March 2016 Budget

March 2016 Budget

March 2016 Budget

Below is a summary of the main points announced by the Chancellor of the Exchequer in the March Budget.

Please note that every care has been taken in preparing this summary but no responsibility can be accepted for loss occasioned to any person acting or refraining from acting as a result of the material herein.

Main Tax Rates & Thresholds

Income Tax

2016/17

The basic personal tax-free allowance is increased to £11,000 (restricted for income in excess of £100,000)

The first £32,000 of taxable income is to be taxed at 20% (or 7.5% for dividends in excess of £5,000).

The next £118,000 is taxable at 40% (or 32.5% for dividends). The balance over £150,000 is taxable at 45% (or 38.1% for dividends).

2017/18

The basic personal tax-free allowance is £11,500 (restricted for income in excess of £100,000)

The first £33,500 of taxable income is to be taxed at 20% (or 7.5% for dividends in excess of £5,000).

The next £116,500 is taxable at 40% (or 32.5% for dividends). The balance over £150,000 is taxable at 45% (or 38.1% for dividends).

The tax rate applicable to trusts income (excluding dividends) is 45%.

New tax-free allowances have also been announced, meaning that from April 2017 individuals will not pay tax on up to £1,000 of income from occasional jobs or the first £1,000 of property income.

National minimum wage

From April 2016, the national living wage will apply to workers aged 25 and older, at £7.20 per hour. The minimum wage will continue to apply to workers aged 24 and under.

Transferable tax allowances for married couples

For 2016/17, a spouse or civil partner who is not liable to income tax above the basic rate can transfer up to £1,100 of their personal allowance to their spouse/civil partner provided the recipient of the transfer is not liable to higher rate tax.

This will generally only be beneficial where one spouse is non-working or a lower rate taxpayer.

The transferable amount will increase to £1,150 for 2017/18.

Individual Savings Accounts (ISAs)

The ISA subscription limit for 2016/17 is maintained at £15,240. This limit will be increased to £20,000 from April 2017.

Lifetime ISA

A new Lifetime ISA (LISA) will also be introduced from April 2017 for those aged between 18 and 40. This ISA can be used to save for your first home or for your retirement. Any savings put into the ISA before your 50th birthday will receive a 25% bonus from the government. You can save as little or as much as you want each month, up to a maximum of £4,000 per year.

Couples saving for their first home can each have a Lifetime ISA, maximising the amount which can be saved. Existing Help to Buy ISAs can be transferred into the Lifetime ISA in 2017 or kept separate. However, only one of them will be able to use the government bonus to buy a house.

If you opt to save for your retirement, you will be able to access all the savings and accumulated income tax free from your 60th birthday. Withdrawals made before this date will result in the 25% bonus being lost and a 5% charge will also apply.

National Insurance for 2016/17

Class 1 NIC : Employee & Employer – rates & thresholds per week unless stated:

  • Lower Earnings Limit: £112.00
  • Upper Earnings Limit for employees’ primary Class 1 NICs: £827.00
  • Upper Accrual Point: £770.00
  • Primary Threshold: £155.00
  • Secondary Threshold: £156.00
  • Upper Secondary Threshold for U21’s: £827.00

Employee’s (primary) Class 1 contribution rates

Weekly earnings above £155.01 to £827.00: 12%

Weekly earnings above £827.00: 2%

Employer’s (secondary) Class 1 contribution rates

Weekly earnings above £156.00: 13.8%

Class 2 NIC

Self employed NIC: £2.80

Small earnings annual exemption level : £5,965

Class 2 NIC will be abolished from April 2018 at which point Class 4 NIC will also be reformed.

Class 4 NIC

Annual profits below lower profits limit of £8,060 : Nil

Annual profits above £8,060 but below £43,000 : 9%

Annual profits above upper profits limit of £43,000 : 2%

Employment Allowance

As previously announced, the Employment Allowance will rise to £3,000 from 5 April 2016. In addition, the Employment Allowance will no longer be available where the director is the only employee of the company.

Capital Gains Tax (CGT)

The annual exemption for 2016/17 is £11,100.

