Tax Connect – September 2015 (Review of Summer Budget)

September 11, 2015

In the first Conservative only budget in over 18 years, George Osborne introduced a variety of tax changes to the UK, some of the key items of which are summarised below.

Dividends

Perhaps the most controversial announcement was the overhaul of tax on dividends. From April 2016 the notional tax credit system (which sees basic rate taxpayers pay no tax on dividends) will be scrapped and instead a new dividend allowance of £5,000 will be introduced. Anything received above that will be taxed at 7.5%, 32.5% and 38.1% for basic, higher and additional rates respectively, compared to the current rates shown below:

2015/16 – CURRENT RATE 2016/17 – NEW RATE
Basic Rate 0% 7.5%
Higher Rate 25% 32.5%
Additional Rate 30.56% 38.1%

 

After some initial confusion as to how this allowance will work in practice, HMRC has now confirmed that all taxpayers, regardless of their marginal rate, will benefit from the first £5,000 of dividend income tax free and revealed that the £5,000 dividend tax allowance is not actually an allowance. Rather, it is a zero-rate of income tax applied to dividend income only.

Dividends are currently taxed as the highest slice of income, so they are always subject to the taxpayer’s highest marginal tax rate. This will continue to apply but the first £5,000 of that dividend income will be taxed at 0% and the grossing up of dividends in the tax computation will no longer be required.

These dividend tax proposals are likely to cause some problems for investors with significant dividend income but it represents a bombshell for small company owner managers paying themselves low salaries and larger amounts of dividends. Those following the traditional advice of taking a low salary and topping up to the basic rate band with a dividend will see their tax bill increase by around £1,800 – enough to trigger payments on account.

Conversely, higher and additional rate taxpayers with dividend income of £5,000 or less will see a reduction in their tax liability.

It is important to maximise your profit extraction now and review for the year ahead in order to minimise your tax liability – please get in touch so we can assist you with this.

Savings Allowance

From 6 April 2016 all bank and building society interest will be paid gross, without deduction of tax. Each basic rate taxpayer will also have a savings allowance worth £1,000, saving tax of up to £200. A 40% taxpayer will enjoy a savings allowance of £500. Additional rate taxpayers who have income of over £150,000 will not be given a savings allowance, so they will have to pay the full 45% charge on their savings income through self assessment.

Employment allowance

From 6 April 2014 most employers have been able to claim an annual employment allowance of £2,000 to set against employer’s class 1 NIC. This will rise to £3,000 per year from 6 April 2016. However, one-person companies will no longer be eligible to claim the allowance. This will increase costs for personal service companies and affect the tax efficient amount of salary directors will be able to extract from their own companies.

Tax free childcare

Employers can currently provide tax and NIC-free childcare vouchers to employees worth £55 per week for a basic rate taxpayer (less for higher and additional rate taxpayers who joined the voucher scheme after 5 April 2011).

The employer provided voucher scheme is to be replaced with ‘tax free childcare’ (TFC) from early 2017, postponed from late 2015. TFC is a Government-backed savings scheme which parents will use to save for the cost of childcare. For every £8 the parent contributes the Government will pay in £2, up to £2,000 per year per child.

Parents who join their employer’s childcare voucher scheme before TFC comes into effect will be able to choose whether to stick with the voucher scheme or move to TFC. The tax free amount for childcare vouchers applies per parent, whilst the Government’s contribution under TFC applies per child.

There are a number of other differences between the two schemes which need to be weighed up for each family as parents choose which scheme to use from 2017.

Restriction of top rate tax relief for Pensions

The Chancellor announced further changes to pensions, following the recent reforms to how pension benefits can be taken from money purchase schemes. From 6 April 2016, those with ‘adjusted income’ above £150,000 will be subject to a tapered reduction in their annual allowance for tax relieved contributions. The normal £40,000 allowance will be reduced by £1 for every £2 of excess income, subject to a minimum allowance of £10,000.

We would recommend maximising your pension contributions before the tax relief is reduced and would be happy to advise you in this area.

