Update 16th March 2017
Chancellor Phillip Hammond yesterday backtracked on his pledge to increase Class 4 NIC during this parliment. Therefore, the rates will continue as follows:
Class 2 NIC will still be abolished from April 2018 and we await news of how the Chancellor will fund the increased State Pension for the self-employed person.
Updates and changes taken from the recent Budget.
Personal Tax Rates and Allowances
The Personal Savings allowance of £1,000 for basic rate taxpayers commenced on 6th April 2016 for bank interest received. The banks stopped deducting tax on interest received from this date. The income is still declarable on tax returns with the balance over £1,000 being taxed accordingly.
From April 2017, a £1,000 allowance will be available for property and trading income whereby any income up to £1,000 will be tax free. For those with property or trading income over £1,000, you can either choose to deduct the relevant expenses of the £1,000 allowance to offset against the profit.
If you have savings income, the Savings Rate band of £5,000 remains and as long as you income is below £16,000 (2016/17) and £16,500 (2017/18) then this income will be tax free.
From 6th April 2016, dividend income was taxed in a new way. The rates of taxation are as follows:-
National Insurance Contributions (NIC)
Employed weekly rates
From April 2018, Class 2 National Insurance will be abolished. Class 4 National Insurance will be reformed to include an entitlement to State Pension and this is likely to change in 2020.
VAT Registration Threshold
From 1st April 2017, the registration threshold is £85,000 on a rolling 12 month basis.
Capital Gains Tax
The rates of Capital Gains Tax are unchanged as follows:-
Capital Gains from property sales will attract the old rates of 18% and 28%.
Corporation Tax Rates
The Stamp Duty payable on commercial property purchases changed on 17th March 2016 to the slice-basis. The rates are as follows:-
For residential properties, the rates are:-
From 1st April 2016, the Stamp Duty payable on the purchase of second homes will attract an additional 3% charge to the residential rates above.
Employee Termination Payments
From April 2018, termination payments (redundancy pay) above £30,000 paid to employees will attract employers National Insurance. The current rate is 13.8%.
Loans to Participators (Company Directors Loans)
From 6th April 2016, the tax paid on loans to participators (Company Directors) increased from 25% to 32.5%. This tax remains fully refundable once the loan has been repaid in full. The loan must be repaid from taxed income by the Company Director.
It is important to remember that if you no longer claim Child Benefit you must remain registered within the system in order to obtain your National Insurance Credits for your state pension, even if you do not receive any payments.
The biggest, and probably most surprising changes announced in the Summer Budget 2015, were in connection with the Annual Investment Allowance and dividend income. It was only a matter of time before the Government targeted the way in which dividend income is taxed as it has been unchanged since the 1970s. The changes to the Annual Investment Allowance however surprised everybody.
Annual Investment Allowance Changes
This has been a hot topic for some time and indeed, during the last few months, we held seminars to show how the old proposed changes could affect your business as the allowance was due to drop to £25,000 from January 2016. Well, there is some very welcome news that the limit will be increased to £200,000 from the same date and that the change is proposed to be on a permanent basis.
Dividend Income (bear with us....this takes some explaining)
If you receive dividends from shares held, the taxation of these is changing with the abolition of the 10% tax credit from April 2016. THIS CHANGE WILL AFFECT EVERYONE WHO RECEIVES DIVIDEND INCOME.
Most of you probably arent aware of how the current system works but below is an explanation of how dividend income is calculated: -
Dividend paid to shareholders £9,000 HMRC calculate this as 9/10 of the actual dividend
Then you are required to gross it up: -
10% tax credit £1,000
Gross dividend voted £10,000 to be entered onto your tax return
Under the new proposals, the 10% tax credit will be removed and replaced with a £5,000 Dividend Tax Allowance. Basically, the first £5,000 of dividend income is tax-free. After that, the new tax rates will be as follows: -
If you are a basic rate taxpayer the dividend income will be taxed at 7.5%
If you are a higher rate taxpayer the dividend income will be taxed at 32.5%
If your income is in the additional rate the dividend income will be taxed at 38.1%
So how will this affect you? Below are some examples of dividends received for the tax year 2016/17 (all examples assume that the personal allowance has been fully utilised by salary and that no other income has been received)
John receives dividends of £20,000 (by way of cheques) from shares held.
Under the old system, the income would have been recorded on Johns tax return as follows: -
Gross dividend £22,222
Tax credit £2,222
Net dividend £20,000 actual monies received
As Johns total income is £33,222 (salary of £11,000 plus dividends of £22,222) he would have no tax liability as his income is within the basic rate tax band and he has already suffered dividend tax at the 10% rate.
Under the new system, if John was to receive the same £20,000 in dividends, his income would be £31,000 in total as the old dividend tax credit is now ignored. Based on this level of income, £16,000 of Johns income would not be taxed (salary of £11,000 covered by his personal allowance plus the £5,000 dividend tax allowance). The balance of £15,000 would then be taxed at 7.5% meaning that John would have a tax liability of £1,125.
So, if the dividend level remains the same, John is in a worse position. From the £20,000 dividend income, he would be left with £18,875 after paying the tax due.
If company profits allow, dividends of £22,222 could be voted so that Johns total income is as before (£33,222).
Johns dividends, under the new system, would be recorded as follows: -
Dividend Tax Allowance £5,000
Balance of dividend received £17,222
The dividend tax is then due on the £17,222 at a rate of 7.5% which means that a tax liability of £1,292 will be due.
So, is John better off if his total dividend is as before?
If dividends of £22,222 can be voted, he sets aside the tax of £1,292, and takes the balance of the dividend of £20,930.
John is therefore better off under the new system by £930 (£20,930 - £20,000). The only thing he needs to remember is to set aside the tax due to HM Revenue and Customs.
Paul receives dividends of £50,000 (by way of bank transfers) from shares held.
Under the old system, the income would have been recorded on Pauls tax return as follows: -
Gross dividend £55,555
Tax credit £5,555
Net dividend £50,000 actual monies received
Of Pauls total income, £23,555 would currently be taxed at the higher dividend tax rate of 32.5%. After deducting the tax credit on this income, Paul would have a tax liability of £5,300.
To show the same level of income on Pauls tax return, under the new system, the income of £55,555 will be recorded as follows: -
Dividend Tax Allowance £5,000
Balance of dividend received £50,555
The dividend tax is then due on the £50,555 at a rate of 7.5% on £27,000 of the dividend and at a rate of 32.5% on the balance of £23,555.
Pauls tax liability will be £9,680. He is therefore paying an extra £4,380 under the new rules on his dividend income.
Income Tax, National Insurance and VAT
Under the proposals of the budget, the chancellor announced a freeze on the rates of income tax, national insurance and VAT for the duration of this Parliament.
The personal allowance will be increased from April 2016 to £11,000.
Therefore from April 2016, the tax bands will be as follows: -
Income up to £11,000 will not be taxed as it is covered by your personal allowance
Income between £11,001 and £43,000 (basic rate taxpayer)
Income between £43,001 and £150,000 (higher rate taxpayer)
Income over £150,001 (additional rate taxpayer)
For anyone earning over £100,000, please note that your personal allowance will be reduced by £1 for every £2 of income over £100,000. So if your income is above £122,000, you will lose all of your personal allowance and pay additional tax.
National Minimum Wage now to be called Living Wage
This will be replaced from April 2016 by the National Living Wage. Anyone over the age of 25 will be paid £7.20 per hour. The Governments intention is to increase this hourly rate to £9 per hour by 2020.
The rate of Corporation Tax is coming down. It will reduce to 19% in 2017 and to 18% in 2020.
This is brilliant news for all small businesses.
Changes for Employers
Currently, if you employ staff, you are able to claim the Annual Employment Allowance of £2,000 as a deduction from your Employers National Insurance contributions. From April 2016, this allowance will increase to £3,000 per year which is great news.
However, if the only employee of the Company is the sole director, then from April 2016 no Employment Allowance will be claimable.
Changes for Landlords
If you currently claim the 10% Wear and Tear Allowance this will change from April 2016 with this no longer being claimable.
Instead, Landlords will deduct the actual costs of replacing furnishings.
If you own a furnished holiday let, Capital Allowances will continue to apply.
If you are an individual Landlord whose personal income is within or above the higher rate tax band, from April 2017 restrictions will come into force to restrict the amount of tax relief you can claim in relation to finance costs. The maximum relief will be 20% and not your current higher tax rates.
This is in addition to the removal last year of the ability to get relief for replacement white goods for unfurnished lettings.
From April 2016, the relief will increase from £4,250 to £7,500 per year.
Personal Savings Allowance
From 6 April 2016 your savings income (excluding ISA or NISA savings income) will be tax free up to £1,000 per year for basic rate taxpayers. Higher rate taxpayers will receive an allowance of £500 per year tax free. Additional rate taxpayers will receive no allowance each year.
Your bank will cease to stop the usual 20% tax from the interest that they pay to you from this date.
How this will be monitored will be made clear after a further public consultation has taken place as we dont yet know how we will record the balance of the interest income for any individual who currently does not prepare a tax return. We expect that you will be required to complete a tax return to declare this additional interest income.
Individual Savings Accounts (ISAs)
From 6 April 2016, you will be able to withdraw and replace money from an ISA without the replacement of the funds counting towards your annual subscription limit.
The current nil-rate band of £325,000 is frozen to April 2018. It is proposed to continue this level to April 2021.
In addition to the above, a new nil-rate band for family homes passed on to direct descendants on death will be introduced from 2017/18. The initial nil-rate band will be £100,000 rising to £175,000 by 2020/21.
Any unused nil-rate band will be transferred to a surviving spouse or civil partner. So in 2020/21, it is possible for £500,000 of nil-rate band to be transferred to a surviving spouse or civil partner giving them a £1million nil-rate band.
Insurance Premium Tax
From 1 November 2015, the rate will increase from 6% to 9.5% so expect your insurance renewal quotes to be higher in relation to this change.
Vehicle Excise Duty (Road Tax) Changes
For all new vehicles registered from 1 April 2017, the amount of road tax that you pay will change. The rates are all based around the CO2 emissions of the vehicle. The rates are split into first year rates and then a standard rate for subsequent years.
Vehicles with ZERO emissions will have nothing to pay.
If your vehicle has emissions of 115g/km, then your first year fee will be £160 with subsequent charges of £140 per year.
If your vehicle has emissions of 230g/km, then your first year fee will be £1,700 with subsequent charges of £140 per year.
The maximum first year fee is £2,000 for vehicles with emissions over 255g/km.
The final bit of bad news for this section is that should your new vehicles purchase price be in excess of £40,000 then an additional charge of £310 is due for the first 5 years of taxing the vehicle.
Tax & National Insurance Tables 2016/17
FINAL NOTE these are the proposals of the Summer Budget 2015. Until they have been ratified they can be changed.