Spring Budget 2017: Private Client
Fairness, and the need to raise additional taxes from those perceived to be more able to make further contributions, were the key justifications behind several of the changes announced today. The reduction in the dividend allowance and the increase in national insurance for self-employed individuals aim to start levelling the playing field between those who provide their services in different ways, although some may view these as counter to the desire to create an economy that supports entrepreneurs. For a lot of private clients, however, the budget was relatively insignificant.
Class 4 NICs
In a measure designed to reduce the difference between the tax positions of employees and self-employed individuals earning the same amounts, the rate of Class 4 National Insurance Contributions (NICs) will increase by 1% to 10% in April 2018, and by a further 1% the following year. The first increase will come in alongside the previously announced abolition of Class 2 NICs. The combination of the additional charge and the saving will mean that only those individuals earning more than £16,250 will pay more NI.
Update: After must resistance to this measure, the Chancellor has announced that there will be no National Insurance increases during this parliament so this change will not proceed.
One of the Chancellor’s main justifications for this move is that there is now little difference in the benefits to which employed and self-employed individuals are entitled. This is undoubtedly the case, but many self-employed individuals will still feel aggrieved at this “levelling of the playing field”, given their lack of employment rights, entitlement to paid holiday and assurance of job security.
Update: The Chancellor will still be tackling the growth of self-employment and the gig economy and the perceived threat this causes the Treasury. If he does not do this through National Insurance changes, we may see fewer individuals being able to claim this status in the first place with a more draconian attack on the self-employed. Depending on how far the Chancellor goes, the NI changes which have now been scrapped may in the long term have had less impact on the sector.
Reduction in dividend tax allowances
The tax-free dividend allowance available to all UK taxpayers will reduce from £5,000 to £2,000, with effect from 6 April 2018.
This reduction will affect private company owners, as well as individuals with significant non-ISA shareholdings, with those paying tax at the top rate due to suffer an increase of up to £1,143 in their tax liabilities each year. This may also bring yet more taxpayers into Self Assessment when HMRC are trying to reduce that number. With a year to plan for the changes, private company owners may wish to reconsider their level of company dividends. Other investors could be able to take advantage of increased ISA limits to shelter these dividends from income tax.
Qualifying Recognised Overseas Pension Schemes (QROPS)
Transfers to QROPS requested on or after 9 March 2017 will be taxable at the point of transfer unless:
1) both the individual and the pension savings are in the same country, or
2) both are within the European Economic Area (EEA), or
3) the QROPS is provided by the individual’s employer.
If none of these exemptions apply, a 25% tax charge will be deducted before the transfer is made by the administrator or manager of the transferring scheme. Charges will also apply to an otherwise tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer. Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.
The charge will not apply for those retiring within the EEA and using an EEA based QROPS. However, for more internationally mobile retirees who wish to settle in a jurisdiction outside the EEA, this limits the options and potentially increases risks.
Below is a summary of the measures previously announced:
From April 2017, the personal allowance will increase to £11,500 (from £11,000) and the higher rate threshold to £45,000 from (from £43,000). This is a move towards the government’s aspiration that the personal allowance will be £12,500 by the end of this parliament, with no-one paying tax at 40% until their earnings exceed £50,000.
Pensions and Tax Savings
The annual ISA allowance increases from £15,240 to £20,000 from 6 April 2017.
Also from April 2017, the amount that can be put back into a pension scheme by those who are already drawing down, will be significantly reduced, with the Money Purchase Annual Allowance being reduced from £10,000 to £4,000.
Reforms to the taxation of non-domiciled individuals from 6 April 2017
From 6 April 2017, non-UK domiciled individuals will become deemed UK domiciled if they have been UK tax resident for 15 out of the previous 20 years.
As part of this reform, there are opportunities in relation to treating non-UK assets as if they were purchased on 6 April 2017 for capital gains tax purposes and cleaning up mixed bank accounts; these will soften the blow to those who will now lose their non-domicile status.
Taxation of UK residential property held through non-UK structures
From 6 April 2017 the transfer of UK residential property will always be subject to inheritance tax, even when held indirectly through an offshore structure. This change is intended to make all non-UK structures ineffective as a shelter for inheritance tax, and these structures should therefore be reviewed.
Business Investment Relief
The Business Investment Relief rules for non-domiciled individuals will be widened from 6 April 2017 with a view to increasing its usage.
New Tax Allowance for Property and Trading Income
Two new income tax allowances of £1,000 each for trading and property income will be effective from 6 April 2017 so individuals with trading and/or property income below this level will not need to declare it to HMRC.