Spring Budget 2017
The spring budget delivered by Philip Hammond was unusually light with only 28 measures. However, a few of the changes will have a significant impact on many taxpayers. The government is clearly trying to deal with what they perceive as tax imbalances between employees and those who are self-employed or operate Limited Companies. Given that the country is £1.7 trillion in debt (which works out at c. £62k per family!), we can expect more tax hikes in future. The key headlines were:
Increase in Personal allowance for individuals and the basic rate tax limit
This is good news for all taxpayers as the government announced that from April 2017, the personal allowance will increase by £500 to £11,500 and the basic rate band by £1,500 to £33,500.
As an example, if you have annual earnings of £45,000, you would previously have paid £7,200 in income tax. This would reduce to £6,700 from April 2017, saving £500 in tax.
National insurance for self-employed individuals
Currently self-employed individuals will pay Class 4 NICs on profits between £8,060 and £43,000 at a rate of 9% and 2% on profits in excess of £43,000. The maximum payable at 9% is therefore £3,144.60.
From April 2017, the 9% will apply to profits between £8,164 and £45,000. The maximum payable at 9% is therefore £3,315.24.
From April 2018, Class 4 NIC will increase by 1% to 10%. From April 2019, it will then increase by a further 1% to 11%. So based on the current bands, the maximum payable at 10%/11% will increase to £3,683.60 and £4,051.96 respectively.
Class 2 NICs will be abolished as previously announced. On average, individuals will see an increase to their annual NICs by approximately £240 per year.
Currently taxpayers receive a £5,000 tax-free dividend allowance. After this, dividends at the basic rate are taxed at 7.5%, 32.5% in the higher rate and 38.1% in the additional rate.
From April 2018, this allowance will reduce to £2,000 which is aimed at director shareholders operating and extracting funds through a Limited company.
This will result in additional tax of £225 for those taking annual dividends of £5,000 or more.
As a reminder, here are the key changes which will be applied from April 2017 (some announced in previous budgets):
Personal tax changes from April 2017:
- ISA allowance will rise by £4,760 to £20,000
- Personal allowance will increase by £500 to £11,500
- The threshold for paying higher rate tax will increase by £2,000 to £45,000
- The Lisa (Lifetime ISA) is launched with a saving limit of £4,000 per year, the government topping up with a 25% bonus i.e. £1,000.
- Buy-to-let mortgage interest rate relief is phased out starting with only 75% relief in 2017.
- Two new annual allowances of £1,000 for trading and property income.
Company tax changes from April 2017:
- Corporation tax rates will drop by 1% to 19%
- New category for limited cost traders on the VAT flat rate scheme takes effect with a flat rate of 16.5%. If total spend on “relevant goods” for the period is less than either £250 or 2% of gross sales then the 16.5% rate must be adopted. This is seen as another measure to reduce the benefit contractors get when working through Limited Companies.