Tax on dividends
A key, if rather unexpected, announcement was that rates of tax on dividends will increase from 6 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 rates on dividends above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. This compares to the current effective rates of tax on dividends of 0% for basic rate taxpayers, 25% for higher rate taxpayers and 30.5% for additional rate taxpayers.
This change will mean those of you running your business through a company and receiving the majority of your income in the form of dividends are likely to see a modest rise in income tax payments in respect of the 2016/17 tax year onwards (for most the impact in terms of tax payments is likely to be 31 January 2018 onwards or potentially 31 January 2017 onwards in a few cases). However the reduction in corporation tax rates outlined below mean that over the medium term, the overall tax burden for company owners may not, in many cases, increase significantly. There are also many other advantages of running a business through a company, both financial and commercial, that remain.
We will be providing a full analysis of the changes once the finer details are released by HMRC, including steps individuals may wish to take before the changes come in next April. We will contact each of you before the changes with a clear plan of action. In the meantime there is no need to make any changes to current remuneration plans.
Businesses
A much more positive development for companies was further cuts in their corporation tax rates. These have been reduced and aligned for all companies at 20% over recent years. They will now go down to 19% in 2017 and then again to 18% in 2020.
The Annual Investment Allowance limits, which allow a full deduction against profits for the purchase of plant and machinery (e.g. equipment) in the year of purchase, have been going up and down like a yo-yo over recent years. There will now be a permanent level of £200,000 per year from 1 January 2016. This is a reduction from the current £500,000. If you are planning significant capital expenditure (in excess of £200,000) then planning some of this before 31 December 2015 might be advantageous.
Businesses will also benefit from a cut to their National Insurance bills by another £1,000 as the Employment Allowance (a deduction against employer’s National Insurance) increases from £2,000 to £3,000 per year. However from 6 April 2016 companies where the only employees are directors will be unable to claim the relief.
Individuals
The personal allowance will be increased in April 2016 to £11,000 (currently £10,600) and the higher rate tax threshold extended to £43,000 (currently £42,385). The promise to take family homes worth up to £1million out of Inheritance Tax was kept, with the government introducing an additional nil-rate band for main residences from 2017-18. By April 2020 married couples and civil partners will be able to pass a main residence worth up to £1m to their children tax free. The allowance is to be limited to one property but the personal representatives will be able to nominate which property should qualify if there is more than one in the estate. However there will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. The existing nil-rate band of £325,000 (£650,000 per married couple or civil partnership) has been frozen until April 2021 and can still be used for any assets.
But, as anticipated, after April 2016 the highest earners will lose most of their tax relief on pension contributions. The pensions annual allowance will be reduced by £50p for every £1 of income over £150,000, so that once income reaches £210,000 the annual allowance is reduced to £10,000. This will apply to personal and company contributions.
Those middle and higher rate taxpayers who have invested in buy-to-let properties had a nasty surprise when the Chancellor announced that tax relief for mortgage interest payments will gradually be restricted to the lower rate of tax. This will make such an investment much less attractive.
There are also plans to reform the wear and tear allowance currently in place on residential properties. From April 2016 this will be replaced and a new relief for residential landlords will come into place which allows them to deduct actual costs for replacing furnishings as and when they occur.
Those with significant investments in the stock market may also be affected by the changes to the taxation of dividends outlined above. Although higher rate taxpayers with less than £5,000 of dividend income per annum will be better off due to the introduction of the £5,000 dividend tax allowance. Dividends will continue to be tax free in ISAs and pensions.
The rise in Insurance Premium tax will affect almost everyone. The increase from 6% to 9.5% may not sound that much but it will cost us in total an extra £1.5bn per year.
The Budget – other announcements
Other announcements on the day included the ‘tax lock’ on the main rates of income tax, VAT and national insurance and a number of changes to non domicile status. An analysis of these points and more can be found here.