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).

    Pensions Annual Allowance

    Pensions Annual Allowance

    The annual allowance is the maximum amount of ‘benefit’ or ‘total pension input’ that can build up from contributions during each ‘pension input period’ without incurring a tax charge. If the annual allowance is exceeded, an annual allowance charge is payable at your marginal rate/s of income tax i.e. 20%, 40% or 45%.

    In 2010/11 the annual allowance was £255,000. However, it was reduced to £50,000 in 2011/12 and, on 6 April 2014, it was reduced to £40,000.

    Tax yearAnnual allowance
    2016/17£40,000
    2015/16£40,000
    2014/15£40,000
    2013/14£50,000
    2012/13£50,000

    Carry forward rules

    Even though the annual allowance for the current tax year is £40,000, you may be able to make additional contributions of up to £140,000 into your other pension under HMRC’s ‘carry forward’ rules.

    These rules allow you to carry forward any unused annual allowance for the past three tax years – as long as you had a pension in place for each of the three years and your total contributions don’t exceed your current earnings.

    Pension Input Periods

    With effect from 6 April 2016, all pension input periods will be the same period as the tax year. Because this is not currently the case for some pension schemes, the tax year 2015/16 will act as a transition from each scheme’s current pension input period to the tax year. This transition will apply regardless of whether or not a pension scheme already uses tax years for its input period.

    Total Pension Input

    The total pension input is the amount of contribution that will be tested against the annual allowance. The total pension input is calculated according to the type of scheme to which your and/or your employer contributes.

    Defined Contribution Schemes

    The following elements are included in the total pension input:

    1. Any relievable pension contribution paid by you or someone else on your behalf.
    2. Any contribution paid on your behalf by your employer.

    The tax relief is awarded at the time the contribution is made. The total pension input calculation will take place at the end of the pension input period, once all contributions have been made so that the total pension input can be entered onto your self-assessment tax return.

    As a result of this, a calculation will be done to see whether an annual allowance tax charge is due.

    Because the tax relief is awarded at the time the contribution is made, the ‘relievable pension contribution’ is taken into account when calculating the total pension input.

     

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