2016 Budget in Brief
A quick review of financial planning points covered in the Chancellor’s Budget speech today
UK growth target
UK’s growth target for 2016 revised down to 2.0% by the Office for Budget Responsibility from the 2.4% target set in November 2015.
The government has forecast that over the next 4 years, the deficit will have been eliminated and the government will be running a surplus – where more tax is raised than is spent.
To help achieve this, government is making a further £3.5 billion of savings from departmental spending in 2019-20, less than 50p in every £100 the government spends. There will be an efficiency review to inform future spending decisions.
The Personal Allowance will rise from the current £10,600 to £11,000 in 2016 and to £11,500 in April 2017.
The point at which the higher rate of Income Tax will become payable is increasing from £42,385 to £43,000 in 2016 and to £45,000 in April 2017.
This measure will take around half-a-million people out of the higher rate bracket.
Lifetime ISA (do we call it LISA?)
In a Budget that the Chancellor emphasised several times “put the next generation first” perhaps the most ‘interesting’ element was the introduction of the Lifetime ISA. It is aimed at encouraging those under 40 to save or invest for a first property or for their retirement (click here for more on Lifetime ISA).
Capital Gains Tax
From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.
There will be an additional 8 percentage point surcharge to be paid on residential property and carried interest (the share of profits or gains that is paid to asset managers). Private residence relief will continue so that an individual’s home will be exempt from CGT.
Simon Bashorun, Financial Planning Team Leader at Investec Wealth & Investment, said: “The increase in the distance between income tax rates and CGT rates will make drawing on capital each year as a form of ‘income’ even more attractive than it currently is. This reinforces the need for individuals to build up portfolios that can provide gains to draw down on tax efficiently in the future. Alongside the changes to the taxation of dividends and the normal annual capital gains allowance, the reduction in CGT rates makes directly held stocks and share investments very attractive indeed in certain situations.”
Entrepreneurs’ relief will be extended to long-term investors in unlisted companies. Gains of newly issued shares in unlisted companies purchased on or after 17 March 2016 will be subject to CGT at 10%, provided they are held for a minimum of 3 years from 6 April 2016 and subject to a new lifetime limit of £10 million of gains.
Tina Riches, national tax partner at Smith & Williamson, said: “Not all investors or businesses count for the lower entrepreneurs’ relief rate, so the general reduction in CGT rates for higher rate taxpayers from 28% to 20% will encourage further investment in companies, helping to boost investment for those not eligible for entrepreneurs’ relief. Ultimately, this reflects the Chancellors leaning towards the enterprise economy, partly at the expense of owners of buy to lets and second homes.”
Cutting business rates for all rate payers
From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates.
Currently, this 100% relief is available if you’re a business that occupies a property (e.g. a shop or office) with a value of £6,000 or less.
There will be a tapered rate of relief on properties worth up to £15,000. This means that 600,000 businesses will pay no rates.
From April 2018 employers will pay National Insurance contributions on pay-offs (for example, termination payments) above £30,000 where Income Tax is also due.
For people who lose their job, payments up to £30,000 will remain tax-free and they will not need to pay National Insurance on any of the payment.
Class 2 National Insurance contributions
Class 2 National Insurance contributions (NICs) for self-employed people will be scrapped from April 2018. Currently, self-employed people have to pay Class 2 NICs at £2.80 per week if they make a profit of £5,965 or more per year. They also pay Class 4 NICs if their profits are over £8,060 per year.
From April 2018, they will only need to pay one type of National Insurance on their profits, Class 4 NICs.
Paying Class 2 NICs currently enables self-employed people to build entitlement to the State Pension and other contributory benefits.
After April 2018, Class 4 NICs will also be reformed so self-employed people can continue to build benefit entitlement.
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20%, the lowest in the G20. It will now be cut again to 17% in 2020, benefitting over 1 million businesses. New tax allowances for money earned from the sharing economy
From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.
People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.
A favourite of higher paid executives, the practice of salary sacrifice has grown significantly since auto-enrolment. In fact, the Government states it is ‘concerned’ that salary sacrifice schemes have grown by 30% since 2010.
It works by the employee asking for a reduction in bonus or salary and the employer pays an equivalent reduction as a pension contribution. The employee gets the top rate of tax relief immediately plus a saving in National Insurance Contribution (NIC) of 1%. However, the real benefit is the saving in employers NIC of 13.8%.
How these benefits will be affected is unclear at this point: the Government said it is considering limiting the range of benefits that attract income tax and NICs advantages, but conversely goes on to state that it intends to preserve salary sacrifice for pension contributions in the future.
Commercial property stamp duty
Currently, stamp duty rates on freehold commercial property and leasehold premium transactions apply to the whole transaction value. From 17 March 2016 the rates will apply to the value of the property over each tax band.
The new rates and tax bands will be 0% for the portion of the transaction value up to £150,000; 2% between £150,001 and £250,000, and 5% above £250,000.
Buyers of commercial property worth up to £1.05 million will pay less in stamp duty.
Stamp duty rates for leasehold rent transactions will also change, with a new 2% stamp duty rate on leases with a net present value over £5 million.
Insurance premium tax
The Chancellor announced a further 0.5% increase in insurance premium tax. Whilst this increase is lower than had been predicted in some quarters, it will still have an impact on the cost of certain employee benefits.
Many advisers may well concur with Tina Riches, national tax partner at Smith & Williamson, on this matter. She said: “We can all sigh with relief on hearing the Chancellor say that pension tax will not change for the time being. What we also need from the Government is a longer term pensions tax plan so people can plan their retirement with some certainty.”