The Chancellor’s Summer Budget

The Chancellor’s Summer Budget unfortunately did not produce a simpler tax system or less regulation for business. As usual there was an element of tweaking with allowances and it was a relief to see no increases in the main rates of income tax, VAT and NI. However, some important changes are coming, and you might need to be aware of them!

Higher tax on dividends

The Budget has cast a potential blow in the direction of limited company shareholders who benefit from dividend income.

The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016.

In addition, tax rates on dividend income will be increased, with effect from April 2016, to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Those with significant dividend income will pay more tax.

This move will make tax-motivated incorporation less attractive and will have a wide affect on many family-owned companies which pay through dividends rather than salaries.

Limited company owners will need to assess the financial effect on individuals and consider whether changes to remuneration policy are required for 2016. There may be an opportunity to make larger dividend payments in the current tax year.

To discuss with our experts, call Minford Chartered Accountants, on 01904 414471.

Pensions – The amount people with an income of more than £150,000 can pay tax-free into a pension will be reduced as will the lifetime allowance

Most people can contribute up to £40,000 a year to their pension tax-free. From April 2016, this amount will be reduced for individuals with adjusted annual incomes of over £150,000, including pension contributions.

This reduced annual allowance for high earners is operated by tapering the annual allowance by £1 for every £2 of income over £150,000 to a minimum annual allowance of £10,000, from April 2016.

As the changes will not be implemented until 6 April 2016, there is a significant opportunity for high earners to maximise their pension contributions in the current tax year.

Additional changes announced include:

  • from 2016/17, a reduction of the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over, to the marginal tax rate of the recipient. The 45% tax rate will continue to apply to lump sum death benefits paid to trusts.
  • There will be a reduction in the Lifetime Allowance for pension contributions from £1.25 million to £1 million from 6 April 2016.

The changes are complex and will have an impact on many business owners who are looking to save for the future.

To discuss with our experts, call Minford Chartered Accountants, on 01904 414471.

Taking the family home out of Inheritance Tax

Currently, Inheritance Tax is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another.

From April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18.

There will be an additional main residence nil rate band of £100,000 with effect from 6 April 2017, increasing each year to £175,000 from 6 April 2020. Therefore IHT relief of up to £175,000 per person is available.

The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, which will remain frozen until April 2021. This is good news for many, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21!

However, for those at the higher end of the scale, with estates worth more than £2 million, the allowance will be gradually withdrawn.

The additional nil-rate band will only apply to transfers on death and will be transferable between married couples and civil partners to the extent that it is not used on first death.

The devil is of course in the detail. We believe that you will need to carefully assess how beneficial this might be. For example, the additional nil-rate band will not be available to use in relation to assets other than the family or main home, nor is it available where the home is left to family members other than direct descendants (i.e. children, step children, foster children, and their direct descendants). However, the additional nil-rate band will be available when an individual downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct family descendants. These proposals are subject to further consultation later this year.

There is a lot to think about.

To discuss with our experts, call Minford Chartered Accountants, on 01904 414471.

Abolishment of permanent non-dom status

Non-domiciled individuals (non-doms) live in the UK but consider their permanent home to be elsewhere. The UK rules allow non-doms to pay UK tax on their offshore income only when they bring it into the UK.

Permanent non-dom status will be abolished from April 2017. From that date, anyone who’s been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for tax purposes.

For the avoidance of doubt, this means that they will become subject to UK tax on their worldwide income and gains on an arising basis and subject to UK Inheritance Tax on their worldwide assets. Excluded property trusts will continue to have the same Inheritance Tax treatment as at present, with the exception of UK residential property held within such a trust as outlined below. On departure from the UK, the deemed domicile status will be retained for five years.

It was also announced that UK residential property that is held by a non-domiciled individual will be assessed for UK Inheritance Tax on death, regardless of how that property is held. This means that properties held within trusts, corporate entities or other opaque structures will be subject to UK Inheritance Tax. Further consultation has been announced. The legislation will be effective from 6 April 2017.

From April 2017, individuals who are born in the UK to parents who are domiciled here, will no longer be able to claim non-domicile status whilst they are resident in the UK.

This is not good news for a large number of business owners. The effects need to be discussed as early as possible.

Call Minford Chartered Accountants, on 01904 414471.

The annual investment allowance will be set at its highest ever permanent level at £200,000

Good news again for many small businesses. The annual investment allowance, which has previously been increased temporarily, will be set permanently at £200,000 from January 2016.

The allowance means businesses can deduct the full value of certain items, including equipment and machinery, up to a total value of £200,000 from their profits before tax.

The certainty around the level of the allowance will help all businesses plan their capital expenditure.

To discuss with our experts, call Minford Chartered Accountants, on 01904 414471.

Other budget announcements

From April 2016, a new National Living Wage of £7.20 an hour for the over 25s will be introduced. This will rise to over £9 an hour by 2020.

The national living wage will have business consequences which may not be compensated by the corporation tax cut for small businesses, although suspending National Insurance for the first 4 employees will help. The knock-on effects further up the wage distribution must be considered.

The tax-free Personal Allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016.

The higher rate threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17

Corporation Tax will be cut to 19% in 2017 and 18% in 2020

The Employment Allowance will increase by a further £1,000 to £3,000, cutting employer’s National Insurance bill from April 2016. However, companies where the director is the sole employee will no longer be able to claim the employment allowance.

Restriction of tax relief on finance costs for wealthier landlords. The restriction will be phased in over four years, starting from April 2017, cutting tax relief from 40%/45% to 20%.

In addition, from April 2016, the ‘wear and tear allowance’ will be replaced.

Rent a room relief for those who rent out a room in their own home goes up to £7,500 from £4,250.

ISA rules to change to allow individuals to withdraw and replace money in their Cash ISA in the same tax year without the reinvestment counting towards their annual ISA allowance.

Companies can no longer claim a tax deduction for goodwill amortisation. This change has immediate effect and will only impact future purchases.

Minford Chartered Accountants

01904 414471.