The Budget - 8 March 2017

This was the first budget delivered by Philip Hammond following his appointment as Chancellor of the Exchequer after the Brexit Referendum.  He started his speech by reminding the House that this is the last Spring Budget (budgets will be in the autumn in future), but that 24 years ago a previous Conservative Chancellor had said the same thing only to be sacked 10 weeks later.

This report covers the main changes to taxes and their effect on most people.  It is not intended to be a complete definitive guide to the budget.  All figures are approximate.  If you are looking for a definitive guide then you should try one of the 'Big Four' accountancy firms' websites, or the Financial Times. Alternatively you could try the official budget pages at HM Treasury.

Most of the changes take place a year or more in the future.

This report does not discuss changes to fuel, tobacco or drink duty. There's plenty of commentary in the press without us joining in!

The summary below includes announcements from the budget, but also includes changes announced in earlier budgets as these affect the tax system for 2017-18 and later.

Income Tax

Dividends

National Insurance

Savings

Corporation Tax

Personal Service Companies

Capital Allowances

Capital Gains Tax

Property taxes

Buy to Let Mortgage Interest

VAT

Landlords

Child Benefit

Income Tax

The following income tax changes have been announced:

• The personal allowance for tax free income increases to £11,500 from April 2017.
  
• The higher rate tax threshold (the amount of income above which people pay tax at 40%) increases to £45,000 from April 2017.
• The personal allowance will continue to be reduced for taxpayers with income exceeding £100,000.  The allowance will reduce by £1 for every £2 of income over £100,000.  This has the effect of creating a 60% tax band between £100,000 and £123,000 for 2017-18.
• The top rate of tax remains at 45% for taxable income exceeding £150,000.
• The transferable tax allowance for married couples increases to £1,150 for 2016-17.

Dividends

The Chancellor announced a 60% reduction in the tax free dividend allowanceI from £5,000 to £2,000 from April 2018.

Let us recap for a moment.  In his July 2015 budget the then Chancellor announced a complete rethink of the taxation of dividends to take effect from April 2016. The tax credit being be replaced by a £5,000 tax-free dividend allowance and dividends not covered by this will be taxed at 7½% for basic rate taxpayers and 32½% for higher rate taxpayers.

This sounds like a government that cannot decide what its tax policy should be.  The allowance was introduced one year ago to compensate for the withdrawal of the tax credit.

This change will impact on taxpayers with large amounts of dividend income, primarily people with large share portolios and people with small companies.

Savings

The ISA limit increases to £20,000 from April 2017.

The NS&I Bond previously announced will be available from April 2017 and will carry an interest rate of 2.2% for savings up to £3,000.

National Insurance

National insurance remains largely unchanged with the following notable exceptions. 

Class 4 National Insurance (paid by the self employed on their profits) will increase from the current rate of 9% to 10% in April 2018 and then to 11% in 2019.  This represents a 22.22% increase.

Class 2 National Insurance (paid by the self employed) will be abolished from 2018.

It should be noted that there is some fury within the Conservative Party about the Class 4 increase and the Prime MInister has said this legislation will be delayed until the autumn.  It is possible that it could change along the way for reasons of political expediency.

15 March Update: Government announced today that the increase in Class 4 National Insurance will not go ahead.

Corporation Tax

The reduction in corporation tax rates that were announced in 2015 and 2016 start to take effect from April 2017.  The rate reduces from 20% to 19% in April 2017 and then to 17% in 2020.

From April 2016 the tax charge on overdrawn directors' loan accounts will increase from 25% to 32½%.  This aligns this tax rate with the new dividend tax rates.

In 2016 the Chancellor announced that losses incurred from April 2017 that are carried forward will be able to be used against profits from other income streams.  However if profits exceed £5m the amount of profits that can be offset by losses carried forward will be restricted to 50%.

The amortisation of goodwill purchased after 8th July 2015 will not be allowed as a deduction against corporation tax.

Personal Service Companies

Legislation known as "IR35" has been used to address the use of personal service companies for some years.  The budget contained a number of measures aimed at what the Chancellor called "long-standing anomalies" in this area.

From April 2017 individuals working through their own company in the public sector (defined as government departments, education institutions, the police, and bodies such as the British Museum, BBC, Channel and Transport for London) will not be responsible for paying the relevant tax and national insurance as this responsibility will move to the public sector employer who will apply the IR35 rules in their calculations.

Capital Allowances

In his July 2015 budget the Chancellor set the Annual Investment Allowance (which has varied enormously over the last few years) at a "permanent level" of £200,000 from January 2016.  We are pleased to see this "permanent" rate remains in force.

Capital Gains Tax

The Capital Gains Tax rates were unexpectedly reduced with effect from 6 April 2016 so that gains made by higher rate taxpayers on non business assets will be taxed at 20%, and other gains will be taxed at 10%.  However gains made on residential property remain at the old rates of 18% and 28%.

The Annual Exempt Amount of £11,100 was not increased.

Inheritance Tax

The July 2015 budget announced that an additional £350,000 family home allowance will be phased in over four years from April 2017, taking the total allowance for a couple to the promised £1m.

Property Taxes

Stamp Duty Land Tax rates were overhauled in the 2014 Autumn Statement.  The new rates for individuals are available here.

In 2013 a new 15% rate was introduced on properties costing over £½m purchased through a company.

From April 2016 an additional 3% is payable on the purchase of second homes.

From April 2013 a Residential Property Tax will be payable by companies on real estate held in a corporate structure.  The annual levy is based on the property value and varies from £15,000 for properties valued at £2m, and increases to £140,000 where the property is valued at £20m.  Since 2013 additional bands have been introduced so that properties valued at over £½m are now included.

Mr Osborne announced changes to commercial stamp duty coming into force on 17 March 2016.  The new rates for commercial property are available here.  This is a tax  reduction for small value transactions, but an increase for high value ones.

VAT

There was no change to VAT rates.

The registration threshold is now £85,000.

Landlords

In his July 2015 budget the Chancellor announced two changes to the taxation of lettings income.  

Mortgage interest relief for buy to let mortgages will only be relieved at the basic rate of tax with this change being phased in over four years commencing in April 2017.

The 10% wear and tear allowance available for furnished lets will stop from April 2016.  Landlords will have to make a claim when they replace furnishings.

Child Benefit

There were no changes to the high income child benefit charge.

The reduction in child benefit for households where one or more people earn over £50,000 came into effect in January 2013 having been announced in the 2011 budget and amended in the 2012 budget. 1% of the child benefit is withdrawn for every £100 the highest earner in the family's income exceeds £50,000, so all child benefit is paid back to the government if income exceeds £60,000.

Summary

The major headline changes were the increase to Class 4 National Insurance for self employed, and the 60% reduction in the tax free dividend allowance.  Both of these will hit the owners of small businesses, described by the Chancellor as "the entrepreneurs and innovators who are the lifeblood of our economy".  A strange policy as it hits at the very people who voted the government into power.

The question this commentator has to ask is was Philip Hammond too cocky in his opening remarks?  Will he last longer than the previous Chancellor he referred to at the beginning of his speech?

15 March Update: The Chancellors headline policy certainly didn't last very long - one week only.

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