Rutton Viccajee’s guide to the latest Budget, part 1, focussing on personal tax. This is general guidance / reading only. Before acting, always ask for specific guidance tailored to your situation, particularly if there is any amount of tax at stake.
Some comments are courtesy of CWB Tax – with thanks.
The Budget Statement 2016 – introduction
The Budget Statement of March 2016 has little overall flavour. The only abiding features appear to be:
– A continual insistence on ‘grandstanding’: ‘good news’ measures announced several times (often affecting future years! So they can be –re-announced next year) and ‘bad news’ measures tucked away in the detail – and only announced once – in the small print!
– Last year’s March budget was a rushed affair, so no surprises that many corrections have now been proposed – often before the original provisions start to apply.
– No less than three budgets/autumn statements were presented last year. Forgive me for not issuing commentary after each. I would never get any work done!
– This year, the provisions will be rushed through again – because the Government wishes to concentrate attention on the EU election. The measures will not be debated until June, and must be enacted by 5 August – and probably a lot earlier. Just when MP’s are fingering their EasyJet tickets and checking overseas temperatures…
– Tax simplification has DEFINITELY gone out of the window. Nothing is simpler this year, last year or probably next year.
– The Chancellor has little money to play with, and quite a few ‘nasties’ have come in. Some have been in disguised – for example, the increase in commercial SDLT (stamp duty) has been presented as a ‘simplification’ and a reduction, whereas it is likely to raise an additional £600m! (as the top rate increases from 4% to 5%).
– Don’t blame me – I voted Eskimo Natural Law Party. They lost.
– But there are some major tax reliefs and reductions in administration also, both last year and this, so a very mixed bag.
So let’s look at this year’s Budget.
Bear in mind some of what follows was previously announced last year – and then promptly changed or corrected! So some material is repeated – but partly corrected – from last year. So tear up last year’s summary, and here’s the latest:
The personal allowance has been raised to £11,000 from 6 April 2016, (previously £10,600.)
Advance notice: The Chancellor has said that it will increase to £11,500 for 2017/18.
(But he keeps changing his mind. And some mischievous Brexit commentators suggest he may not be around after May! But that’s just mischief-making.)
The bands for 2016/2017 are:
Basic rate up to £32,000 20% (previously 31,785)
Higher rate up £150,000 40%
Additional rate over £150,000 45%
The basic rate threshold will increase to £33,000 for 2017/18. Maybe.
The starting rate of tax: savings income (only)
As previously announced, the starting rate for savings income is £5,000 (and has been since 5/4/2015).
This means that no tax is payable, if a person has no earnings and no pension, but only savings income up to £5,000.
However, if the taxpayer’s total income exceeds the £5,000, the starting rate does not apply at all.
Clearly this is a highly unusual situation and will not apply to very many of our clients. (Most have something other than savings income).
Personal savings allowance
A new personal savings allowance introduced from 6 April 2016.
This will exempt from income tax:
– The first £1,000 of interest earned on savings for a basic rate taxpayer
– The first £500 of such interest from high rate taxpayer.
This allowance does not apply to anyone paying the 45% additional rate.
The trouble is, you have to tell us the income in the first place, so we can work out whether you are a basic rate taxpayer or not! So it’s not quite the simplification measure it seems.
To avoid a lot of repayment claims, banks and building societies will pay interest gross from 6th
Don’t forget: this only applies to interest, and only from banks and building societies – not anyone else. It will not apply to dividends or other types of savings income, so the name is a little bit of a misnomer.
P 11d’s and benefits in kind
From 6 April 2016, there are some big changes in terms of the P11d system.
A little known rule now disappears (unless you are a vicar!):
First, from 6 April 2016, the “lower paid workers” (P9d) rule will not broadly apply. This is where a worker earning less than £8,500 p.a. – and therefore special P9d rules used to apply.
Clearly this figure has not kept up with inflation over the years. Even somebody on a minimum wage would now be earning that amount. That means there are no P9d rules and no separate system for people earning that amount.
Much more importantly, there is, coming, up the abolition of the dispensation regime.
PAYE dispensations cease from 2016/17 onwards.
A major bugbear of the P11d system now disappears – so at least something is getting better – but only from April this year.