From 6 April 2016, the rates of Capital Gains Tax will reduce from 18% to 10% for gains that fall within the basic rate band and from 28% to 20% for gains that fall within the higher rate band.

The current 18%/28% rates will remain in place for chargeable gains on the disposal of residential property which does not qualify for private residence relief.

Stamp Duty Land Tax

A 3% Stamp Duty Land Tax surcharge relating to the purchase of a second or subsequent residential property will come into effect from 1 April 2016. A refund of the surcharge will be available where the first property owned is sold within 36 months of the second property being purchased.

New Stamp Duty Land Tax Rates

With effect from 17 March 2016, the SDLT liability on a purchase of non-residential property will be as follows:

  • Purchase price up to £150,000 – Nil
  • Purchase price £150,001 to £250,000 – 2% on amount above £150,000
  • Purchase price over £250,001 : £2,000 + 5% on amount above £250,000

The Chancellor also announced that there will be a change in the way in which SDLT on non-residential property is calculated to bring it in line with the changes made in 2014 to SDLT on residential property.

Entrepreneurs’ Relief

ER will be extended to long term external investors in unlisted trading companies. This Investors’ Relief will provide a 10% rate of Capital Gains Tax for gains realised on the disposal of ordinary shares in an unlisted company.

In order to qualify, the shares must be newly issued shares in unlisted companies, acquired on or after 17 March 2016 and held for a minimum of three years from 6 April 2016.

There will be a lifetime limit of £10 million on the amount of capital gains which qualify for relief.

Corporation Tax

Corporation tax rates for UK companies will reduce from the current 20% to 19% on 1 April 2017 and the rate of corporation tax will be reduced further to 17% by 2020.

Business Rates

From April 2017, 100% Small Business Rate Relief will be extended from the current £6,000 limit to cover all small businesses that occupy property with a rateable value of £12,000 or less.

Defined Contribution Pension Schemes

Pension Commencement Lump Sum

There are no guarantees as to the amount of the pension or PCLS under a defined contribution scheme because the benefits available will depend upon the size of the fund that has been built up. However, benefits from a defined contribution pension scheme can usually be taken in the form of a pension and a pension commencement lump sum (PCLS).

Pension Commencement Lump Sum

Benefits can generally be taken before, on or after the scheme’s selected pension or normal retirement age and a pension commencement lump sum is usually available.

There are two exceptions when a defined contribution pension scheme will not provide a PCLS:

  1. The scheme rules do not permit any the proceeds to be paid out as a lump sum
  2. The member has used up all of their PCLS allowance

Usually, anyone who has the chance to take a PCLS selects the maximum available which is generally 25% of fund.

The pension provided by a defined contribution scheme is based on the fund that the member has accrued to the date the benefits are being taken. The actual amount of annual income provided will also depend upon the method by which benefits are drawn such as

Drawdown Pension

This is where an income is drawn from the pension fund. It can be drawn directly from the fund or via a series of short term annuities.

Scheme Pension

The pension is paid directly out of the scheme assets or paid by an insurance company selected by the scheme administrator.

Annuity

Annuities are payable by an insurance company and it is the most common method by which a defined contribution scheme will provide an income in retirement. The amount of income provided will depend upon lifetime annuity rates available at the point of retirement.

All defined contribution schemes can offer the option of a lifetime annuity, but the advent of Pension Freedom in April 2015 and the poor returns available for annuities mean that many people opt for a form of drawdown.

The Financial Conduct Authority (FCA) requires providers of individual pension arrangements to ensure that members are aware of their right to take an open market option, i.e. buy a lifetime annuity from any authorised insurer. This enables members to benefit from the best annuity rates available on the open market.

Lifetime Allowance

If benefits are taken from a pension before the age of 75, the value of the fund will be assessed against your lifetime allowance. Any excess above the lifetime allowance will be subject to a tax charge which is currently 55% if taken as a lump sum or 25% if taken as an income.

If benefits are not taken by the age of 75, a test against the lifetime allowance will take place at the age of 75.

Once in payment, the income is treated for income tax purposes as earned income. However, pension income is not subject to National Insurance contributions (NICs).