Budget 2017: The effect on individual taxpayers

On the 8th March, the Chancellor, Phillip Hammond delivered his first (and last) Spring Budget. This was a Budget to “prepare Britain for a brighter future” and to build “the foundations of a stronger, fairer, more global Britain”.

Compared to previous Spring Budgets, this was somewhat tame with only a handful of tax announcements. Perhaps this is a sign that the Chancellor will save more widespread changes for the new Autumn Budget expected later this year.

We have summarised below the changes and announcements made in the Budget 2017, which will affect individual taxpayers.

Personal allowance & higher rate threshold

Mr Hammond confirmed that the personal allowance will increase to £11,500 and the higher rate threshold will increase to £45,000 from April 2017. This was previously announced in the Autumn Statement. It is the Government’s intention for the personal allowance to reach £12,500 and the higher rate threshold to reach £50,000 by 2020/21.

According to the Government, this measure will benefit 29 million individuals and an estimated 400,000 people will be taken out of tax entirely as a result of these changes.

A summary of the rate has been set out below:


Tax year Personal allowance (£) Higher rate threshold (£)
2014/15 10,000 41,865
2015/16 10,600 42,385
2016/17 11,000 43,000
2017/18 11,500 45,000
2018/19 11,800 (estimate) 46,500 (estimate)
2019/20 12,100 (estimate) 48,000 (estimate)
2020/21 12,500 (stated aim) 50,000 (stated aim)


Dividend allowance

The 0% dividend allowance rate will be reduced from £5,000 to £2,000 with effect from April 2018. This will impact on SME business owners who extract profits from their companies via dividends and also individuals with dividend income in excess of £2,000 from investments.

EXPERT VIEW – DARREL BOOTH, HEAD OF TAX

We have reviewed the effect of this change at various profit rates, for our typical husband and wife owner managed businesses trading through Limited companies. We can advise that although there are some small increases in 2017/18, by the time we get to 2020/21 these have reversed and everyone is back at broadly the same levels as for the current year.


National Insurance

The chancellor has confirmed that Class 2 NIC will be abolished as planned in April 2018. However, we will now see an increase in Class 4 NIC for the Self-Employed with the main rates increasing to 10% from April 2018 and a further 1% increase from April 2019 to 11%.

Taking both measures together, actual increases in National insurance for the Self-Employed will only be felt at profit levels exceeding £16,250.

UPDATE – 15TH MARCH

The Chancellor, Phillip Hammond has backed down over his planned Budget for the increase in Class 4 NICs for the self-employed, in a letter to Conservative MPs. The plan to increase National Insurance levels for self-employed people, have today been dropped.


National savings & investments bond

A new NS&I bond was confirmed which will be available from April 2017. The new bond will pay 2.2pc on savings up to £3,000. Although this income will be taxable, the new personal savings allowance will mitigate any tax for most people.

According to the Chancellor, the bond is “a welcome break for hard-press savers”. However, we understand that new bond will pay just £6.00 more per year than compatible products on the open market.

EXPERT VIEW – PAUL LINDFIELD

The announcement of the new National Savings Bond was slightly disappointing. With a three year term, maximum deposit of £3,000 and an interest rate of 2.2% it offers little that isn’t already available on the high street


Inheritance tax

There were no changes announced on Budget day in relation to Inheritance tax. It’s worth remembering that the new residence nil rate band comes into effect from April this year. It applies to family homes which are passed down to direct descendants, such as children or grandchildren.


Tax relief on pensions

There had been industry noise against the proposed reduction in the Money Purchase Annual Allowance for Pensions (which applies to some people drawing pension benefits) from £10,000 to £4,000 but the Treasury have stuck to their proposals.

The only significant rule change is the introduction of an additional tax on pension transfers to overseas pension schemes known as QROPS. A new tax charge of 25% has been introduced with immediate effect. Whilst this is a significant change to QROPS transfers, by its very nature, this only affects a very small number of people.


Buy-to-let landlords

There were no new announcements affecting buy-to-let Landlords, however the new rules around tax relief on finance costs come into effect from April 2017. Despite significant lobbying, the Government are sticking to the changes announced in 2015.

From April, the deductibility of finance cost incurred in connection with property letting businesses will be limited to the basic rate of income tax. In practice, this will mainly be mortgage interest.

This changed will be phased in over a 4 year period starting from April, as shown in the following table:

Tax year Deduction
2017/18 Deduction from property income will be restricted to 75% of the finance costs.
25% will be available as a basic rate tax reduction.
2018/19 50% finance costs deduction.
50% basic tax rate deduction
2019/20 25% finance costs deductio.
75% basic tax rate deduction
2020/21 From here onwards, all finance costs incurred by a landlord
will be given as a basic tax reduction




EXAMPLE

We’ve set out a recap on the rules below, along with a numerical example:

Consider a buy to let investor who has a property worth £160,000. This was funded via a cash deposit and an interest only mortgage of £100,000. The interest rate on the mortgage is 5%. The following table compares the tax cost under the current rules to that under the new rules.


How does the Budget 2017 affect you & your business?

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