In his first and last Spring Budget, the Chancellor of the Exchequer, Philip Hammond, broke the Conservative manifesto promise by increasing National Insurance contributions for the self-employed. He took aim at company owners and investors with increased tax on dividends, and belied his dull image as ‘Spreadsheet Phil’, by delighting colleagues with a quip about the ‘last’ Labour government.
His announcements aimed to show a steady hand on the tiller as the UK prepares for negotiations to leave the EU. He also dealt with urgent political issues of business rates and social care by promising additional money.
£5k tax-free dividend allowance cut
The £5,000 tax-free allowance, which only arrived in 2016, is being cut to £2,000 from April 2018. This measure aims to raise approx. £1b pa by 2020 and is an attempt to discourage incorporation (approx. 657,000 companies were incorporated in 2016). It will hit both company owners who draw dividends, as well as shareholder investors more widely. Tax on dividends is 7.5% basic rate, 32.5% higher rate and 38.1% additional rate.
Income tax allowances
There will be no change to what had already been announced in terms of income tax thresholds/allowances and rates. The personal tax-free allowance is going up to £11,500, with the higher-rate income tax threshold rising to £45,000. Scotland will have different income tax bands. It was also confirmed there would be an increase in the personal allowance to £12,500 and the higher rate tax threshold to £50,000 by the end of this Parliament.
Changes to National Insurance Contributions for the Self-employed
As already announced, Class 2 National Insurance Contributions (NICs) for the self-employed will be abolished in 2018. However, Class 4 NICs will increase from 9% to 10% in April 2018 and go up to 11% the following year. This measure should raise about £500m pa. The aim is to reduce the NIC gap between employees and the self-employed. Critics of the announcement cite the risk that self-employed workers take, with no statutory sick leave or holiday pay.
Capital Gains Tax
No changes were announced.
New Inheritance Tax Residence Nil Rate Band
An additional tax-free Inheritance Tax (IHT) measure is being phased in from April 2017. When you pass on your main family home, there will be up to an additional £100,000 on top of the £325,000 IHT Nil-Rate Band. This will be known as the Residence Nil Rate Band (RNRB) – it is being phased in at £100,000 and is due to increase to £175,000 per person by 2020.
This will mean that from April 2017, it will be possible to pass on £425,000 without paying IHT as long as your family home is passed on to either children or grandchildren. The new RNRB tax-free band will be withdrawn progressively on estates over £2m.
Buy-to-Let Tax Changes
If you have a Buy-to-Let, the amount of mortgage costs you can offset against rental income to assess your profits are being reduced. The reductions will be phased and will impact how much tax you may need to pay.
There will be no change to what has been previously announced; the rate of Corporation Tax will continue to be reduced in stages to 17% by 2020/21. These measures aim to make the UK competitive from a tax perspective and attractive to foreign investors.
New measures to combat tax evasion and tax avoidance aim to raise £820m, plus a new financial penalty will be introduced for professionals who promote tax avoidance arrangements which are later defeated by HMRC.
Personal Finance Announcements
The ISA allowance will be increased from £15,240 to £20,000 from April 2017.
This is an extra £4,760 of tax-free savings each year. As such, ISAs remain the gold-standard for tax-efficient investment during an individual’s lifetime.
The Lifetime ISA is being introduced from April 2017 to help individuals under age 40 to save up to £4,000 a year towards a first home. The government will provide a 25% bonus. Alternatively, the Lifetime ISA can be saved until an individual reaches age 60.
New National Savings and Investments Bond launched
A new 3-year NS&I bond paying 2.2% on deposits of up to £3,000 will be available from April 2017.
The pension Annual Allowance remains unchanged at £40,000 and the Lifetime Allowance remains at £1m.
Pension Freedoms, the increased pension flexibility has resulted in a tax take of £1.6b according to updated Treasury forecasts.
Money Purchase Annual Allowance reduced
If you have started to take your pension, how much you can then pay into your pension under the Money Purchase Annual Allowance (MPAA) and get tax relief is being cut from £10,000 to £4,000 from April 2017.
From 9 March 2017, transfers from UK Registered Pension Schemes to Qualifying Recognised Overseas Pension Schemes (QROPS) will be subject to a special 25% tax charge unless both the individual and the QROPS are in the same country after the transfer or other specific conditions apply.
Following a consultation, the government is reviewing feedback and will publish a response later in the Spring.
Master Trust Tax Registration
The government will amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime. This will help to boost consumer protection and improve compliance.
State Pension Age
The future of the State Pension Age is subject to review, with an announcement expected by May 2017.
Business Rates changes in England
There will be £435 million to support businesses affected by the business rates relief revaluation, meaning no small business that is coming out of small business rates relief will pay more than £600 more in business rates this year than they did in 2016-17.
Included in the above figure, there will be funding for local authorities will allow them to provide £300 million of discretionary relief to provide help to businesses most affected by the revaluation. From April 2017, pubs with a rateable value up to £100,000 will be able to claim a £1,000 business rates discount for one year.
To help protect consumers, the government plans to issue a green paper. It will focus on protecting consumers from unexpected fees or unfair clauses, simplify terms and conditions, and give consumer bodies greater enforcement powers. Financial services firms will be in scope.
There was also an additional £2b for adult social care over the next three years to help reduce pressure on the NHS. The Chancellor ruled out a ‘Death Tax’ and promised a review to consider a strategic plan for social care later in the year.
This was the Chancellor’s last Spring Budget, which will now move to an Autumn slot, meaning there will be two Budgets this year.
In future, there will be a Spring Statement, which will primarily deal with reports from the Office for Budget Responsibility (OBR).
The Chancellor announced revised forecasts from the Office for Budget Responsibility (OBR), including:
Growth in GDP
Expectations are for positive growth in GDP reaching 2% in 2021, albeit with a different profile from that announced in the Autumn Statement:
- 2016 +1.8% (second to Germany amongst leading developed economies)
- 2017 +2.0%
- 2018 +1.6%
- 2019 +1.7%
- 2020 +1.9%
- 2021 +2.0%
The Budget Deficit is forecast to reduce more quickly than previously announced, particularly in the 2016/17 tax year. Whilst this is an unexpected windfall, the savings will be kept in reserve for the uncertainties of Brexit.
- 2016/17 £51.7b (down from £68.2b predicted in the Autumn Statement)
- 2017/18 £58.3b
- 2018/19 £40.8b
- 2019/20 £21.4b
- 2020/21 £20.6b
- 2021/22 £16.8b
Borrowing is lower in every year of the forecast compared with Autumn Statement 2016 and expected to fall to £16.8 billion or 0.7% of GDP by 2021-22. This is forecast to be the lowest deficit as a share of GDP in two decades. Ironically, this is going to be the first year in a decade where the UK should meet the EU’s budget deficit target.
Britain has a debt of nearly £1.7 trillion, around £62,000 for every household in the country. Interest payments alone are approx. £50b pa, more than the UK spends on defence and the police combined.
Brexit ‘Insurance Fund’
The OBR confirmed there has not been a structural improvement in public finances. Indeed, the outlook has worsened with fiscal headroom in 2019 now at less than £26b, so the Chancellor has less resources to cushion any Brexit fallout.
Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk