UK: Budget 2016: Our Analysis

Last Updated: 30 March 2016
Article by Tina Riches

1.1 A Budget for entrepreneurs

The focus of the 2016 Budget was very much on entrepreneurs, savings and tax. Measures designed to boost the enterprise economy sat alongside a flexible lifetime ISAs and changes to capital gains tax. While small and medium-sized enterprises fared relatively well, the Chancellor continues to clampdown on larger businesses, for example, with interest relief due to change for large multinationals, although overall the changes for them were quite reasonable.

The Government confirmed that the pension tax will not change for now, although what's really needed is a longer-term pensions tax plan to allow people to plan their retirement with more certainty.

The following were among the key Budget announcements:

  • Entrepreneurs' relief – the reintroduction of the availability of capital gains tax (CGT) entrepreneurs' relief on goodwill when a business is transferred to a company is welcome news. The tax relief has been backdated, so anyone who has incorporated on or after 3 December 2014 should check to see if they are entitled to take advantage of this pragmatic change. Two other welcome backdated relaxations were also announced.
  • Tax relief on historic company losses – on the plus side for many businesses, there will be welcome changes for the relief of losses from April 2017, bringing the UK system more in line with its G7 neighbours. It means far fewer SMEs will end up with trapped unusable losses in the future. For companies with profits over £5m there will be some restrictions, but the Government expects this to affect only about 1% of UK companies.
  • ISAs – changes to the ISA rules are an interesting compromise between encouraging spending in the economy and encouraging younger people to save for retirement. Increasing the ISA allowance to £20,000 will mean more people's savings will stay outside the tax net. The new flexible lifetime ISAs – if they allow for withdrawals and replacement of savings – will help younger people save for a home and then top-up again as they get older.
  • Capital gains tax – the Chancellor's plan to reduce CGT rates (from 28% to 20% and 18% to 10% for higher rate and basic rate taxpayers, respectively) is welcome for entrepreneurs and others investing in businesses, as well those with large share portfolios who may be hit from April 2016 by the higher taxes on dividends. It's yet another disappointment, however, for owners of buy-to-lets and second homes who fail to benefit from this latest initiative.

2. Personal and trust taxes

2.1 Personal allowance and higher rate threshold increase

Planned increases to the personal allowance and higher-rate threshold for 2016/17 were confirmed with announcements made for 2017/18.

The personal allowance will increase to £11,000 for 2016/17 and to £11,500 for 2017/18. Following the phasing out of age-related personal allowances, there is only one level of personal allowance, regardless of the taxpayer's age.

Higher rate taxpayers also receive a boost and many taxpayers will be taken out of higher rate tax, following confirmation of an increase in the higher rate threshold to £43,000 for 2016/17 and £45,000 for 2017/18. A corresponding increase will apply to the NIC upper earnings limit to ensure that the thresholds remain aligned.

Comment

The higher than previously trailed increase to the personal allowance and higher rate threshold from April 2017 is welcome news and reflects the Government's pledge to increase the personal allowance to £12,500 and higher rate threshold to £50,000 by the end of the current parliament.

However, as previously highlighted, not all taxpayers benefit from the increases to the personal allowance. Those earning above £100,000 will generally continue to see the personal allowance restricted by £1 for every £2 earned above this threshold, leading to an effective 60% tax rate, subsequently dropping back to 40%.

2.2 Abolition of Class 2 national insurance contributions

The Government has confirmed that from April 2018, Class 2 national insurance contributions (NICs) will be abolished for the self-employed.

Class 2 NICs are the contributions payable by self-employed individuals including partners in partnerships.

Since April 2015 these contributions have been paid through self assessment at a flat rate of £2.80 per week (2015/16 tax year). From April 2018 Class 2 NICs will be abolished completely.

A consultation on benefit entitlement for the self-employed has been carried out and the Government will announce its responses to this in due course. The results are expected to outline how the self-employed will access contributory benefits after class 2 NIC has been abolished.

Comment

Given the low level of Class 2 NIC, the added complexity and inefficiency did seem unnecessary, so the confirmation of its abolition is welcomed.

We shall have to wait for the Government's responses to the consultation to ascertain how the self-employed will continue to obtain contributory benefits and to ensure there is no erosion of an individual's benefits.

2.3 Introduction of a personal savings allowance

A new allowance is to be introduced for basic rate and higher rate taxpayers to apply a 0% rate of income tax to a slice of their savings income.