There is now a new exemption for ‘expense’ benefits in kind, including vouchers and credit tokens, where employee would otherwise have been entitled to deduct the amount as a business expense.
So if there’s a valid (business expense) counter-claim, there’s now no need to report the expense, and then counterclaim. Neither is there any need to rely on a dispensation to avoid the problem.
This is a very welcome simplification, although it does put the emphasis on the employer to not only get the system right, but also have a system of (expense claim) checks in place.
From 2015/16 there is exemption for trivial benefits provided by employers.
This is where the cost of providing the benefit to the employee does not exceed £50, and also, is not provided in recognition of any particular services.
Again this is a welcome relief. Where, for example, one gives a bouquet of flowers to an employee as a birthday gift, or a gift for a new baby, or any such occasion.
The relief is unlimited. The employer can provide any number of such benefits. (So employees can have as many birthdays, or indeed babies, as they like!)
However, there is a £300 per annum limit which applies to office holders (directors) and their family members. So company directors in particular need to be careful of that.
Pension lifetime allowance
The lifetime allowance has been cut from £1.25 million to £1 million as from 6 April 2016. This will remain (maybe) for 2017/18.)
Pension flexibility – as announced in 2015 and not subsequently changed!
When a person which is 60, he or she can draw out their pension pot however they wish. There is no longer any need to buy an annuity.
25% of each withdrawal will be tax-free.
BUT: the balance is taxed at the individual’s marginal tax rate. So please take tax (and/or IFA) advice before spending the lot! The tax cost may not be worth it, and you still have to live on something, not just holidays and garden decking.
Property and trading income allowances
From 6 April 2017, a new
– £1,000 allowance for property income and
– a £1,000 allowance for trading income
…will be introduced.
Individuals with gross property income or gross trading income below £1,000 will no longer need to declare or pay tax on that income, and there will be no obligation to calculate profits after expenses.
Those with gross income above the allowance will be able to choose to calculate their taxable profit either by deducting their expenses in the normal way or by deducting the relevant allowance instead.
The intention is to exempt (e.g.) small EBay traders and similar, with an eye on the new DTA’s coming up – see below.
The annual ISA allowance will be increased from April 2017 to £20,000 from the current level of £15,240.
This could be very useful for persons saving for a first home:
A new Lifetime Isa will be introduced for those aged under 40.
Contributions will be a limited to £4,000 per annum, and these will receive a 25% bonus from the government.
Contributions can be made up to the age of 50, and withdrawal is restricted until age 60, unless the funds are being removed to buy a first home, in which case they will be available after the first 12 months.
The system of taxing dividends, both from UK and non-UK companies (and unit trusts, etc.) changes from 6 April 2016.
Dividends received after that date will no longer attract a tax credit. The taxable amount will be the amount received.
However the first £5,000 of dividend income will be taxed at a new dividend nil rate.
I.e. like the savings allowance, the exemption will not affect the tax on other income.
Dividend income above the £5,000 dividend allowance will be taxed at a special rate as follows:
Basic rate taxpayer 7.5%
Higher rate taxpayer 32.5%
Additional rate taxpayer 38.1%
Good news for some but not for others.
Good news for those whose dividends are below £5,000.
Bad news for small businesses where the proprietor has opted to withdraw his living expenses by way of dividend rather than earnings.
(But minimum salary and dividends are still far and away the cheapest way to pay yourself through your company.)
In most cases there will be a larger tax charge than last year where the distributions to an individual exceed around £22,000.
IR35 and public sector workers
From 2017 or 2018, public sector entities that engage workers through a service company will be required to apply PAYE and NIC to the amount paid to the company as if the worker were an employee of the public entity if IR35 would have applied to the engagement.
This shifts from the service company to the public entity not only the tax obligation but also the obligation to decide whether or not IR35 applies to the engagement.
As the public entity will be liable for the tax and NIC if it gets it wrong, it is likely to resolve any doubt in favour of IR35 applying – and in most engagements there is some doubt as the test of an employment derives from a string of court decisions, not statute.
The definition of public bodies will include not only government and local government but also
a) the NHS
b) schools and further and higher education institutions
c) the police
d) other public bodies such as The British Museum, the BBC and Channel 4
e) publicly-owned companies such as Transport for London.
Clearly this is intended to stop the use of service companies.
