2016 Budget Update

UK Chancellor George Osborne announced the 2016 Budget. The most significant changes announced in the 2016 Budget are detailed below:

Income tax personal allowance

The income tax personal allowance will increased from £10,600 to £11,000 in 2016/17.

The basic rate limit will increase from 31,785 to £32,000 in 2016/17.

The higher rate threshold will increase from £42,385 to £43,000 in 2016/17.

Dividends

From 6 April 2016, the dividend tax credit will be abolished and replaced with a £5,000 tax free allowance and an increase for dividend tax rates to 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers.

The changes to the taxation of dividends will have a significant impact on UK Limited Company Contractors. Belsize Accountancy will assist our clients to assess and plan for the tax implications arising from the new legislation. Feel free to contact us for more details.

National Insurance

The National Insurance Employment Allowance has increased from £2,000 to £3,000 in tax year 2016/17. It will no longer be available to single company directors.

Class 2 National Insurance contributions for the self employed to be abolished from 6 April 2018.

Directors Loans

The Section 455 tax on Directors’ loans will increase from 25% to 32.5% from 6 April 2016.

Corporation tax rates and bands

The main rate of corporation tax to continue at 20% in April 2016. It is forecast to be cut to 17% in 2020.

From 2017 it is proposed that new restrictions will be introduced on utilisation of brought forward losses where profits are above £5m. The losses will be subject to a 50% limitation.

Companies will be provided with more flexibility on how losses can be used. Businesses will be able to use carried forward losses arising on or after 1 April 2017 against profits from other types of income and from other companies in the group.

From 1 April 2017 there will be new rules governing the deductibility of interest.

The threshold for small business rate relief will increase from £6,000 to £15,000, and the higher rate will be increased as well from £18,000 to £51,000.

Other changes include Expansion of UK withholding tax on IP related payments with immediate effect and more flexible rules on loss streaming and group relief.

Capital Gains tax

The main rates of capital gains tax will be cut from 18% to 10% in 2016/17 for the basic rate and from 28% to 20% for the higher rate. However, the main rates will continue for residential property and carried interest.

VAT

Small businesses will benefit from the increase in the VAT registration threshold which will rise from £82,000 to £83,000 from 1 April 2016. The deregistration will also increase from £80,000 to £81,000.

Entrepreneurs relief for investors

Entrepreneurs’ relief will be available to long term investors in unlisted companies. A 10% rate of CGT will be applicable to gains on disposal of shares in unlisted companies purchased from 17 March 2016 provided they are held for a minimum of 3 years from 6 April 2016. The gains are subject to a separate lifetime limit of £10m.

Annual Investment Allowance

The Annual Investment Allowance for Companies will continue at £200,000, effective 1 January 2016.

Proposed changes to IR35 and Intermediary Rules

HMRC is proposing changes to the rules for personal service companies (PSC’s) and intermediaries providing services to organisations in the public sector. The new rules will transfer responsibility for IR35 from the PSC to the public sector end client or agency.

Individual Savings Accounts (ISA’s)

ISA Allowance will remain at £15,240 which can be apportioned between cash and shares ISA’s. It is proposed that the ISA allowance will rise to £20,000 in 2017.

ISA savers are now able to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year.

A new flexible Lifetime ISA (“LISA”) will be available from April 2017 for adults under the age of 40 where savers can contribute up to £4,000 a year and the government will top this up with an additional 25% bonus. The bonus will be paid up to the age of 50. The funds must be used to buy a first home up to the value of £450,000. Savers can withdraw the funds up to the age of 60 but will face penalties and a repayment of the top up if the funds are not used to purchase a home.

Savings allowance

A personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers has been introduced from 6 April 2016.