The Budget 2017 and how it will impact you – Personal Tax
Many had predicted this Budget to be a relatively low-key event, with Chancellor Philip Hammond – gearing up for his first Autumn Budget later this year – perhaps keeping back any major tax changes for then. Indeed, many of the main tax changes taking effect from next month were announced well in advance.
The predictions were correct, as there were few tax announcements in the Chancellor’s Budget and the press releases that were issued shortly after Mr Hammond sat down. Below is a summary of the key personal and employment taxes announcements:
Personal Allowance and the Higher Rate threshold
Previously confirmed in last November’s Autumn Statement, the Chancellor reiterated the government’s promise to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020. He confirmed that the personal allowance will rise from the current level of £11,000 to £11,500 from April, while the higher rate threshold will increase from £43,000 to £45,000.
It is worth noting that a corresponding National Insurance threshold increase will mean the Income Tax savings will be diluted for higher earners. For example, someone earning £25,000 a year will see their PAYE tax bill fall from £2,800 to £2,700, while someone earning £50,000 will see their PAYE tax fall further, from £9,200 to £8,700.
However, as the Employee’s NIC Upper Earnings limit increases also from £43,004 to £45,032, this will pull earnings that were previously subject to Employee’s NIC at 2% into the 12% bracket. For an individual earning £25,000 a year, the increase in the Primary Threshold (from £8,060 to £8,164) will mean their Employee’s NIC bill will drop from £2,033 to £2,020. On the other hand, someone earning £50,000 will see their bill increase, from £4,333 to £4,523.
Making Tax Digital
HMRC’s digital plans with Making Tax Digital (MTD) were announced last autumn, with a planned April 2018 roll-out for quarterly reporting by unincorporated businesses and property landlords.
After a consultation period that saw forceful opposition to the government’s plans and timescale, HMRC announced in late January that it would still press ahead regardless with the April 2018 roll out, but give further thought to the turnover level above which businesses will be required to make quarterly returns.
The Chancellor confirmed that unincorporated businesses and landlords with turnover below the VAT threshold – £85,000 from April – will have an extra year before MTD applies. The Budget press releases confirmed when businesses, self employed people and landlords will be required to start using the new digital service from, depending on their qualifying criteria and circumstances:
- April 2018 if they have profits chargeable to Income Tax, pay Class 4 National Insurance Contributions (NICs), and turnovers are in excess of the VAT threshold
- April 2019 if they have profits chargeable to Income Tax, pay Class 4 NICs, and turnovers are below the VAT threshold
- April 2019 if they are registered for and pay VAT
- April 2020 if they pay Corporation Tax
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from the MTD requirements.
Dividend allowance reduced from April 2018
The dividend taxation rules were only recently changed in April 2016, with the introduction of a £5,000 dividend allowance and an increase of 7.5% in the rates of tax then applied to dividend income across all tax bands:
First £5,000 of dividends 0%
Basic rate band dividends 7.5%
Higher rate band dividends 32.5%
Additional rate band dividends 38.1%
Barely a year into the new dividend regime, HMRC has changed its mind, believing that the main beneficiaries of the £5,000 dividend allowance are business owners who pay themselves by way of low salary and dividend.
In an attempt to ensure that investors still benefit from the allowance (when coupled with the increases to the tax-free personal allowance and ISA allowance), and at the same time partially reduce the tax difference between the self-employed and those working through a company, HMRC decided to reduce the dividend allowance from £5,000 to £2,000 from 6th April 2018.
Such a minor change will not affect tax planning for owner-managed businesses, and this will mean that higher rate business owners taking tax efficient low salary and dividends will pay only an extra £225 in tax from April 2018. Some investors with sizable share portfolios will also see their tax increase, although the Budget press release states that 80% of general investors will still pay no dividend tax.
Off-payroll working in the public sector
The off-payroll rules (often known as IR35, or ‘the intermediaries legislation’) were first introduced back in 2000 to ensure that individuals who work through their own Personal Service Company (PSC) pay broadly equivalent taxes as employees, where they are directly employed.
HMRC announced changes well in advance of this Budget to change the IR35 rules for engagements in the public sector from 6th April 2017. The changes can be summarised as follows:
- If a PSC works directly for a public sector body, the public sector body is responsible for determining whether IR35 applies and, if so, must deduct tax/NIC from any payments made to that PSC.
- If a PSC works for a public sector body via an agency, the public sector body is responsible for determining whether IR35 applies. If IR35 applies, it must inform the agency, which must then deduct tax/NIC from any payments made to that PSC (assuming it is the fee payer).
- If a PSC works for a public sector body via a consulting or outsourcing specialist (i.e. an intermediary), the public sector body is responsible for determining whether IR35 applies. If IR35 applies, it must inform the intermediary, which must then deduct tax/NIC from any payments made to that PSC (assuming it is the fee payer).
These changes do not affect workers and PSCs who provide their services to private sector organisations, although whether these changes are rolled out into the private sector in years to come remains to be seen.
In addition, the 5% allowance currently available to those who apply the IR35 rules to reflect the costs of administering the rules will be removed for those who work in the public sector.
Ahead of these changes, HMRC has released a new digital Employment Status Service to help identify whether engagements fall within the off-payroll rules. This is an updated version of the now-obsolete Employment Status Indicator (ESI) tool. Using this tool is optional and will give the HMRC view of the employment status. However, we found the old ESI tool to be unreliable, so it remains to be seen how the updated version will perform.
Help and advice
Although some of the measures will not be implemented until a few months from now, it is important to be prepared for any changes that could affect your financial affairs.
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