The Budget - 17 March 2016

Delivered by George Osborne on 17 March 2016 this was the second budget of the Conservative Government.  The Chancellor described it as a "budget for the next generation".

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, with the exception of the reduction to Capital Gains Tax rates (not applicable to domestic property) which come into effect on 6 April 2016.

This report does not discuss changes to fuel, tobacco or drink duty.  Nor does it discuss the Chancellor's announcement of a sugar levy on the soft drinks industry which will be introduced from April 2018.  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 2016-17 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 which increased to £10,600 in April 2015 and increases to £11,000 from April 2016 will increase to £11,500 in April 2017.
  
• The higher rate tax threshold (the amount of income above which people pay tax at 40%) increases to £43,000 in April 2016, and then to £45,000 in 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 £122,000 for 2016-17, and 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 £1,100 for 2016-17.

Dividends

In his July 2015 budget the Chancellor announced a complete rethink of the taxation of dividends to take effect from April 2016. The tax credit will 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 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 was increased from £15,200 to £20,000 for 2016-17.  

A new "Lifetime ISA", available from April 2017 to people under the age of 40, was announced.  People saving up to £4,000 a year into a Lifetime ISA will receive a 25% government bonus on the amount they invest, however this bonus will be lost if the saver withdraws the money before they are 60, unless the money is used to purchase a home.

National Insurance

National insurance remains largely unchanged with the following exceptions.  

The £2,000 annual reduction in contributions paid by employers which started in April 2014 increases to £3,000 from April 2016, but will no longer be claimable by businesses where there is only one person on the payroll and that person is a director.

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

Corporation Tax

In his July 2015 budget the Chancellor announced a reduction in corporation tax rates so that its current rate of 20% will reduce to 19% on 1 April 2017 and then to 18% on 1 April 2020.  However the 2016 budget stated the rate would be 17% by April 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.

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.

These provisions are not yet law and so may change over the next 12 months.

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%.

Has this change made entrepreneurs' relief obsolete?

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.

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 £82,000.

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 reduction of capital gains tax, the Lifetime ISA and the Sugar Levy.  However last year's changes to the taxation of dividends and landords will probably be top of most small business people's thinking, although this year's rather quieter announcement changing the rules for Public Service Companies may be as important.  

The big political question of course is has George Osborne done enough to become leader of the Conservatives (and Prime Minister) when David Cameron steps down?

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