As announced at the 2015 Budget, a new personal savings allowance will be introduced from 6 April 2016.

The allowance will mean that basic rate (20%) taxpayers will not pay tax on the first £1,000 of savings income and higher rate (40%) taxpayers will not pay tax on the first £500. However, additional rate (45%) taxpayers will not qualify for an allowance.

Comment

This is another well trailed announcement, which is expected to result in 95% of taxpayers, around 17 million people, no longer required to pay tax on their savings income.

This is however not an exemption, so the savings income covered by the allowance will count towards total income for other purposes such as the high income child benefit charge, the withdrawal of the personal allowance and restrictions in the pension annual allowance for additional rate taxpayers.

As a consequence of this, the Government will also remove the obligation on banks and building societies to deduct basic rate tax on interest paid.

2.4 Changes to the taxation of dividends to be introduced from 6 April 2016

As announced in the 2015 Summer Budget, from 6 April 2016, the way in which individuals are taxed on dividends will change.

Currently, a 10% notional tax credit attaches to a dividend paid by UK and some non-UK companies. This reduces the effective rate of income tax on the net dividend to 0% at the basic rate, 25% at the higher rate and 30.56% at the additional rate. From 6 April 2016, this method of taxation will change with the notional credit being abolished.

A dividend tax allowance will be introduced, which will not tax the first £5,000 of dividend income of UK resident individuals in each year.

Dividend income in excess of this will be taxed at 7.5% where it falls in the basic rate band, 32.5% for the higher rate and 38.1% for the additional rate. The income within the allowance will count towards total income for other purposes, in a similar way to the new savings allowance.

Comment

The overriding aim behind these changes was to discourage sole traders from incorporating for tax-motivated reasons. However, the regime applies to all dividends not simply those paid by owner-managed businesses.

The introduction of the £5,000 allowance, coupled with the increase in the dividend tax rates, means that there will be winners and losers after 6 April 2016.

As these changes were announced in the 2015 Summer Budget, people have had some months to consider the impact that they may have. For those that have not yet given due consideration, time is running out to take action before the end of the tax year and they should consider doing so now.

2.5 Taxation of sporting testimonials for employed sportspersons

Changes first proposed at the 2015 Autumn Statement will be introduced to subject income from testimonials announced after 25 November 2015 and taking place after 6 April 2017 to income tax and NICs. An exemption will apply to the first £100,000 of income where the testimonial is not contractual or customary.

Before these changes, an extra statutory concession allowed the proceeds of a non-contractual sporting testimonial not to be taxed as earnings. HMRC has for some time been gathering feedback on the proposal to withdraw this concession and bring the treatment in line with that applying to other voluntary payments made by the public, such as tips to waiters and taxi drivers.

Independent testimonial committees will now need to operate PAYE where the total proceeds from a non-contractual sporting testimonial or benefit match (or a number of events forming a testimonial year) exceed £100,000.

The changes will not apply where the testimonial was granted or awarded before 25 November 2015.

Comment

Although the Government ultimately pressed ahead with these changes, it is pleasing to see that changes were delayed in order to allow proper consultation.

Furthermore, following consultation, the decision to double the one-off exemption from £50,000 to £100,000 should be applauded, as it will smooth the transition for retiring sportspeople to move into other employment while they retrain to do something else.

2.6 Update on changes to taxation of non-doms

The Government has announced transitional provisions for those non-UK domiciled individuals (non-doms) affected by planned reforms whereby those who have been UK resident in 15 of the past 20 years will be treated as deemed UK domiciled from 6 April 2017. The legislative timetable for the reforms has also been amended.

Proposals were announced in Summer Budget 2015 to reform the taxation of non-UK domiciled individuals (non-doms) with effect from 6 April 2017:

  • those who have been resident in the UK for 15 of the past 20 years will be deemed to be UK domiciled for all tax purposes;
  • those who were born in the UK with a UK domicile of origin but who have subsequently acquired a non-UK domicile of choice will be deemed to be UK domiciled for all tax purposes whenever they are resident in the UK; and
  • all UK residential property held directly or indirectly by non-doms will be within the charge to UK IHT.

The first two of these reforms were due to be legislated via Finance Bill 2016 and the third in Finance Bill 2017. It has now been announced that all the reforms will be contained in Finance Bill 2017.

Two transitional provisions have now been announced for those becoming deemed UK domiciled from 6 April 2017:

  • the ability to treat the base cost of non-UK assets for CGT purposes as being the market value of those assets at 6 April 2017; and
  • what sounds like a review of the composition of funds offshore 'to provide certainty on how amounts remitted to the UK will be taxed'.

