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UK Budget 2017 – Spreadsheet Phil Lives Up To His Name

As Philip Hammond took to the despatch box, he could take comfort that the UK economy was the s465_documentsecond-fastest growing G7 economy in 2016, and the 2017 growth forecast has been upgraded. However, the growth forecast for the next few years has been downgraded, and with Brexit looming, Mr Hammond delivered a Budget very much designed to steady-the-ship.

From a personal tax perspective, Mr Hammond tinkered at the edges and, except for reprimanding George Osborne for his Class 2 National Insurance changes and overly generous Dividend Allowance, today’s announcements had all been signposted.

Mr. Hammond did comment that, “Since 2010, the top one percent of income tax payers now pay 27% percent of all income tax.” This indicates no desire from this government to increase the tax burden on the wealthy or high earners.

The personal tax highlights from the Spring 2017 Budget speech are:

National Insurance Increase for the Self-Employed

Currently, self-employed individuals pay National Insurance (NIC) in two forms: Class 2 and Class 4. For tax and NIC purposes, self-employed includes partners in a partnership.

Class 2 NIC is being abolished from April 2018 and the current Class 4 NIC rate is 9%. The Class 4 NIC rate will increase to 10% in 2018 and 11% in 2019; the purpose is to make up for the loss of NIC after Class 2 is abolished, but also to equalise the NIC rate for employees and the self-employed.

It has long been argued that the NIC difference, between employees and the self-employed, was justified as the self-employed are not entitled to some statutory employment benefits, such as sick pay or maternity leave. Mr Hammond, therefore, announced a report will be published to look into whether parity in NIC obligations should mean parity in statutory benefit entitlement.

There was, however, no suggestion of introducing the US tax concept of charging self-employed individuals a deemed employer’s NIC. There will therefore still be a large discrepancy in the government’s total NIC receipts, between employees and the self-employed.

Reduction on the tax free Dividend Allowance

Mr Hammond continued George Osborne’s theme of discouraging incorporation for tax reasons. Under Mr Osborne’s chancellorship, the taxation of dividends underwent major reform as it was considered that owners of private companies (Director/Shareholders) could gain an unfair tax benefit. At the same time, Mr Osborne introduced a £5,000 tax free Dividend Allowance.

In his Budget speech, Mr Hammond explained that the £5,000 allowance still permitted Director/Shareholders the ability to gain an unfair advantage, and provided an, “extremely generous tax break for investors with substantial share portfolios.” Consequently, the Dividend Allowance will reduce to £2,000 from April 2018.

Tax Free Childcare

Mr Hammond confirmed that, from April, the Tax Free Childcare system will be rolled out. The idea is that parents can register an online account with the government, pay money into the account, and the government will ‘top up’ the account at the 20% basic tax rate. The government top up is capped at £2,000 (£4,000 for disabled children). More information can be found at Tax-Free Childcare: 10 things parents should know.

US Persons should be cautious as the government top up may be considered taxable income and the account may generate Form 8938 and FBAR (Form 114) reporting.

Lifetime ISA

Announced in last year’s budget, the Lifetime ISA is available from 6 April 2017, for individuals aged 18 to 40. This is another government top up scheme where the government will pay a 25% bonus (limited to £1,000 per year) on amounts saved up to age 5. The money in a Lifetime ISA needs to be used for buying your first home or saved or retirement. Otherwise, the 25% bonus is clawed back and a penalty is assessed on the amount saved.

As above, US Persons should be cautious as the government top up may be considered taxable income and the account may generate Form 8938 and FBAR (Form 114) reporting.

In addition, US Persons are generally subject to US tax on ISAs. Stocks & Shares ISAs commonly fall into the onerous “Passive Foreign Investment Company” (PFIC) US tax regime.

Qualifying Recognised Overseas Pension Schemes

A further announcement was made regarding a new UK tax charge on Qualifying Recognised Overseas Pension Schemes (QROPS). This was not in Mr Hammond’s speech but was released by HM Treasury as it will be included in Finance Act 2017. The new measure affects individuals who make a QROPS pension transfer on or after 9 March 2017.

A 25% UK tax charge on transfer will be applied unless:

• Both the individual and the pension savings are in the same country after transfer,
• Both are within the European Economic Area (EEA) after transfer, or
• The QROPS is an occupational pension scheme sponsored by the individual’s employer

The measures also introduce provisions so that transfers, on or after 6 April, are within the scope of the new QROPS rule in the five tax years following the transfer.

The new measures are designed to attack pension tax planning arrangements that use countries such as Malta to port pensions from one country to another.

US persons should be cautious when reviewing their pension arrangements and should consider the US tax implications for what can be a complex area.

Reforms to the Taxation of Non-domiciles

Notable in its absence from today’s Budget speech was any further mention or clarity on the changes to the non-domiciled tax regime.

Although the reforms have been previously announced, the changes take effect from 6 April 2017, and the tax profession had been hoping that HMRC would provide much needed guidance on the specifics of the reforms.

These reforms are far reaching and we will outline them, in a separate blog, over the coming days.

If you have any questions from the above, please do not hesitate to get in touch with your usual contact at US Tax & Financial Services Ltd.

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