Landlords – Relief for Interest

Currently individual landlords receive tax relief at their highest rate of income tax on all of the interest they pay to finance their letting business. From April 2017 the amount of interest that will be eligible for tax relief at the marginal rate will be restricted to the following:

  • 75% of the interest paid in 2017/18
  • 50% of the interest paid in 2018/19
  • 25% of the interest paid in 2019/20

The balance of the interest will be eligible for 20% tax relief in each case, and from 6 April 2020, only basic rate tax relief will be available for interest.

The change in these rules may mean a review of the funding structure for your buy-to-let business is necessary and we would be happy to assist in any way we can.

Landlords – Abolition of Wear & Tear Allowance

At present, a wear and tear allowance is given at 10% of the net rents received in respect of fully furnished let properties. This will be abolished from 6 April 2016. In its place all landlords of residential property (whether fully furnished or not) will be able to claim the actual cost of replacing furnishings.

Landlords – Increase in Rent-a-room relief

Rent-a-room relief, which exempts rent received where a person lets out part of their only or main residence as residential accommodation, will increase from £4,250 to £7,500 from 6 April 2016. This applies not only to lodgers but also to bed-and-breakfast businesses, provided that the house is the owner’s main residence. If the total rent received is higher than the limit, the owner can choose to deduct the actual expenses incurred, or to deduct the limit and pay tax only on the excess.

Inheritance Tax – Rates and nil band

The IHT nil rate band will be frozen at £325,000 per person until 6 April 2021. Any unused nil rate band can be passed to a surviving spouse or civil partner, producing a total tax exempt band for the couple of £650,000.

Inheritance Tax – Extra relief for passing on a home

This amount is insufficient to shelter the value of many homes from IHT, so the Government is introducing a new extra nil rate band to be applied only to the value of a home left on death to a direct descendant of the deceased. This home-related nil rate band will start at £100,000 per person from April 2017 and increase over four years to £175,000 per person, allowing a couple to eventually pass on a family home worth up to £1m with no IHT (2 x £325,000 plus 2 x £175,000).

The home-related nil rate band will not apply in full if the total estate is worth over £2m, and will not apply to a house that has never been used as a residence by the deceased (e.g. a buy-to-let property).

Goodwill amortisation

Since 2002, companies have been entitled to deduct the amortisation of purchased goodwill from their profits for corporation tax purposes. This has given a tax advantage to the purchase of business undertakings as a going concern over the purchase of shares in other companies, where no deduction is allowed for any of the cost of investment.

This deduction was abolished from 3 December 2014 where goodwill was acquired from a related party, for example where a business was transferred to a company on incorporation.

It has now been abolished for any acquisition of goodwill and other customer-related intangible assets from 8 July 2015. Goodwill acquired before that date is not affected, so the continuing amortisation of existing assets will continue to be deductible. Where an unconditional obligation to acquire goodwill had been entered into before 8 July, relief will be available.

For goodwill purchased after this date, there will be a restricted relief for losses realised if it is sold. Such a loss will be a ‘non-trading debit’ which cannot be relieved as flexibly as a trading loss.

Corporation Tax payment dates

Companies with profits up to £1.5m normally have to pay their corporation tax nine months and a day after the end of the accounting period. The profits limit is shared between companies in the same group. Companies with profits above the limit are due to pay their tax in four instalments on the 14th day of the 7th and 10th months of their accounting period, and the 1st and 4th months following it. Instalments normally have to be estimated, with interest accruing on money paid later or earlier than it was due.

From April 2017, companies with the largest profits – £20m a year, shared between group companies – will have to pay their tax earlier still, in the 3rd, 6th, 9th and 12th months of the period.

Annual Investment Allowance (AIA)

The AIA is the maximum amount a business can spend on equipment in one year and get full tax relief in that year. The amount of the AIA has varied between £25,000 and its current level of £500,000 over the last five years. The Chancellor has said this variation will now cease as he will introduce a permanent AIA cap of £200,000 from 1 January 2016.

There are complicated rules for the maximum amount of relief where an accounting period straddles the change of limit and you should plan when you are going to make your capital expenditure to maximise your tax relief.

 

The content of the newsletter should be treated as general information and is not mean to be a substitute for taking specific professional advice.