Wednesday 8th March saw the first Budget by Philip Hammond. So was it a damp squib? Something to cause sleepless nights? Or did we get off lightly?
We have set out the main important tax announcements here, going through what the change means and how it may affect you.
The Money Purchase Annual Allowance:
An individual can remove funds from their pension and avoid paying income tax if it falls within their 25% tax free allowance; that individual could then make further pension contributions and claim relief. This had been used as a means to avoid tax on current earnings by diverting the salary into the pension scheme. The money purchase annual allowance (MPAA) was introduced to counter this by limiting the amount individuals who have flexibly accessed their money purchase pension savings to £10,000. This limit has now been reduced to £4,000.
Life insurance policy gains:
In certain circumstances, where there has been a part surrender or part assignment of a life insurance policy, a wholly disproportionate gain can arise. Legislation is to be introduced where affected individuals can apply to HMRC to have the gain recalculated on a just and reasonable basis.
The Government intends to consult on a reform of rent-a-room relief to ensure it better achieves its original intended purpose to increase the supply of affordable long-term lodgings.
Small to medium sized businesses
The dividend allowance:
From 6th April 2018, the amount of dividends that can be received by an individual without incurring income tax will be reduced from £5,000 to £2,000. The Government’s stated policy here is that the allowance is aimed at investors and not a form of remuneration, and that £2,000 is sufficient to assist such investors. They also make it clear that it is part of an intention to close the gap between the tax treatment of the self-employed and those working through a company that they own. We are concerned what this means for the future of director owned businesses and whether the Chancellor will go down the route of treating all payments from close companies as salary. We will be keeping an eye on this in the next Budget. There will be limited planning opportunities before any major change in the law occurs but this assumes that the company in question has distributable reserves and our time frame may be a small window.
NIC for the self-employed:
As part of bringing the amount of tax and NI paid by employees and self-employed closer together, and taking into account that Class 2 NICs will be abolished from April 2018, the Government announced in the Budget that it would increase the main rate of Class 4 NICs from 9% to 10% with effect from 6 April 2018 and from 10% to 11% with effect from 6 April 2019. This announcement has now been overturned. A U-turn has been made due to the NIC rise being against the ‘tax-lock pledge’ made ahead of the 2015 election not to increase Income Tax, VAT or NIC. The Chancellor has still vowed to reduced the gap between employed and self-employed people to ensure they are treated “fairly”. We shall watch this space…
Cash basis accounting:
The cash basis accounting (‘the cash basis’) is an optional and simplified method for calculating taxable profits for trading businesses – i.e. self employed and partnerships – with straightforward tax affairs. The amendments change the the entry threshold for the cash basis from £83,000 to £150,000. The policy here is to make it easier to run small businesses. It could also be an attempt to discourage individuals from incorporating where the business is small with very few owners.
IR35 when working in the public sector:
Where an individual provides their services to a business in the public sector, the burden of applying IR35 will now lie with the public sector body, including collection of the income tax and NI.
Trading and property allowance:
It was confirmed that individuals won’t have to pay Income Tax on trading or property income providing the income (note: not profits) in either of these cases is less than £1,000. This does not need reporting either. If income is more than £1,000 an individual can elect to pay tax on receipts less £1,000 instead of deducting actual expenditure. This relates to individuals only, not partnerships or companies, and each individual only gets one £1,000 allowance. There are also a couple of stipulations with regard to property income.
Losses carried forward:
Where a company has made a loss on or after 1 April 2017, to the extent that these are carried forward they will be usable against profits from different types of income and profits of other group companies. In addition, for a company or group with profits over £5m the use of losses carried forward will be restricted so that they can’t reduce their profits arising on or after 1 April 2017 by more than 50% (this applies to losses carried forward arising at any time).
Interest deductions for companies:
With effect from 1 April 2017, a limit will apply to the tax deductions that companies can claim for their interest expenses. The new rules will restrict each group’s net deductions for interest to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) that is taxable in the UK. Note, all groups will be able to deduct up to £2 million of net interest expense per annum, so groups below this threshold will not need to apply the rules.
Non-UK residency and domicile issues
Qualifying recognised overseas pension schemes (QROPS):
Where there is to be a transfer to a QROPS that is requested on or after 9 March 2017, a 25% tax charge will apply unless, from the point of transfer, both the individual and the pension savings are in the same country, both are within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer. The changes also widen the scope of UK taxing provisions so that, following a transfer to a QROPS on or after 6 April 2017, they apply to payments out of those transferred funds in the five tax years following the transfer.
The Government continue to crack down on those in the tax industry who are still trying to get tax payers to enter into tax avoidance schemes: following the introduction of POTAS (Promoters of Tax Avoidance Schemes), many have tried to circumvent this regime by reorganising their structures; legislation has been introduced to prevent this. Note, we do not get involved in this type of tax planning and never have done. All of our planning is genuinely bespoke. This continued attack by the Government supports our attitude to tax planning.
Employed / Self-employed / Company:
The other theme set to continue is the narrowing of the taxation gap between individuals running businesses via companies, the self-employed and the employed. Watch this space… through your fingers and from behind a chair! People are up in arms about the NIC and dividend allowance changes this time… but the next budget may not be so kind!