Tax thresholds
The personal allowance will increase to £11,000 in 2016/17 and £11,200 in 2017/18 and the higher rate income tax threshold will increase to £32,000 in 2016/17 and £32,400 in 2017/18. As a result higher rate tax will be payable on income over £43,000 in 2016/17 and £43,600 in 2017/18. These are increases to the thresholds previously announced in March.
The threshold at which employees Class 1 National Insurance drops from 12% to 2% increases in line with the income tax thresholds.
Once the personal allowance has reached the long term target of £12,500 future increases will be set to match the national minimum wage for an adult working 30 hours per week.
Changes to the taxation of dividends
Major changes will be introduced to the taxation of dividends from April 2016.
The dividend tax credit will be abolished and all individuals will be able to receive £5,000 dividend income tax free under the new Dividend Tax Allowance. The tax rates on dividends in excess of this amount will be 7.5% for basic rate tax payers, 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers. Dividends will continue to be tax free in ISAs and pensions.
This may be the start of a drive by the government to align the income tax rates on dividends with that of other income and to reduce tax motivated incorporations. Will National Insurance on dividends be introduced next?
The tax lock
Following the announcement in the Queen’s Speech legislation will be introduced to fix income tax, National Insurance and VAT rates for the duration of the current parliament.
Income tax rates will not increase above 20%, 40% and 45% for earnings income in England, Wales and Northern Ireland and for UK wide savings income.
Class 1 National Insurance rates will not increase above 12% and 2% for employees and 13.8% for employers. The point at which employees NI drops from 12% to 2% will also be fixed to the threshold at which higher rate tax becomes payable. This does however leave the door open for changes to the Class 2 and 4 National Insurance rates.
VAT rates will be limited to 20% and 5%.
Restrictions to the pension annual allowance
From April 2016 individuals with adjusted income in excess of £150,000 will see their pension annual allowance tapered down to £10,000. The annual allowance is tapered by £1 for every £2 income over the threshold. Individuals with income in excess of £210,000 will have an annual allowance of £10,000. Adjusted income includes taxable earnings and pension contributions, whether made personally or by the employer.
Any unused annual allowance that is carried forward will be tapered before it can be used.
Where an individual has a threshold income of £110,000 or less they will not be subject to the reduction in annual allowance regardless of the level of their adjusted income. The threshold income will normally be an individual’s net income; broadly total income less allowable losses.