It is likely that a public body will in future want to engage the worker direct to avoid arguments.
However, if the choice is between losing the worker and accepting the company, they may be willing to rely on an indemnity from the worker. Unfortunately such an indemnity will itself point towards an employment and a worker would be likely to be wary of giving an indemnity that leaves control over the fight with HMRC to the public entity.
This could well be a first step to a more general application of this rule.
It is hard to see how the BBC can compete with ITV, Sky and BT for talent if the BBC has this obligation but its competitors do not.
Property business deduction
The removal of the 10% wear and tear allowance for furnished lettings is now well known. As from 6 April 2016.
However, the ‘replacement’ basis is still available for some items – tables, chairs, white goods – but not fixtures (e.g. anything fitted, like a new boiler).
Here are more details:
From 6 April 2016 (1 April for corporation tax) a person who carries on a property business which includes a dwelling-house will be able to claim a deduction in computing property business income for the cost of the replacement of a domestic item which is provided for use in the dwelling, is provided solely for the use of the lessee, and which meets the normal wholly and exclusively test.
The deduction cannot be claimed if the dwelling is used for the commercial letting of furnished holiday accommodation, or if the taxpayer derives rent-a-room receipts from the dwelling-house and claims rent-a-room relief.
If the new item is not “substantially the same” as the old, the deduction is limited to what a substantially similar item would have cost.
Any disposal proceeds of the old item must be deducted from the cost of the new.
A domestic item is an item for domestic use (such as furniture, furnishings, household appliances and kitchenware) but does not include a fixture or a boiler or water-filled radiator installed as part of a space or water heating system.
The end of the personal tax return? Digital Tax Accounts (DTA’s)
Tax returns are being phased out from early 2016, so said the Chancellor last year. Forget it.
The new DTA’s are still a figment. Moreover, they are based on the premise that all self-employed persons keep accurate bookkeeping on their mobile phones (using ‘Xero’ or similar – notoriously unreliable!) and are only too keen to press a button once every three months and update their HMRC DTA!!!
Reality is now beginning to dawn so far as the Treasury, and HMRC, are concerned, brought in by a series of briefing meetings with the accountancy profession.
However, the ambition remains, however unrealistic:
The aspiration is that the tax return will be replaced by a “digital tax account”.
Your digital tax account will be a “pre-populated” [sic] (I think they mean part-populated) return produced by HMRC with the information that they already hold.
P60 information and state pension information is a good example.
You will IN THEORY simply need to log into your account, check the HMRC information is correct, and check and add any additional items that they still do not know about.
But the devil is in the detail.
This is being sold as a huge advance in modernising the tax system, and making sure you don’t have to do a tax return again. Just zap onto your app and away you go!
OK, but the reality is rather different. You still have to return your income – just on a new platform.
Anyone with untaxed income (self-employed, rentals, small proprietary companies etc.) will still have to prepare accounts (etc.) and file the details online, same as now.
HMRC accept that client’s unadjusted business figures will often be meaningless. Until accountants file correct and sensible figures at the end of the year (just like now!) to correct the first four client submitted ‘unadjusted’ submissions!
Apologies to all you Xero fans out there who pride yourselves in your bookkeeping. You are not included in these pejorative observations – naturally.
Neither is it clear what happens where the “pre-populated” HMRC data is simply incorrect. The software has not been written yet, and they only have until 2016 to get it right.
Existing HMRC systems have been stubbornly unable to marry up your P60 (etc.) data with your tax return for years – so we in this office are not too optimistic, I am afraid, that this brave new era will come, or will work.
The chance of your tax return headaches going away is very, very small. (That’s why you have us!)
(In any case, this only applies to personal tax: the need to make a corporation tax return, for limited company clients, continues as before.)
Board and lodging provided to carers
For 2016/17 onwards, no income tax liability will arise on a home care worker in respect of the provision of board or lodging (or both) provided that the provision is on a reasonable scale, is at the recipient’s home and is by reason of the recipient’s employment as a home care worker.
A person is employed as a home care worker if the duties of the employment consist wholly or mainly of the provision of personal care in the recipient’s home to another individual where the recipient is in need of personal care because of old age, mental or physical disability, past or present dependence on alcohol or drugs, past or present illness, or past or present mental disorder.