Today, Philip Hammond delivered his first Spring Budget. We’ve taken a close look at what he had to say, so we can bring you a summary of the most important changes the Chancellor announced:
‘New news’... what the Chancellor revealed today
National Insurance contributions for the self-employed
Currently, self-employed people pay two types or ‘classes’ of National Insurance:
- Class 2 – this is a flat rate of £2.85 a week (2017/18), which becomes payable when profits reach the Small Profits Threshold of £6,025 a year.
- Class 4 – this is a percentage-based contribution charged on profits above £8,164 a year (2017/18). The main rate on profits between £8,164 and £45,000 (the ‘Upper Profits Limit’) is 9%, and the secondary rate on profits in excess of £45,000, is 2%.
As previously announced, Class 2 contributions will be abolished from 2018, saving the self-employed, who generate profits above the Small Profits Threshold, £145.60 a year from 2018.
Today, the Chancellor announced an increase in main rate of Class 4 National Insurance contributions from 9% to 10% from April 2018 and then to 11% from 2019.
What this means
Looking at the combined effect of changes to Class 2 and Class 4 contributions, self-employed people with profits of less than £16,250 will pay less National Insurance than they do at present, while those with profits above this figure will pay more.
Dividend Tax Allowance
Less than a year after the introduction of the new £5,000 Dividend Tax Allowance, it was announced that this will be reduced to just £2,000 from April 2018.
We outlined these changes in detail last year in our article explaining How dividend income is taxed
The £5,000 allowance will remain in force until April 2018, so no immediate action is needed by investors in shares and in mutual funds such as Open-Ended Investment Companies (OEICs) and unit trusts.
However, from April 2018, investors should be aware that dividend income above £2,000 will be taxed at the following rates:
· 7.5% (basic rate taxpayers)
· 32.5% (higher rate taxpayers)
· 38.1% (additional rate taxpayers)
Assuming a dividend yield of 3.5% (roughly the dividend yield on the FTSE All Share index today), an investor can still hold over £50,000 in shares, OEICs or Unit trusts without paying tax on the dividends received.
This change will impact two groups:
1) Investors with larger investments. Investors with more modest amounts will find their needs met by ISAs and pensions, both of which are more tax-efficient than mutual funds or directly held shares.
2) Small business owners. Small business owners can pay less tax and National Insurance by taking income from their businesses as dividends. The change announced today will make the benefits of doing so more questionable – and some small businesses may now consider changing the way they take income – for example, more salary and less dividend – or operating as self-employed, rather than as a limited company.
National Savings and Investment (NS&I) Bond
We now have more details about the NS&I Investment Bond which was announced in the last Autumn Statement. It will offer an interest rate of 2.2% over a term of three years and will be available for 12 months from April 2017. The Bond will be open to everyone aged 16 or over, subject to a minimum investment limit of £100 and a maximum investment limit of £3,000.
Transfers to some overseas pension schemes
The government has announced a new 25% tax charge on some transfers of UK pension funds to overseas pension schemes (known as Qualifying Recognised Overseas Pension Schemes, or QROPS for short) on and after 9 March 2017.
The government’s view is that QROPS are used to avoid tax and want to stamp out these transfers except where there is a “genuine need” for the transfer.
The following transfers will not be subject to the tax charge:
· where the individual and scheme are resident in the same country
· where the individual and scheme are both resident in a European Economic Area (EEA) country, including where each is in a different EEA country
· where the QROPS is an occupational pension scheme provided by their current employer
‘Not-so-new news’ – what was already due to happen from April 2017
Even before the Chancellor stood up today, the beginning of the new tax year (6 April) was already earmarked for some significant changes. Here’s a quick reminder:
1. Income tax
- The personal allowance – the first part of your taxable income on which the tax rate is 0% – will increase from £11,000 to £11,500. The personal allowance is gradually withdrawn for people with taxable income of more than £100,000, and those with taxable income above £123,000 (2017/18) don’t get any personal allowance. Personal allowance may also be adjusted to take into account tax owed or due to the taxpayer, or to reflect taxable benefits received.
