoidance rule are met.
These include a condition triggering income treatment if the recipient or a connected person is involved with a similar business in the two years after the liquidation, and the transaction is undertaken for tax avoidance motives.
From 6 April 2016 the Employment Allowance increased to £3,000 per annum (Previously £2,000). This increase means that a business can employ four workers full time on the new National Living Wage without paying any secondary class 1 (‘employer’) NIC.
However, from 6 April 2016 companies where the director is the sole employee will no longer be able to claim the Employment Allowance.
Employers who hire illegal workers face civil penalties from the Home Office. The government will build on this deterrent by removing a year’s Employment Allowance from those receiving civil penalties from 2018.
NIC for apprentices under 25
From 6 April 2016 employer NICs are 0% for apprentices under 25, working towards a government recognised apprenticeship, who earn less than the upper secondary threshold of £827 per week. Employers NIC above the threshold are 13.8% and Employee NICs are payable as normal. Information about government recognised apprenticeships can be found here.
Employee Benefit and Expense Changes
From 6 April 2016 there is a statutory exemption for certain expenses, such as travelling and subsistence expenses, reimbursed to an employee. This replaces the previous system where employers had to apply for a dispensation to avoid having to report non-taxable expenses on forms P11D.
Employers can now include taxable benefits in pay and thus account for PAYE on the benefits. However, in order to payroll benefits for 2016/17, employers will have to register with HMRC for the service before the start of the new tax year. Employers will then not have to include these Payrolled benefits on forms P11D.
The £8,500 threshold below which employees do not pay income tax on certain benefits in kind has been removed. There are new exemptions for carers and ministers of religion.
You may need to revisit your employees benefits to avoid extra tax charges.
For more details check the HMRC website.
Capital Gains Tax
The rates of capital gains tax reduced from 6 April to 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. However, the existing rates of 18% and 28% rates will continue to apply for carried interest and for chargeable gains on residential property that do not qualify for private residence relief. In addition, the 28% rate still applies for ATED related chargeable gains accruing to any person (principally companies).
A new type of entrepreneurs’ relief has been introduced from March 2016 for newly issued shares in unquoted trading companies which are issued on or after 17 March 2016. The shares must be held for at least 3 years before disposal (starting from 6 April 2016), but this change will limit the tax on disposal to 10% on a separate limit of up to £10 million of lifetime gains.
Changes made to entrepreneurs’ relief in 2014 and 2015 had some unintended consequences therefore the legislation has been amended. Where goodwill is sold to a close company in which the disposer has less than 5% of the shares or votes, entrepreneurs’ relief will be available on the disposal; this change is backdated to 3 December 2014.
The new 2015 rules were introduced to prevent abuse of the relief but they also resulted in relief not being due on ‘associated disposals’ when a business was sold to a family member. Revisions have been made so relief is available on a disposal of a privately-held asset when the accompanying disposal of business assets is to a family member.
Also, where there was an associated disposal, relief was restricted where the disposer did not sell at least 5% of his ownership in the business. This is now not to apply where the claimant disposes of the whole of his interest and has previously held a larger stake. These changes are backdated for associated disposals made on or after 18 March 2015.
The announcement in 2015 of an extra slice of nil rate band for IHT applying to the family home is to be extended where the home has been sold and its value is represented by other assets in the estate. Legislation to achieve this will be included in the Finance Bill 2016.
Stamp Duty Land Tax
As announced in the Autumn statement the new 3% additional rate of SDLT applies from 1 April 2016. It applies to second homes and buy to let investments by individuals, major investors and companies. The 3% will not apply to properties within the ATED regime, which are subject to 15% in any event.
The government has now announced:
Purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence
Purchasers will also have 36 months between selling a main residence and replacing it with another main residence without having to pay the higher rates
A small share in a property which has been inherited within the 36 months prior to a transaction will not be considered as an additional property when applying the higher rates
There will be no exemption from the higher rates for significant investors.
Stamp Duty Land Tax on Commercial Property
Following the restructure of SDLT for residential property, the government announced a reform of the SDLT charge on business property. More information and a SDLT calculator can be found on the HMRC website.
Government funded Tax Free Childcare
Tax Free Childcare is a new Government initiative which is due to be slowly rolled out from early 2017, and will replace the existing Childcare Voucher Scheme in April 2018.
This new scheme will also be available for parents who are Self-employed, unlike the current scheme.
For eligible families, Tax Free Childcare offers to cover 20% of childcare costs (up to £2,000 per child, per year), for children up to the age of 12.
The current Childcare Voucher Scheme will continue to be available for employees who sign up before April 2018, for as long as they choose to remain in the scheme.
Employers should bear in mind that many parents will save more money with Childcare Vouchers than they would with the new Tax-Free Childcare, so keeping the scheme open to existing users is important.
Tax Changes for Private Landlords
The restriction of tax relief for finance costs on residential properties to the basic rate of Income Tax was announced in the 2015 Budget although it is not introduced until the 2017-18 tax year.
It is important that all private landlords with mortgages or other loans are aware of this change.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic tax rate reduction from their income tax liability.
Therefore, Landlords whose total taxable income has previously always been within the basic rate (20%) Income Tax band may now find that they are pushed up into the 40% Tax band without their profits increasing, making them worse off.
The change will be phased in over four years, starting from 6 April 2017, when 25% of finance costs will be subject to the new rules, growing to 50% in the 2018-19 tax year, 75% in 2019-20, then from 2020 onwards the new rules will be fully in place.
Making Tax Digital
The Government set out the vision for a transformed tax system in the March 2015 Budget.
HMRC is aiming to be able to interact digitally with all tax payers by 2020, but there still seems to be a high level of uncertainty relating to the impact of Making Tax Digital (MTD).
So what does MTD consist of?
Every taxpayer and business in the UK will be provided with a Digital Tax Account (DTA). Individual taxpayers have a Personal Tax Account ; whilst every business will have a Business Tax Account, for handling business affairs related to VAT, PAYE, Corporation Tax, Partnership Tax, amongst others.
The aim of the DTA will be to feed real time data into the account through the use of 3rd party software with the aim of providing a taxpayer with a full overview of any income (rental income, self employment income, bank interest, any dividends received); within a real-time environment.
The resulting factor of this?
The tax return form will be replaced with a digital tax account. The main difference being that HMRC will carry out the assessment of the tax to be paid based on the information supplied into the account.
As of April 2018, HMRC intend for the majority of sole traders and landlords (including those in employment but also have a secondary source of £10,000 or more per annum) to keep records in some form of digital format and submit the high level information online - at the very least on a quarterly basis. Following this timeframe, it will be rolled out to SME businesses by 2020 with intentions of reporting VAT and corporation tax obligations.
This is a big change and will sound very daunting to those who have little knowledge or experience with computers and the internet but rest assured that we will be help with every step of the process.