UK Budget, March 2016 Tax Highlights
Growth forecast cut, Sugar Tax introduced and Capital Gains Tax Reduced; these are just a few of the headline changes that the Chancellor announced in his budget. It is therefore no surprise that there was a mixed response to some of these announcements but, from a tax perspective, there were certainly some glimmers of positivity. Highlights are below:
Capital Gains Tax Reduced
The following CGT reductions will take effect from 6 April 2016:
- Reduced from 28% to 20% for higher and additional rate taxpayers
- Cut from 18% to 10% for basic rate taxpayers
This is a significant change which will benefit UK taxpayers. This will also, on the whole, benefit US taxpayers resident in the UK who are paying tax on the arising basis.
New Tax rules for Dividends
From April 2016, the following changes will apply to the taxation of dividends:
- The notional 10% tax credit will be removed completely and instead a 7.5% tax for basic rate taxpayers will apply.
- The first £5,000 of dividend income (irrespective of income from other sources) will be tax exempt for all individuals.
- Higher rate taxpayers will pay 32.5% on dividend income.
- Additional rate taxpayers will pay 38.1% on dividend income.
Personal Allowance to increase
The Personal allowance is to increase from £11,000 in April 2016 to £11,500 in April 2017. Generally, this will mean that taxpayers who have less then £100,000 in earned income during the tax year will be allowed to receive £11,500 tax-free from April 2017.
Increase in 40% tax threshold from April 2017
The threshold at which people pay 40% income tax will rise from £42,385 to £45,000 from April 2017.
Introduction of Lifetime ISA
In an effort to assist taxpayers in saving to buy a home, or to save for retirement, the Chancellor has announced the introduction of a new type of ISA from April 2017.
- Savers will receive a 25% annual bonus from the government on their savings, tax free.
- The account will remain active until you either buy a property (at any time provided that it is your first property) or reach the age of 60.
- If you withdraw from the account for any other reason you will be subject to a 5% charge and will not receive the government bonus.
- Maximum contributions will be £4,000 per tax year (so in theory, you could receive a £1,000 bonus per year).
- Taxpayers will be allowed to have both a Lifetime ISA and normal ISA, subject to the £20,000 contribution limit.
- Income received in the account will be tax free and the ISA, to all intents and purposes, will function the same as any other stocks and shares or cash ISA.
Increase in ISA allowance
The current ISA annual contribution limit of £15,240 will be increased to £20,000 from April 2017.
Class 2 National Insurance Contributions to be abolished
From April 2017, class 2 National Insurance Contributions (NIC) will be abolished and self-employed taxpayers will just be required to pay class 4 NIC.
Like Class 2 NIC, Class 4 is assessed on your profits but the rate is different. The rate of Class 4 NIC is 9% on your profits between £8,060 and £42,385 and 2% on your profits over £42,385.
Reduction in Corporation Tax from 20% to 17% in 2020
The Chancellor appears to be continuing his belief that the reduction in corporate tax has created jobs and increased investment in the UK. As such, he has announced that the rate of corporation tax will be cut as follows:
- Cut from 20% to 19% from April 2017
- Cut from 19% to 17% from April 2020
Should you wish to understand more of how the budget affects you, please do not hesitate to contact us.