Written by Ray Coman
Mr Osborne delivered his eighth Budget as Chancellor at round 12.30pm today. The Budget was announced against a backdrop of slowing global growth, recent interest rate cuts by central banks into negative territory and the forthcoming EU referendum in Britain. The first two Budgets of our current government have been far reaching and full of surprises. This contrasts with the Budgets of the preceding coalition government which tended to alter very little.
The overviews below follow the chronological order in which the announcements were made, with some supporting explanation.
From 6 April 2016, the charge for a loan to a participator will increase from its current rate of 25% to a new rate of 32.5%. A participator is typically a shareholder or director of a company with five or fewer owners. Directors of a one-person or ‘contractor company’ and family owned business will usually be participators.
A full summary of the rules can be read here in the article about overdrawn director’s loan accounts. In brief, where a contractor has not retained sufficient funds in the company at the year end to cover corporation tax, it will be a requirement to lend money as a director. This loan gives rise to a tax charge.
Company funds are usually represented by the company bank account, however amounts owed from clients and equipment and other assets brought into the business can also be used as a buffer.
If the bank account is brought back into balance in future years, the charge can be repaid by HMRC. However there is a cash flow drawback and an administrative burden of borrowing money from the company.
Payments on termination of an employment contract receive preferential tax treatment, provided the payments are not an entitlement under the employment contract. Under current legislation a termination payment is not subject to employer’s national insurance and the first £30,000 will not be subject to income tax in the hands of the employee.
From 6 April 2018, many termination payments over £30,000 will be subject to employer’s National Insurance.
This measure has the purpose of an anti-avoidance provision.
A series of new rules are scheduled to be introduced to bring profits derived from the UK into the charge of UK corporation tax. The measures are aimed at companies with profits of over £5 million.
The rules will have most impact on multi-national organisations with that particular scope to structure finances so group profits are taxed in jurisdictions with lower than average rates.
For most companies, the deduction from profits chargeable to corporation tax for interest payments will be restricted to 30% of UK income.
Only 50% of current year profits can be reduced by losses brought forward from previous years.
The tightening of rules on withholding tax for royalty payments and other measures will also be presented.
Following previous announcements, the corporation tax, which is currently 20%, was due to fall to 19% in April 2017 and to 18% in April 2020. The Chancellor announced that the rate will now be reduced further to 16% in 2020.
Traders and landlords with less than £1,000 will not need to declare this income on a Tax Return. The income will be tax free. This will particularly benefit vendors with a side-line on websites such as E-Bay and AirBnB. Traders bringing in more than £1,000 income can deduct the allowance from their income profits, instead of actual expenses. A total of £2,000 can be exempted from tax, one allowance for property income and the other for trading.
From April 2017, small business rate relief will be increase. The relief currently exempts businesses with a rateable value of £6,000, however this is set to increase to £12,000 from next year. The higher rate threshold will also increase at the same time from £18,000 to £51,000.
With effect from midnight, the chancellor has brought the stamp duty system for commercial property in line with that for residential property. The tiered system will mean that no stamp duty is payable on a property worth £150,000 or less, 2% is paid on consideration between £150,000 and £250,000 and 5% is levied on the value of the property which exceeds £250,000.
With the stated aim of helping “small firms”, the new duty will benefit all but purchasers of the highest value property.
- Levy on sugary drinks
- Fuel duty freeze (despite lower petrol prices on account of the recent oil glut.)
- Tobacco duty rise.
- Freeze on beer, cider, whisky and other spirits duty with other alcohol taxes rising.
Class 2 is a flat rate of national insurance which is payable by sole traders and partners. The contribution secures a year towards the number required to qualify for a basic state pension. This tax will now be abolished in 2018. A social security and state pension entitlement will accrue to self-employed people via the Class 4 National Insurance. This is payable at the same time as income tax.
With effect from 6 April 2016, the basic rate of capital gains tax will be cut from 18% to 10% and the higher rate of capital gains tax will be cut from 28% to 20%.
The rate at which an individual pays capital gains tax depends on their total income. Gains below the annual allowance are not taxable. Taxable gains are added to an individual’s yearly income. To the extent that total income and gains are above the higher rate tax threshold, gains are taxed at the higher rate. Otherwise gains are taxed at the basic rate.
Gains made on residential property will continue to be charged at the existing rate of 18% basic and 28% higher rate tax.
Entrepreneur’s relief will reduce capital gains tax for the subscription of shares in an unlisted company and held for the longer term. The new rules will apply to any purchase in new shares made from tomorrow. The requirement will be for the shares to be held for at least three years from 6 April 2016 or date of purchase, whichever date is the later.
In effect the rate of tax will be 10% and subject to a life time limit of £10 million. The new rules extend relief currently available for shares purchased under the enterprise investment scheme.
The government had consulted on the abolition of entrepreneur’s relief on disposal of a business. However, there were no announcements in the Budget about this relief being withdrawn.
There remains an opportunity for company owners to accumulate profits in the company and withdraw this on eventual disposal. The accumulated funds in the business, usually represented by monies in the bank account, can be withdrawn as capital on eventual disposal. The implication is that the funds will be taxed at just 10%, rather than the much higher rates for dividends or salary.
Nonetheless, holding funds in a company in order to save tax carries the risk that the rules about entrepreneur’s relief will be scrapped.
From April 2017, the government will introduce a new ISA. Savers who are under 40 on 5 April 2017, will be able to contribute up to £4,000 a year into an ISA. For every £4 contributed by the taxpayer, the government will add £1 to the ISA account. The government contributions will continue until the ISA holder reaches 50.
Some or all of the capital can be invested in an ISA for purchasing a property after just one year. However the property must be the first home owned by the taxpayer and have a value of £450,000 or less.
Alternatively, savers can wait until 60 to use the capital as pension income. Unlike pensions however there is no tax to pay on withdrawing the funds. The tax relief on investment is equal to the current basic rate of tax. To this extent the new ISAs will be more attractive to basic rate taxpayers.
If the ISA fund is not used to buy a home or for a pension on reaching 60, any withdrawals would be subject to a 5% charge and loss of the government bonus. The measure is intended to assist young people saving towards a deposit on their first property.
From 6 April 2017, all savers will be able to contribute up to £20,000 a year into their ISA.
The Budget introduced some expensive tax breaks, with a particular focus on easing the burden for small business. However, with a stated policy of national deficit reduction, it remains to be seen whether this trend of fiscal policy can be upheld.