Introduction
Following a change of Government, Chancellor George Osborne had held a second Budget of the year on 8 July 2015.
In this Knowledge Base article, we shall consider the key changes and ambitions of this Government that had previously been announced in this Budget.
Income Tax
The Government had announced an objective to raise the personal allowance to £12,500 and increase the amount of income subject to 20% tax such that the amount of income at which a taxpayer begins to pay 40% tax is increased to £50,000.
This has been done incrementally, commencing with the 2016-17 tax year. Accordingly, the personal allowance has increased from £10,600 in the current 2015-16 tax year to £11,000 in the 2016-17 tax year.
Similarly, the basic rate limit, being the amount of income subject to income tax at 20% after deducting the personal allowance, has increased from £31,785 to £32,000.
The National Insurance Upper Earnings Limited and Class 4 National Insurance Limit has be aligned to these new higher rates. No changes have been made to the main income tax and NI rates.
Dividend Taxation
In April 2016, the Government had abolished the Dividend Tax Credit imputed in a dividend and replaced this with a new Dividend Tax Allowance of £5,000 a year.
Dividend incomes in excess of £5,000 per year are taxed at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Deduction of Finance Costs from Property Income
New rules have been introduced on the deduction of finance costs on rented properties, currently fully allowable against property income. The measure is to affect those that pay tax at a rate higher than the basic rate of income tax (20%) and it restricts their deduction of this type of expense to just the basic rate.
For the purposes of the legislation, a finance cost includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or a loan.
The measure will be introduced in the 2017-18 tax year and will be tapered in over the following years to give landlords time to adjust. Assuming the rates of income tax do not change, a 40% taxpayer in the 2017-18 year will be able to claim three quarters of their finance costs for a tax deduction at 40%, with the remaining quarter deducted at 20%.
Similarly, in 2018-19, half of the finance costs will be deductible at 40%, with the remainder at 20%.
In 2019-20, a quarter of the finance costs will be deductible at 40%, with the remainder at 20%.
Finally, from 2020-21 onwards, all deductions for finance costs against property income will be deductible at 20%.
Please note that this change does not affect Qualifying Furnished Holiday Lets.
Rent a Room Relief
For those renting out a room within their house or flat, the taxpayer’s individual limit has been increased from £4,250 a year to £7,500. This change will take effect from 6 April 2016.
Pension Contributions
The Budget introduced a new measure to restrict Pension Tax Relief on Annual Pension Contribution Allowance, affecting those with incomes over £150,000, including the value of any pension contributions.
Income tax relief is available for Annual Pension Contributions of up to £40,000 plus any unused relief carried forward. The relief is calculated at the taxpayer’s marginal rate of income and carries no income restrictions.
On the 6 April 2016 it had been introduced that taxpayers have their annual allowance reduced by £1 for every £2 earned over £150,000. The maximum reduction in the allowance is £30,000.
There are further measures to adjust how a taxpayer’s earnings are assessed for the above but they are rather too detailed to explain in this Knowledge Base article. We recommend that taxpayers with a high level of earnings speak with their Financial Advisor.
Corporation Tax
The Government had also announced an objective to reduce the main rate of corporation tax from its current level of 20% to 18% by the end of this parliament, which is in 2020.
A Financial Year (FY) spans the period from 1 April to 31 March, so FY17 covers the year between 1 April 2017 and 31 March 2018.
Accordingly, the main rate of non-ring fenced profits are charged at a rate of 19% in FY17, FY18 and FY19. It will finally be reduced to 18% in FY20.
Annual Investment Allowance
Prior to the Budget, there was much speculation of the figure that the Annual Investment Allowance (AIA) which was set on the 1st January 2016. Indeed, this was deferred in the previous Budget and would otherwise have reverted back to £25,000 per annum, down from the previous temporary maximum of £500,000 per annum.
The figure that was set in this Budget for AIA, which came into effect on the 1st January 2016, is £200,000.
Most limited companies have an accounting year that runs from 1 April of any given year until the following 31 March. Since this crosses the AIA date change of 1 January 2016, a calculation is required to determine the entitlement.
Naturally, TaxCalc will be able to assist with this and, provided the correct data goes into the software, will ensure the correct amount of AIA is calculated.
Inheritance Tax
The Budget introduces a new measure whereby a new nil-rate band is created to avoid inheritance tax being paid on a single residence that is passed on at death.
The measure will commence from 6 April 2017 and will initially be set at £100,000, rising to £175,000 by 2020-21. It is intended to reduce the amount of tax payable by an estate upon death but will not apply to lifetime transfers that are chargeable as a result of death.
Furthermore, from 8 July 2015, should the taxpayer downsize or cease being a homeowner, the additional nil-rate band will survive this event. Technical details as to how this will work will be subject to a consultation which was published in September 2015.
Please note that this amount is in addition to the current nil-rate band, which stands at £325,000 and will not be increased.
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