Monday 21st March 2016
2016 Budget Summary
Wednesday 16th March not only saw George Osborne deliver his 8th budget, but it also saw CCF prepare and deliver their 8th budget breakfast the following morning!
We can now give the main detail and changes that affect businesses. This includes changes that were announced on the 16th and also changes that were announced last year that come in to effect from 6 April 2016.
From 6 April 2016 the tax free personal allowance rises to £11,000 and from 2017 this rises to £11,500. As announced previously, when the personal allowance reaches £12,500, it will increase in line with the national minimum wage. This means that people working 30 hours per week on the minimum wage would pay no tax.
The higher rate threshold increases to £32,000 from 6 April 2016 and the following year rises to £33,500.
The second budget of 2015 announced that the new dividend tax would come in. This adds 7.5% tax to all dividends at the basic and higher rate, after relief is gained from a £5,000 tax free amount.
For a typical small company director/shareholder paying themselves an £8,000 salary and £30,000 dividends per annum, they will have a personal tax bill of £1,700. The first payment would arise in January 2018.
Please note however, that HMRC are in the process now of issuing personal tax coding notices for the 2016/17 tax year and are attempting to collect the dividend tax at source. What this would mean is that an estimated tax payment would be taken each month via PAYE. This does not have to happen and can simply be resolved by contacting HMRC and getting them to amend the coding notice. This is something that we can do for clients. All we need is a copy of the notice.
It still remains advantageous for company directors to pay themselves the small salary and dividend. It is however essential that company directors consult their accountants when looking at paying themselves benefits or making purchasing decisions, such as buying a car. The reason being that in some circumstances it can now be more beneficial to do this via the company.
The salary that company directors will pay themselves from 6 April 2016 will remain at £671.
Unincorporated sole traders & partnerships
From 2018-19 Class 2 National Insurance will be abolished. This is the £2.80 per week and not the 9% on profits! The saving will be £145.60 per annum. In the meantime, the standing orders have been cancelled and collection has been merged with self-assessment.
Despite intense speculation before the budget, there were no changes of note to pensions and employer contributions. Making company contributions into a pension scheme therefore remains one of the most tax efficient strategies for getting money out of the company. Whilst CCF cannot advise on pensions and investments, we have a great network of IFA contacts and would be happy to make an introduction if required.
As an incentive to get younger people saving, the chancellor announced the introduction of the lifetime ISA from April 2017. People under the age of 40 would be able to contribute up to £4,000 per annum and the Government will top this up by 25%.
The fund will only be able to be used for buying a house or for drawing as a pension from aged 60. Careful thought therefore needs to be given to this. This is an ideal opportunity for people in their late 30’s to capitalise on this, particularly if they are in a position to tie up £4,000 per annum in savings.
Help to Save
From April 2018 the Help to Save scheme will be launched. The idea is to encourage low income households, those on universal or working tax credits to save. If they save up to £50 per month, the Government will add a bonus of 50% after 2 years.
Last year it was announced that there will be a new extra nil rate band for inheritance tax available when passing the main residence on death to direct descendants.
This budget also announced the introduction of downsizing relief. As a result, when an individual downsizes their property they will still gain relief from IHT for the value of the main residence prior to downsizing. Obviously there needs to be the detail provided and we expect that there will be time limits on the relief (between the downsizing and death).
Tax Free Childcare
It is two years since a new childcare scheme; due to be launched in October 2015 was announced. The introduction of this has been deferred and deferred.
Finally, the budget announced that this will now be phased in from April 2017. The new scheme is managed directly online and allows parents to save up to £2,000 per child by buying vouchers that are topped up by 20% by the Government.
In addition to this, the old scheme whereby employers can provide childcare of up to £55 per week for basic rate tax payers will remain open to new participants until April 2018.
Choosing the right scheme is essential. It all depends on the number of children in the household and how much is spent per week on childcare. People who only have minimal childcare costs are likely in some circumstances to favour the old scheme, whereas those with more than one child in nursery full time would benefit from the new scheme.
As a reminder, from 6 April 2016 the wear and tear allowance for furnished lettings is being abolished. Now, instead of claiming 10% of rentals instead of the actual cost of replacing furnishings and moveable fixtures, landlords will claim the actual costs of replacing furnishings. This will impact landlords of furnished lettings who historically do not spend much on replacing such items.
The restriction on relief for mortgage interest is being phased in from 2017. This means that higher rate tax payers will only gain relief for their mortgage interest costs at 20% rather than the full 40%.
From 6 April 2016 ‘rent a room relief’, for people who have lodgers, will benefit from the first £7,500 being free from tax. This has increased from £4,250 and so represents quite a saving.
Stamp Duty on Second Homes
The stamp duty thresholds remain the same for individuals buying their main residence.
Those wishing to buy a second home or a buy to let property will now have to pay an additional 3% on top of the current rates.
The stamp duty rates now work incrementally, which is a big improvement on the old system which was punitive for individuals whose property values fell just into the next tax bracket..
Capital Gains Tax
The main rate of capital gains tax will be reduced from 28% to 20% and at the basic rate from 18% to 10%. The exception to this is residential property, whereby the rates will remain the same. This is effective from 6 April 2016 and so careful consideration needs giving to the timing of sales between now and the end of the tax year.
Entrepreneur’s relief has now been extended to apply to external investors. They must hold the shares for more than three years prior to a sale to benefit from the 10% tax rate.
It appears that the Government may have backtracked on their proposal last year to restrict tax relief on transferring goodwill to limited companies on incorporation. We have not seen any mention of this other than in the budget policy document and suggest that advice should be sought before making any decision involving reliance on this relief.
Property and Trading Allowance
From April 2017 individuals with property profits or trading profits of less than £1,000, will not have to pay tax on this income or have to complete a tax return.
Care needs to be taken to consider the property restrictions on mortgage interest relief, as we suspect some individuals may miscalculate their profits!
National Minimum Wage
Historically the annual minimum wage rises come in from 1 October. The next rise will be from 1st October 2016, however after that, the rises will align with the living wage and will move to 1 April each year.
From 1 October 2016 the minimum wage will be £6.95 for 21+ year olds and £5.55 for under 21 year olds.
There are no immediate changes, but from 1 April 2020 the corporation tax rate will fall to 17%
Don’t forget that from 1 April 2017 the rate falls from 20% to 19%.
The main change announced affecting small and medium sized companies is the increase in section 455 Tax. This is the penalty tax paid when a directors’ loan account is overdrawn. This is rising to 32.5% from 25%. This tax gets repaid to the company once the directors’ loan is repaid.
Travel and Subsistence
Employees that are working for a company via an intermediary, predominantly managed service companies, will no longer be able to claim for travel between home and the workplace. We are waiting on the drafting of the Finance Act to understand the full impact.
The registration threshold from 1 April 2016 rises to £83,000 and the de-registration threshold rises to £81,000.
We trust this gives you a good update of how the budget might affect your business. If you would like further clarification on any areas, please do not hesitate to contact us on firstname.lastname@example.org