Tips and ideas budget special
Mar 18, 2016
Well, spring is certainly here and, with it, some good news in George Osborne’s Budget! I’ve been here since 6.30am reading the small print and writing this edition of tips and ideas as there’s a fair bit to report on this year! So, here goes with what I think is relevant. As always, please call me if you have any questions.
New income tax rates and allowances for individuals
The tax-free personal allowance will rise from £10,600 for the current year (2015/16) to £11,000 in 2016/17 and then £11,500 in 2017/18.
For 2015/16 higher rate income tax kicks in at an income of £42,385. As from 6 April 2016 (tax year 2016/17) this rises to £43,000. The Chancellor has now announced a larger increase in the higher rate threshold for 2017/18 such that income will have to exceed £45,000 before it’s subject to higher rate tax.
Dividend tax kicks in
As announced in the 2015 Autumn Statement, the new dividend allowance of £5,000 kicks in on 6 April 2016. Dividends in excess of this allowance will be taxed at 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively.
Overdrawn directors’ loans penalty
You’ll be aware that, if a director’s loan account is overdrawn at the end of the company’s financial year (because, for example, he or she has drawn out too much relative to the dividend and salary declared in the accounts) then, unless it is somehow repaid within nine months of the year-end (either by physically repaying the money to the company or by declaring another dividend) a 25% tax charge is levied on the overdrawn balance.
That 25% charge (which, incidentally, is equal to the amount of personal tax that a Higher Rate taxpaying director would have had to stump up had an additional dividend been declared to wipe out the loan) is to rise to 32.5% from April 2016. This was expected, as the 32.5% rate matches the new, higher rate of personal tax payable on dividends for Higher Rate taxpayers (the rate will be 7.5% for dividends falling within the Basic Rate).
Great news on business rates
From April 2017, small business rate relief (SBRR) will be permanently doubled and the threshold will be raised to £12k tapering to £15k. The threshold at which business rates bills are calculated using the standard multiplier will be raised to properties with rateable values of £51,000 (previously £18,000) and above. Revaluations, for business rates purposes, will take place at three-yearly intervals. Current rates are based on 2008 property values which lends an advantage to businesses based in London and the South East where property values have soared since then.
Even lower corporation tax
At the summer 2015 Budget, following the General Election, the government announced plans for reductions in the rates of corporation tax, to 19% in 2017and then 18% in 2020.Further good news was announced in the 2016 Budget. The government will cut the rate of corporation tax to 17% in 2020, benefitting over a million companies. These cuts will ensure the UK has the lowest rate of corporation tax in the G20, and by far the lowest in the G7.
More flexibility for tax losses
If your company makes a loss from a particular activity, the current rules are fairly stringent in terms of what profits that loss can be offset against. Also, if you have a group of companies, losses carried forward can only be used by the company that incurred the loss and some losses carried forward can only be set against profits from certain types of income (all pretty complicated, to be honest!). The good news is that, as from April 2017, greater flexibility will be introduced, meaning that businesses will be able to relieve carried forward losses against profits from other sources and from other companies within a group. Although there’s going to be a restriction to this, that restriction will only apply for profits in excess of £5m. So, all in all, this is really good news as it will accelerate tax relief for losses.
Company cars even less attractive
The good news is that a 100% tax write-off will continue to be available for companies purchasing low-emission cars for a further three years, until April 2021 (the current 100% relief rule was temporary). The bad news is that, to qualify as ‘low-emission’ from April 2018, a car will need to emit just 50g/km of CO2 (the current threshold is 75g/km). So, if you can find a company car emitting between 50g/km and 75g/km you might want to consider buying it through your company before April 2018. After that date, the 50g/km threshold will mean that, effectively, only hybrid and electric vehicles will qualify for the 100% relief. Further bad news is that the he CO2 emissions threshold for the 18% rate of capital allowances for company cars will reduce from 130g/km to 110g/km in April 2018. Any cars emitting more that 110g/km (currently 130g/km) will only qualify for a capital allowances (a tax write-off) of 8% per annum on the cost of the vehicle.
Good news on capital gains….but not for residential landlords!
Capital gains are currently taxed at 18% insofar as they fall within the taxpayer’s basic rate band and at 28% for gains falling within the higher and additional rate bands. These two rates will drop to 20% and 10% respectively for some gains made from 6 April 2016 but, and this is important, the 28% and 18% rates will continue to apply for gains from disposals of residential properties and carried interest investments. In particular, this means that landlords with residential buy to let portfolios will continue to be taxed at the current rates. Those looking to dispose of commercial properties, however, will benefit from the new, lower rates of capital gains tax.
The capital gains tax annual exemption for 2016/17 should remain at £11,100 but it has not been confirmed.
VAT thresholds increase
From April 2016 the taxable turnover registration threshold for VAT will increase from £82,000 to £83,000. The taxable turnover deregistration threshold will increase from £80,000 to £81,000.
Big increase in the ISA limit
The annual limit on investments into all types of ISAs (including the new Lifetime ISA being launched from 2017/18 – see below) is to increase substantially, from £15,240 in 2016/17 to £20,000 in 2017/18.
The new Lifetime ISA
From April 2017 a new Lifetime ISA will be introduced. Individuals under the age of 40 will be able to save up to £4,000 each tax year (they can contribute until they’re 50) and then the Government will top this up with a 25% bonus at the end of the year. Money saved in this ISA can then be used to buy a first home worth up to £450k or can be withdrawn from age 60. If monies are withdrawn for other reasons the bonus will have to be repaid, along with a 5% charge. People with a Help to Buy ISA will be able to transfer it to a Lifetime ISA. Payments into a Lifetime ISA will count towards the new annual £20k limit for all ISA’s.
