Treasury Chancellor George Osborne has announced his summer update to the 2015 Budget following the majority election of the Conservative Party. Here is the summary of the key changes in the Budget:
Income tax personal allowance
The income tax personal allowance will increase from £10,600 to £11,000 in 2016/17, and further increase to £12,500 by 2020.
The higher rate threshold will increase from £42,385 to £43,000 in 2016/17. The higher rate threshold is pledged to increase further to £50,000 by 2020.
Dividends
Significant changes are proposed to the taxation of dividends with the removal of the dividend tax credit from 6 April 2016.
Savers and Limited company contractors will no longer be able to reclaim the dividend tax credit in their tax returns. Instead, the first £5,000 of dividend income will be tax free with subsequent dividends being taxed at 7.5%, 32.5% and 38.1% according to the respective bandings.
The tax on dividend income is summarised as follows:
- First £5,000 dividends are tax free
- Basic rate taxpayers will pay tax at 7.5% (previously zero)
- Higher rate taxpayers will pay tax at 32.5% (previously 25%)
- Additional rate taxpayers will pay tax at 38.1% (previously 30.56%)
Currently dividends paid to basic rate taxpayers are treated as having been taxed already as Company profits are subject to corporation tax. Basic rate taxpayers are able to claim the dividend tax credit and pay next to no tax on earnings up to £38,000.
Small business owners who are higher rate taxpayers will be faced with the decision of growing their business and paying themselves dividends at c. 30%, or selling the company and paying capital gains tax at 28%.
Individuals who receive significant dividend income will pay more under the new rules. Most Limited Company Contractors are likely to be affected. Belsize Accountancy will be discussing the impact on all Limited Company clients over the next few weeks.
National Insurance
The National Insurance Employment Allowance will increase from £2,000 to £3,000 from tax year 2016/17.
Single Director Limited Companies will no longer qualify for the Employers Allowance which will only be available to businesses employing more than one employee. Under the current system, which was introduced last year, any company can claim the Employment Allowance.
The government will consult on abolishing Class 2 NIC’s and reforming Class 4 NIC’s for the self employed.
Property taxes
Mortgage interest relief will be restricted for buy to let landlords who will only be able to claim tax relief at the basic rate on their mortgage payments. Currently higher rate taxpayers are able to receive tax relief at their marginal rate of tax and so can achieve 40% - 45% relief on their mortgage interest repayments.
The restriction to mortgage interest relief will be phased in from April 2017 whereby 75% of the mortgage interest will be eligible for full relief and the remaining 25% eligible for relief at the basic rate of tax (currently 20%).
The 10% wear and tear allowance will be scrapped from April 2016. Landlords will be restricted to reclaiming the cost of allowable furnishings and maintenance for their property as they arise. The advice to clients who are currently benefitting from wear and tear allowance would be to try to avoid replacing such items before April 2016.
Rent a room relief will increase from £4,250 per annum to £7,500 from April 2016.
Corporation tax
The main rate of corporation tax will be reduced from 20 per cent to 19 per cent from 1 April 2017. The corporation tax rate will reduce further to 18 per cent by 2020.
The small profits rate will be reduced in line with the main rate.
Large companies with profits of more than £20m per year will be required to pay their corporation tax 4 months early. At present, large companies do not have to pay corporation tax until the seventh month for their accounting period. The new proposals will mean that they pay tax in the third, sixth ninth and twelfth months.
Non Domiciled Residents (“Non Doms”)
Non-UK Domiciled individuals will be subject to new legislation from 6 April 2017.
The Non Dom tax status will be scrapped from April 2017 for individuals living long term in Britain. Anyone who has been in the country for 15 of the last 20 years will no longer qualify for the Non Dom allowance and will be deemed to be domiciled in the UK.
Non Doms currently do not pay taxes on their earnings outside of the UK unless the funds are remitted to the UK. The new rules mean that individuals who no longer qualify for the Non Dom tax status will be subject to UK tax on their worldwide income on an arising basis and will be subject to inheritance tax on their worldwide assets. On departure from the UK, the deemed domicile status will be retained for 5 years.
Residential properties indirectly held by Non Doms through foreign companies (or structures) will be liable to inheritance tax from April 2017.
Individuals who are born in the UK to parents who are domiciled here, will no longer be able to claim Non Dom status while they are resident in the UK.
Annual Investment Allowance
The Annual Investment Allowance for Companies will reduce from £500,000 to £200,000 from 1 January 2016.
Pensions
From 6 April 2016, individuals earning above £150,000 will have their annual allowance for pension contributions restricted from £40,000 to £10,000. The annual allowance will be tapered away by £1 for every £2 of income over £150,000 to the minimum annual allowance of £10,000. High earners with an income over £210,000 will receive the minimum pension allowance of £10,000.
As the changes will not be implemented until April 2016, high earners will have the opportunity to maximise their pension contributions in the current tax year.
The Lifetime allowance for pension contributions will be reduced from £1.25 million to £1 million from 6 April 2016 as previously stated.
Individual Savings Accounts (ISA’s)
From 6 April 2016, ISA savers will be able to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year.
Minimum Wage
The National Minimum Wage for over 25’s is set to increase to £9.35 an hour over the next 5 years. It will rise to £7.20 from April 2016.
Welfare
Tax credits and universal credit will be restricted to two children.
The benefits cap would be reduced from £26,000 to £23,000 in London and £20,000 in the rest of the UK.
Inheritance Tax
The inheritance tax allowance for homes left to children or grandchildren will increase by £175,000 by 2020. This brings the total inheritance tax threshold up from £325,000 to £500,000 providing couples with a threshold of £1 million for their homes.
The additional main residence nil rate band will be introduced on 6 April 2017 at £100,000, increasing each year to £175,000. This is in addition to the existing inheritance tax band of £325,000 which will be frozen till 2021. The additional IHT allowance will taper at a rate of £1 for every £2 for estates with a net worth over £2 million.
The additional nil rate band is only available for use on the family or main residence and is only available for transfers to direct descendants such as children, step-children or grandchildren. The allowance is also transferrable between married couples on death.
IR35 for Contractors
The government has indicated that the IR35 rules will be reviewed with a view to improve their effectiveness.
Travel expenses
Proposals are in place for new rules to restrict for tax relief on travel and subsistence expenses for worked engaged through an employment intermediary, such as an umbrella company or a personal service company. The rules will apply to those contractors who are 'supervised, directed and controlled’. The changes will take effect from 6 April 2016.
Other taxes
- Insurance premium tax to increase from 6% to 9.5% from 1 November 2015.
- Drivers of expensive cars will be subject to an increase of £450 to their annual road tax.
- The Bank Levy will be reduced over 6 years and replaced with an 8% profit surcharge to lenders.
Sunday, December 27, 2015