The 8 July Budget contained a number of measures with implications for personal and business finances. Here’s a quick round-up of some of the key announcements.
- The income tax personal allowance will increase from £10,600 in the current financial year to £11,000 in 2016-17 and £11,200 in 2017-18.
- The higher rate threshold, above which income tax is paid at 40 per cent, will increase from £42,385 in 2015-16 to £43,000 in 2016-17 and £43,600 in 2017-18. The levels of the personal allowance and higher rate thresholds are slightly higher than those announced in the March 2015 Budget.
- Child benefit will be frozen for four years from April 2016, along with other working age benefits.
- The amount you can earn tax-free from letting out furnished accommodation in your home will rise from £4,250 per year to £7,500 from April 2016.
- Insurance premium tax (IPT) is charged on insurance premiums and covers most general insurance, such as car and household, although life and most other long-term insurance policies are exempt. From 1 November 2015, the standard rate of IPT will be increased by 3.5 per cent to nine per cent.
- The pensions annual allowance – the amount that can be saved each year into a pension and receive tax relief – is currently £40,000 a year. From April 2016, for every £2 of adjusted income someone has above £150,000 – including their own and employer pension contributions – the annual allowance will be reduced by £1, down to a minimum of £10,000.
- From 2017, a new £175,000 inheritance tax (IHT) allowance will be phased for the estates of people leaving their home to direct descendants. The effect of the new allowance – called the main residence nil rate band, which will sit on top of the existing £325,000 IHT threshold – will be to create an effective IHT threshold of £1 million for spouses and civil partners by 2020-21.
- Dividend tax credit means that non and basic rate taxpayers currently pay no tax on dividend income. From April 2016, the credit will be replaced by a £5,000 annual dividend tax allowance. Tax above the threshold will be levied at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers, those with annual income of more than £150,000. ***See our important note at the foot of this article***
- Residential landlords can currently offset ten per cent of annual rental income against tax as a wear and tear allowance for furnishings. From April 2016, the allowance will be scrapped. Instead, landlords will deduct the annual cost of replacing furnishings.
- Legislation will be introduced to strengthen HM Revenue & Customs’ powers to recover tax debts directly from taxpayers’ bank and building society accounts, including cash ISAs.
- The corporation tax rate will be reduced from 20 per cent to 19 per cent in 2017 and to 18 per cent in 2020.
- The employment allowance – a discount on employers’ national insurance contributions – will rise from £2,000 a year to £3,000 in April 2016. Companies where the director is the sole employee will no longer be able to claim the employment allowance from April 2016.***See note at the foot of this article***
The government will publish a “roadmap” by the end of the year, showing how it will transform tax administration for individuals and small businesses by 2020. It will also publish a business tax roadmap by April 2016, setting out its plans for business taxes in the same period.
***Important note on dividend income***
As we are all aware, over the years, governments together with HMRC have enacted various attacks on the freelance limited company sector such as IR35. The perception is that freelance contractors get an unfair advantage in being able to work through a limited company.
In fact, over the years, we as accountants have been able to advise freelance contractor clients on very advantageous methods of extracting profits from their company.
The changes notified in the Budget will in the first instance increase the tax charge on the traditional method of taking most of the profits out as dividends. Non and basic rate taxpayers currently pay no tax on dividend income, however from April 2016, everyone will receive a £5,000 annual dividend tax allowance.
Once this has been exhausted, even those dividends earned below the higher rate tax threshold will carry an additional 7.5% tax charge. The rule of thumb applied over the years that dividends taken up to the higher rate tax threshold will not incur income tax will no longer apply.
As always, we at Cogent will be analysing all the options available for our clients to see how to mitigate their overall tax liability. It is early days in analysing these options and we will over the coming months be in touch to provide available strategies to help you to retain more of your hard-earned income.
***Note on the employment allowance***
As usual, you can be confident we will provide our clients with the best advice. We will be looking at the options and will guide you accordingly.