The Budget – Personal + Employment taxes

Garbutt + Elliott, accountants in York and Leeds, respond to the 2016 budget on topics including personal allowances, capital gains tax and employment taxes.

Personal Allowances

The Personal Allowance is currently £10,600, increasing to £11,000 from April 2016. The allowance from April 2017 had been previously been announced at £11,200, but this has now been increased further to £11,500.

The higher rate threshold is currently £42,385 and will increase to £43,000 from April 2016. The April 2017 threshold was previously announced at £43,600, but this Budget has increased it further to £45,000. The Chancellor crowed that this will take 500,000 people out of higher rate tax, but it is worth noting that it only places higher rate taxpayers in a slightly better position than they would have been had the higher rate allowance moved in line with inflation.

Capital Gains Tax

In the Government’s efforts to “encourage a culture of investment”, the rates of Capital Gains Tax (CGT) are being reduced and a new extension to the 10% Entrepreneurs’ Relief rate is being introduced:

Reductions in the Capital Gains Tax rates

From April 2016, the higher rate of CGT will be cut from 28% to 20% and the basic rate from 18% to 10%. However, these new lower rates do not apply for residential property, which will continue to be taxed at the current 18% and 28% rates.

It is worth remembering that CGT on residential property does not apply to your main home, only to additional properties. This may typically include letting properties or second homes – but some second homes may qualify for full or partial relief from CGT, depending on the circumstances.

Whilst those with stocks and shares will be happy, the Chancellor appears to continue his attack on property investors with second homes and buy-to-let, who will continue to pay the higher 28% rate of tax.

Extension to the 10% Entrepreneur’s Relief rate

In addition, a new 10% rate of CGT will be introduced from April 2016 for those who invest in unquoted trading companies. To qualify, the individuals must have subscribed for newly issued shares on or after 17 March 2016 and those shares must be held for at least three years (starting from no earlier than 6 April 2016). This is subject to the same lifetime cap of £10m as the existing Entrepreneurs’ Relief (ER) rules.

This appears to be a relaxation to the current ER rules, under which to qualify for the 10% rate, an individual needs to have at least 5% of the ordinary shares (and voting rights), be an officer or employee, and have been in that qualifying position for at least one year prior to disposal.

Whilst the existing one year ER criteria will continue to be the better option for those who can qualify, for those who are not directors or employees, or who do not have the requisites 5% shareholding, this extension to ER will be beneficial. It is important to note that this is only forward-looking from April 2016, so the first claims to this new 10% rate will only occur from April 2019 onwards.

Class 2 National Insurance contributions (NICs) for self-employed people will be scrapped from April 2018

Currently, self employed people have to pay Class 2 NICs at £2.80 per week if they make a profit of £5,965 or over per year. They also pay Class 4 NICs at 9% if their profits are over £8,060 per year (reducing to 2% on profits over £42,385).

It is the payment of Class 2 NICs that currently enables self-employed people to build entitlement to the State Pension and other contributory benefits. Class 4 NIC has no effect on state benefits entitlement; it is in essence an additional tax on profits.

From April 2018, Class 2 NIC will be abolished and only Class 4 NIC will be paid on their profits. We understand that after April 2018, Class 4 NICs will be reformed so self-employed people can continue to build benefit entitlement.

Employment Taxes

Employers will pay National Insurance on pay-offs above £30,000 from April 2018

Certain forms of termination payments are exempt from employee and employer National Insurance contributions and the first £30,000 is Income Tax free.

The Government aims to tighten the scope of the £30,000 exemption and prevent what they perceive as manipulation of the rules, by introducing an employer’s NIC charge (currently 13.8%) on those payments above £30,000 that are already subject to Income Tax.

Employee Shares                  

For new Employee Shareholder Status shares issued from 16 March 2016 onwards, there will now be a lifetime limit of £100,000 for gains to be exempt. Previously there was no limit on the amount that could be tax-free.

Company Car Tax Changes

HMRC have clearly recognised that many company cars are now electric and hybrids, and have taken action to increase the scale charge benefit for them. Prior to April 2015, cars with CO2 emissions below 50g/km (which would be one of today’s typical petrol hybrids) benefitted from 0% appropriate percentage (i.e. the percentage applied to the car’s list price to calculate the taxable benefit).

However, this is very rapidly increasing over the coming years, with the 2019/20 rate being announced in this Budget:

2014/15                0%

2015/16                5%

2016/17                7%

2017/18                9%

2018/19                13%

2019/20                16%

Zero Emission Company Vans

It was announced back in 2014 that the taxable benefit for zero-emissions vans would be 20% of that of conventionally fuelled vans for the 2015/16 tax year (currently a van benefit is £3,154 and the fuel benefit is £594), increasing to 20% for 2016/17, 60% in 2017/18, 80% in 2018/19, 90% in 2019/20 and finally the charge was the same for all vans by 2020/21.

In a change of plans, the 20% rate will now continue to apply for zero-emission vans beyond 2015/16 for a further two years – continuing into 2016/17 and 2017/18. It will then increase to 40% in 2018/19, 60% in 2019/20, 80% in 2020/21, 90% in 2021/22, before all vans are taxed the same from 2022/23.

For advice on any of the topics covered, please contact Richard Whitelock or enquiry@garbutt-elliott.co.uk