- The basic rate tax band in England, Wales and Northern Ireland will increase from £32,000 to £33,500. This is the next part of your taxable income, on which 20% income tax is paid. Coupled with the change in the personal allowance, this means you’ll need to have taxable income of £45,000 or more in 2017/18 before you pay higher rate tax.
- In Scotland, the Scottish Government is using its new tax-raising powers to reduce the basic rate tax band from £32,000 to £31,500. Scottish taxpayers will therefore start paying higher rate tax when their taxable income reaches £43,000.
- Higher rate tax will be payable on taxable income between £45,000 and £150,000 (£43,000 and £150,000 in Scotland).
2. Employees National Insurance Contributions
- The primary National Insurance threshold – the amount of income employees need before they start paying National Insurance – rises from £155 per week to £157 per week.
- The Upper Earnings Limit – the limit for the higher 12% rate of National Insurance – rises from £827 of earnings per week to £866 per week. This big increase in the upper limit of the higher rate of National Insurance means that those earning in excess of about £45,000 a year will pay an extra £190 in National Insurance contributions each year.
- The rate of National Insurance for employees is 2% above £866 of earnings per week.
- Some work benefits paid for voluntarily will become taxable. An example of this would be where someone chooses to sacrifice salary to pay for extra income protection. Other benefits paid for by sacrificed salary or bonus, such as pensions or child care vouchers, remain unchanged. You should speak to your employer if you think you could be affected by these changes.
People who have accessed their pension flexibly (by taking a taxable lump sum or an income drawdown payment from their pension) have a lower annual allowance of £10,000 instead of £40,000. From 6 April 2017, the £10,000 allowance will reduce further, to just £4,000 a year.
The lower annual allowance does not apply if:
· you only draw out your tax-free lump and not a penny more
· you were already taking ‘capped drawdown’, and started to do so before 6 April 2015
· you bought an annuity with your pension savings rather than taking income withdrawls or
· you cashed in a whole pension pot of £10,000 using the small lump sum rules
4. Inheritance Tax
6 April sees the introduction of the Residence Nil-rate Band (RNRB). This is an extra allowance on top of the standard Nil-rate Band of £325,000, which is the first part of an individual’s estate on which no inheritance tax is paid. The RNRB applies if:
· the individual dies on or after 6 April 2017
· they own a home, or a share of one, so that it’s included in their estate
· their direct descendants, such as children or grandchildren, inherit the home (or a
share of it) and
· the value of the estate isn’t more than £2 million
For deaths in the following tax years the RNRB will be:
· £100,000 in 2017/18
· £125,000 in 2018/19
· £150,000 in 2019/20
· £175,000 in 2020/21
This means that couples who qualify will be entitled to a combined nil-rate band of £850,000 (£425,000 each) in 2017/18, rising to £1 million (£500,000 each) in 2020/21.
Above the Nil-rate Band, inheritance tax is payable at a rate of 40%.
Annual ISA Allowance
The annual ISA allowance is going up from £15,240 in the current tax year to £20,000 in 2017/18. Anyone aged 16 or over can save in a cash ISA, but stocks-and-shares or innovative finance ISAs are only available to investors aged 18 or over.
Lifetime Individual Savings Accounts (LISA)
A new type of ISA will launch on 6 April 2017: the Lifetime Individual Savings Account, or LISA for short.
LISAs are available to savers and investors aged 18 to 40, who can put away up to £4,000 a year. For every £1 paid into a LISA, the government will add a bonus of 25 pence. For example, if you put in £3,000, you would get a bonus of £750, making a grand total of £3,750. The bonus is available on contributions paid in until your 50th birthday (but you would have had to open the LISA before turning 40).
Money paid into a LISA also counts towards your normal ISA allowance. For example, if you pay in the maximum of £4,000, you’ll only be able to pay in £16,000 to your other ISAs.
The LISA can be used tax efficiently to purchase a first home or for retirement from age 60 onwards.
Money taken out of a LISA other than for the purchase of a first home or for retirement, will suffer a 25% penalty of the total amount. This means that if you do take money out for another purpose – say, to fund a holiday or wedding, you will get back less than you put in. For example, if you put in £2,000 and get a £500 bonus you would have a total of £2,500 in your account. If you take the whole £2,500 back out to pay for a holiday, a penalty of £625 will apply (25% of £2,500) leaving you with just £1,875.