Comment

Professional advisers, including Smith & Williamson, made representations advocating sensible transitional provisions of some kind as part of the consultation process on the deemed domicile proposals in autumn 2015. While a formal response to the consultation has not yet been published, the fact that representations appear to have been heeded is welcome.

The opportunity to opt for a 'rebasing' of assets could reduce both the tax and administrative burden for those becoming deemed UK domiciled.

Turning to remittances of offshore funds, there are a number of possible approaches and it remains to be seen what form the proposals will take. We await further details with interest.

Regarding the legislative timetable, it is helpful that all the proposed reforms will now be contained in a single Finance Bill in 2017 as some of the provisions depend on each other, rather than being split between two Finance Bills. It will be important to ensure there is no slippage in the timetable for publishing draft legislation; that would add to the uncertainty facing those potentially affected. Given that the reforms are due to come into force from 6 April 2017, non-doms should not be put in the position of having to begin planning, while unsure of the final details.

It should not be forgotten that a further consultation document concerning the changes to indirectly-held UK residential property was promised, which ought to happen before the draft Finance Bill 2017 is published.

2.7 Tax administrative changes: further devolution of powers to Scotland

Legislation will be introduced to distinguish between the tax rates applying to 'savings income' and those applying to 'non-savings, non-dividend income', for which the Scottish parliament will have independent rate-setting power for Scottish rates from April 2017.

Following the extension of powers from 6 April 2017 to give the Scottish Parliament full control over setting the rates and thresholds of income tax applying to 'non-savings, non-dividend income' of Scottish taxpayers, measures will be introduced to ensure that English, Welsh and Northern Irish MPs retain a decisive say on the main rates of income tax applying in the remainder of the United Kingdom.

A 'savings rate' will apply to all UK-wide (including Scottish) savings income and will be distinct from the 'main rate' applying to 'non-savings, non-dividend income' of UK-residents not subject to the Scottish rate of income tax.

A third, 'default rate' will also apply to a limited category of taxpayers including, primarily, trustees and non-UK resident individuals.

The measure will have effect from 6 April 2017 to coincide with the further devolution of income tax powers to the Scottish government.

Comment

This administrative change is part of the Government's pledge to implement 'English votes for English laws' and is motivated by concerns about Scottish MPs retaining the right to take part in the decision-making process on setting the main rates of income tax for the Rest of the UK, rates which the UK Parliament can no longer influence in Scotland.

2.8 Compensation and ex-gratia payments made to victims of persecution

The Government will legislate to ensure that compensation or ex-gratia payments from certain schemes will not be subject to IHT.

The legislation will replace a current extra statutory concession that provided an IHT exemption for compensation and ex-gratia payments made by the Government to those persecuted during the World War II era.

The legislation will be extended beyond the current concession to include one-off payments received under the 'child survivor fund', and allow the Treasury to exempt further schemes in the future.

The IHT exemption will apply whether the payment was made before or after the claimant's death and will apply to deaths on or after 1 January 2015.

Comment

While these changes are limited to narrow circumstances and will only apply to a limited number of taxpayers, the aim of the exemptions should be applauded.

2.9 Bad debt relief measures to support peer-to-peer (P2P) lending

Proposals first announced at Autumn Statement 2014 to allow relief for bad debts in respect of P2P loans against other P2P income will take effect from 6 April 2016.

A new relief will be introduced to enable individuals who invest in certain P2P loans to deduct losses realised on defaulted loans against income received from other P2P loans of the same platform.

Any surplus bad debts can be used to offset interest received on loans made through other platforms or carried forward against interest received in the next four tax years from other eligible P2P loans.

The relief will apply automatically for bad debts arising on eligible P2P loans from 6 April 2016. Individuals will also be able to make claims to set losses realised in 2015/16 against interest received from other loans in the same year.

Comment

These changes will be well received by individuals involved in P2P lending and are an indication of the Government's desire to increase competition in the finance sector.

It is good to see that individuals will be able to claim relief for losses arising in the tax year to 5 April 2016 and, from 6 April 2016, basic and higher rate taxpayers should also note that the newly-introduced savings allowance will apply to limit exposure to tax on any surplus interest after the bad debt relief.

To continue reading this article, please click here

Smith & Williamson LLP: Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. The word partner is used to refer to a member of Smith & Williamson LLP

The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Tina Riches
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.