The end of the road for Class 2
Self-employed individuals earning profits in excess of £5,965 per annum (and partners in a partnership) pay class 2 national insurance (that’s currently at a flat rate of £2.80 per week). This will be abolished from April 2018. The self-employed also pay class 4 national insurance on their profits so this will no doubt be adjusted to reflect the abolition of class 2.
Lower stamp duty land tax (SDLT)
With immediate effect, SDLT will be calculated using a progressive, ‘slice’ system on purchases of non-residential property and transactions involving a mixture of residential and non-residential properties. This is akin to income tax, where one slice of income is taxed at 20% and another slice at 40% - rather than applying a unilateral rate across all income.
Under the previous rules, you paid 1% SDLT on a purchase between £150k and £250k, then 3% on a purchase of £200k to £500k and 4% on a purchase in excess of £500k. Under the new rules you pay nothing on the first £150k, 2% on the slice between £150k and £250k and then 5% on anything over £250k.
By way of example, let’s take a purchase price of £300k. It lies in the £250k to £500k band so you’d have paid 3% on the entire £300k (£9k). Under the new regime, the first £150k is exempt. On the next £100k slice between £150k and £250k you pay 2% (£2k). Finally, on the slice above £250k you pay 5% - so that’s £50k at 5% (£2.5k). The total payable is therefore £4.5k. So that’s less than under the previous system. In fact, anybody purchasing non-residential property or a mixture of residential and non-residential properties for more than £150,000 but less than £1,050,050 will now pay less SDLT.
The Government is to consult on possible changes to the Substantial Shareholder Exemption (SSE) rules – so possible changes lie ahead. Introduced in 2002, SSE essentially allows a parent company that has owned 10% or more of a subsidiary trading company for at least a year to sell its shareholding in the subsidiary and pay no tax on the gain. This is a very valuable tax exemption for companies in a group structure, so let’s hope that any future changes are not punitive. I’ll report back on how this consultation progresses.
Some clarification for personal service companies
The personal service company rules (IR35) apply where an individual offers his or her services through a company to a third party but where, essentially, the relationship is more like that between an employee and an employer than between a supplier and customer. This is a massive grey area and the responsibility to get the tax and national insurance treatment right rests on the individual. However, following the Budget, from April 2017 the individual will no longer be responsible for determining whether the IR35 rules apply where the engagement is with a public sector organisation. The intention is that this responsibility will move from the personal service company to the public sector employer, agency, or third party. This will provide clarity for the individual running his or her own personal service company and it’s possible that, in the future, this shifting of responsibility towards the employing organisation will be rolled out more widely across the private sector too.
Entrepreneurs’ relief on associated disposals
Where Entrepreneurs’ Relief (‘ER’) is available on the disposal of a business or part of a business, a reduced rate of capital gains tax of 10% applies up to a lifetime limit of £10m of gains. The relief can also be claimed where someone disposing of a business sells other assets used by the business at the same time (‘associated disposals’).
The new rules will permit relief to be claimed on ‘associated disposals’ to a family member that are linked to disposals of interests in partnerships and unlisted companies, provided the person making the disposal is selling at least 5% of the business and that the transactions are part of a genuine succession arrangement. This change will be backdated to cover disposals on or after 18 March 2015.
Employee shareholder status (ESS) becomes less generous
Employees acquiring shares in their employer’s company from now on (with immediate effect) will, when they sell those shares, have to pay capital gains tax (20% or 10%) on the increase in value of the shares when they sell them, save for a lifetime exemption of £100k. Under the old rules any gains from ESS shares were tax-free. Disposals of shares that were acquired prior to 17 March 2016 will not be taxed and those gains will not count towards the £100k lifetime limit. It’s only for new ESS shares issued from 17 March. This is an unfortunate change which makes the rewarding of employees in this way less attractive.
Higher rates of SDLT on additional residential properties
Higher rates of Stamp Duty Land Tax (‘SDLT’) will apply to purchases of additional residential properties in England, Wales and Northern Ireland (but not Scotland). This was announced in the 2015 Autumn Statement. There will be an additional 3% on top of the current SDLT rates. The nil rate band will increase to 3% and the top slice of SDLT will increase from 12% to 15%. This will impact on buy to let investors.
The new micro-entrepreneurs' allowance
The Chancellor announced the introduction of a £1,000 trading income allowance and a £1,000 property income allowance aimed at those ‘micro-entrepreneurs’ who trade, maybe selling on Ebay (for example) or have a single buy to let property. Where income is below this threshold, there’s no tax to pay and no need to report the income to HMRC. Where income exceeds £1,000 you’ll have to report it to HMRC but will have the choice of either deducting your actual costs from your income to work out your profit or just deducting £1,000. If your actual costs are less than £1,000 then it would be beneficial to take advantage of the £1,000 flat rate deduction!
Get your company to pay for your pensions advice
From April 2017 companies can spend £500 for employer-arranged pensions advice for their staff and obtain tax relief. It will also consult on introducing a pension advice allowance which would allow individuals to withdraw up to £500 tax free from their defined contribution pension scheme in order to pay for the cost of financial advice. This will mean that directors of owner-managed companies would be able to get their company to pay a pension advisor, tax-efficiently.
Increase in termination costs for employers
The first £30k of a termination payment is exempt from tax and national insurance. From April 2018, employer’s national insurance will be payable on the excess of termination payments above £30k (but no employee’s national insurance). This will add to the cost for employers.
I hope you’re still awake! Please call me on 07827 949440 if you have any questions at all regarding the Budget.