With the dust still to settle on the Commons floor, the first budget of 2016 has clarified and confirmed many anticipated changes whilst revealing a few surprises too. The one thing that is clear, without adequate planning, tax liabilities are set to rise for many individuals and corporates in 2016.
Here are the highlights:
INCOME
Income Tax
Higher Rate Threshold raised to £45,000 and personal allowance to £11,500
Dividends
From 6 April 2016 the taxation of dividends received by individuals will change. The current dividend tax credit regime will be abolished, removing the need to gross up dividend payments. Under the new rules the first £5,000 of dividends received by an individual will be tax free but those exceeding that sum will be taxed at the following rates:
- 7.5% on dividend income within the basic rate band;
- 32.5% within the higher rate band;
- 38.1% within the additional rate band
The allowance does not reduce income, instead it applies a zero rate to dividend income only and forms part of the basic, higher and additional rate bands.
As dividends must be taxed as the top slice of income, this will mean that an individual with non-dividend income that takes them into the higher or additional rates will still be able to receive dividends of up to £5,000 tax free, which is a planning point for those with partners who previously had no Basic Rate band free.
Those who receive dividend income in excess of £5,000, which includes many contractors and owners of small or medium-sized enterprises, will find their tax will increase from 6 April 2016, a typical profit extraction of low salary, high dividends will now result in circa. £1,900 personal tax liabilities,
If you are considering taking dividends in excess of the basic rate in 2016/17, it would be advantageous for you to pay additional dividends in 2015/16, assuming sufficient distributable reserves are available.
Alternatively, a higher rate taxpayer with dividend income of no more than £5,000 may benefit from deferring dividend income to 2016/17 if that is possible.
National Insurance
From 6 April 2016 the generous government allowance against employers National Insurance contributions is being removed for companies with a Sole Director/Employee structure. This will increase NIC contributions by up to £3,000 depending on the salary level set. With planning, this reduction can be avoided and sole employee/directors should be seeking advice on this before the new tax year.
In addition to this National insurance will apply to ex gratia payments.
Abolishment from 2018 of Class 2
National Living Wage
Essentially an additional layer to the national minimum wage, for those working aged 25 and over, not in the first year of an apprenticeship, they will be legally entitled to at least £7.20 per hour. Penalties are severe for failure in this area, and action can be brought be the government regardless of any objection by employees. Care should be taken to ensure spousal contracts do not fall foul of these rules.
ISA
Limits increased to £20,000
CORPORATION TAX
Rates Cut even further
CT to be cut to 17% by April 2020
Directors Loan Accounts
Overdrawn DLA accounts will now attract a s.455 charge of 32.50%, this was an inevitable change due to the increase in dividend taxation.
Tax Free Allowances
Nil Bands being introduced for online sales by micro businesses. Surprise measure, more to come on the detail.
CAPITAL GAINS
Rates reduced
New CGT rates are 20% for higher and additional rate taxpayers and just 10% for those in the basic rate. This will still allow business owners to release reserves at preferential rates to that of dividends and income tax rates, without falling foul of the restrictions in ER. Contact us to discuss MVL opportunities and how to incorporate this as part of your tax planning stratergy.
Entrepreneurs Relief on winding up
It appears draft legislation passed through unfettered, we await the detailed documentation for this, however we can confirm the draft:
Distribution of assets to an individual when a company is wound up will be treated as an income distribution where three conditions are met. These are:
- A company is a close company when it is wound up or at any time in the two years before the start of winding-up.
- Within two years of the distribution the individual carries on a similar or the same trade or activity as was carried on by the company, or the individual or a connected person is a participator in a company that carries on such a trade or is connected with a company carrying on such a trade or activity, or the individual is involved with the carrying on of such a trade or activity by a connected person.
- It is reasonable to assume, having regard to all the circumstances, that a main purpose of the arrangement was the avoidance of income tax.
PROPERTY TAXATION
The UK property regime is changing in many ways, here are our headline impacts:
Business Rates
Small business rate relief raised to £15,000, taking 600,000 businesses out of rates entirely.
Wear and tear and renewals
For Let residential properties, the cost of replacing and repairing furnishings and white goods has been relievable in only two ways, neither of which includes the initial cost. Those are the renewals basis, with large restrictions, or if the property is fully furnished, the optional 10% wear-and-tear allowance.
Finally, the rules have been rectified, the budget has introduced a sensible and consistent renewals basis which will include relief for white goods and furniture.
Even though the wear-and-tear allowance will now be abolished from 6th April, a planning consideration between now and 6th April would be, where feasible, delaying the replacement of furnishings until post 6th April to maximise overall relief.
By doing so they can claim the actual cost of replacement after that date and still have the 10% deduction in 2015/16.
Mortgages on second properties
Whether the mortgage itself is taken out on the buy-to-let property or on another asset, if its purpose is to fund a property for letting, interest paid from April 2017 will only be relieved as if the landlord were a 20% taxpayer.
The mortgage tax relief restriction is being phased in annually, and will be fully restricted to a 20% rate from April 2020.
HMRC’s cunning twist, which many smaller landlords will not have appreciated so far, is that many basic rate taxpayers will also be paying more tax. This is because of how HMRC determines whether they are a higher rate taxpayer for these rules, and how the mortgage interest relief is given as a tax credit rather than a deduction from rental profits.
Planning is essential here, this is a critical change and could cause a sharp rise in taxation over the coming years for many small Landlords.
SDLT
Stamp Duty Land Tax increases for additional residential properties. There will be a 3% uplift in SDLT for individuals purchasing a residential property while retaining the original one. This will inevitably cause ripples through the housing market with yields already tight. For larger landlords and groups of investors, there are mitigation opportunities utilising bulk purchases and corporate wrappers.
SDLT increase in nil bands for small businesses and commercial premises.
SUMMARY
This budget highlights the need to stay abreast of fiscal changes, to plan for them and to ensure you are operating efficiently and utilising all available reliefs. With the correct planning tax liabilities should fall under this budget and NOT increase.
F9 Consulting ensure all clients receive a proactive service, if your current accountant is not keeping you informed, maybe it’s time you reviewed options.
I will leave you with this thought, a low fee will not always produce the best result, by choosing a cheap accounting solution, what you may see as a saving on fees, will undoubtedly equate to a loss in tax, often in multiples!
Contact us today to discuss your situation.
