Philip Hammond thankfully resisted any temptation to tinker further with pensions and instead announced some welcome changes to Income Tax thresholds, which creates a significant saving for some.
Below is a summary of the measures that impact on financial planning. We will of course take all of this into account when advising on an individual basis, but the purpose of this summary is to try and highlight the main points that may impact on you and add some commentary on the potential benefits to people in individual situations.
In line with current policy, the Lifetime Allowance (LTA) is due to increase for the 2019/2020 tax year based on the September 2018 CPI figure. The current LTA is £1,030,000 and September’s CPI was 2.4%, so strictly speaking if you increased this mathematically this would increase to £1,054,720. But this has been rounded to £1,055,000.
The LTA is therefore increasing by £25,000, meaning that it may be better to wait until after 6th April 2019 to vest pension benefits.
Tax Thresholds and Allowances
The Budget announced the following thresholds and allowances will take effect from 6 April 2019. None of the rates at which these taxes are charged have been amended.
- Personal allowance will rise to £12,500
- Higher rate threshold will increase to £50,000
- Starting rate for savings income will remain unchanged at £5,000
In the current tax year, the Personal Allowance is £11,850 and the higher rate threshold is £46,350. A Basic Rate taxpayer will save £130 due to the increased Personal Allowance. Someone earning or drawing a pension of £50,000 per annum, for example, will save a further £730 per annum in Income Tax.
However, the rate at which employee National Insurance is applied at 12% is also increasing to £50,000, from £46,350. Consequently, the saving as a result of the extension of the Basic Rate tax threshold for someone earning £50,000 is actually 10% of the increase, as there is a 20% tax saving but a 10% National Insurance increase on this tranche of income.
The impact on someone paying employee National Insurance and earning £50,000 per annum will be a total saving of £520, compared to the 2018/19 tax year. This only applies to employees under State Pension Age. Workers over State Pension Age and people in receipt of pension income do not pay employee National Insurance.
The main advantage is to business owners drawing income in the form of dividends, with a minimal salary. This is especially so if a couple split the share ownership and therefore each use all of their own available tax allowances.
Dividends are taxed at 7.5% at the Basic Rate and 32.5% at the Higher Rate. Therefore, the £3,650 increase in the Basic Rate threshold reduces the taxation of this tranche of income by 25%.
The impact of the Budget on a business owner drawing £12,500 per annum as a salary and £37,500 per annum as dividends will therefore be a saving of £1,068, compared to the 2018/19 tax year.
Capital Gains Tax
The Annual Exempt Amount for capital gains will increase to £12,000 for individuals and £6,000 for trusts.
- The nil rate band remains unchanged at £325,000
- The residence nil rate band will increase to £150,000 as previously planned
Private Residence Relief
The Budget announced a reduction to 9 months in the final period exemption which exists under Private Residence Relief. Currently where the property has at some point been used as the owner’s main residence the final 18 months of ownership are exempt from CGT whether or not the property was occupied by the owner during this time.
There have also been changes made to lettings relief which currently provide up to £40,000 of relief to those who let out a property which was previously used as a main residence. From April 2020 the relief will only be available where the owner is in shared occupancy with the tenant.
ISAs and Child Trust Funds
The adult ISA limit will remain at £20,000 for another while the Junior ISA and Child Trust Fund limits will be increased by CPI from £4,260 to £4,368.
Taxation of Trusts
The Government confirmed that they will publish a consultation on how to make the taxation of trusts simpler, fairer and more transparent. The previous proposals resulting from the consultation on inheritance tax charges in 2014 did not result in any significant changes. Given that we have been waiting on this for over a year and a half now it will be interesting to see what they propose and what impact the Office of Tax Simplification (OTS) report on IHT may have had.
Increasing IR35 off-payroll working rules in the Private Sector
As expected, the Chancellor will introduce rules mirroring those that were brought into place for public authorities, for private sector firms. The rules apply to those that are either working through their own company, a business agency or a third party paying their company. The public authority rules raised £550m a year in 2017/18.
To be clear, this does not affect the self-employed, as their gross profit less expenses, are taxed under income tax rules already.
The rules will be introduced from April 2020 and applies to large and medium business (the smallest 1.5m business will not be affected by this change).
Private sector firms will have to assess if contractors fall into this category, criteria such as having contracted hours and agreed “overtime” payments are details as classifying a contractor as an employee.
The onus will now be on the contracting firm to establish the tax and NI status of whomever they hire. If the contractor does fall into this category, the private sector firm will have to pay employers NICs to the revenue. Furthermore they will have to deduct employees NI and deduct income tax from these payments.
There were two changes to this relief.
To qualify for entrepreneurs relief a company must be deemed to be a trading company. The legislation provides that a company still counts as trading if their activities do not include to a “substantial extent” activities other than trading activities. As long as the company’s non-trading activities do not exceed 20% of its business overall entrepreneurs relief can be claimed.
The period for which a company must be classed as a trading company before disposal is to increase from 1 year to 2 years. This change will come into effect for disposals on or after the 6th April 2019.
It must also qualify as a personal company and the requirements for this have been extended. From 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief. This is to address an identified abuse of the current rules.
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