April 1st, 2016
Budget 2016 - Personal Tax Rates and Allowance
While every attempt will be made to ensure that information provided is accurate at the time of publication, it should be treated as guidance only and does not constitute legal or professional advice. Tax law and guidance changes frequently and readers are advised to consult the current relevant product for the most up-to-date information on this topic.
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Unless otherwise stated, all figures for future tax years have been taken from Annex B of the Overview of tax legislation and rates 2016.
For discussion of the wider Budget announcements, see the Budget 2016 — overview for individuals news item
2016/17 tax year
Income tax allowances
Income limit for personal allowance
Transferable tax allowance (also known as marriage allowance)
Married couple's allowance (born before 6 April 1935)
Minimum amount of married couple's allowance
Income limit for married couple's allowance
Blind person's allowance
Savings allowance (basic rate taxpayers)
Savings allowance (higher rate taxpayers)
The personal allowance for those born before 6 April 1938 (which was frozen at £10,660) is aligned with the basic personal allowance from 6 April 2016, which means the end of age-related personal allowances.
For 2016/17, the personal allowance is tapered where the taxpayer's adjusted net income is between £100,000 and £122,000. Those with adjusted net income of £122,000 or more are not entitled to a personal allowance.
From 6 April 2016 the new allowances for savings income and dividend income will come into force.
The savings allowance was announced in Budget 2015 and applies before considering the starting rate for savings (if that rate is appropriate). The first £1,000 of savings income of basic rate taxpayers and the first £500 of savings income of higher rate taxpayers is taxed at 0%. This policy ties in with the Government's aim of making tax digital, as by removing the need for many higher rate taxpayers in employment or receiving a pension to pay income tax on savings income this takes these people out of the compliance net completely.
The dividend allowance was announced at the Summer Budget 2015 and means the first £5,000 of dividend income is taxed at 0%. This applies irrespective of the individual's marginal tax rate and is part of a major change to the taxation of dividends, which also includes the abolition of the dividend tax credit and the change to the rates of tax on dividend income.
These allowances are discussed in more detail in the following guidance notes:
- Personal allowance
- Married couple's allowance
- Blind person's allowance
- Taxation of interest
- Taxation of dividends
Income tax rates and taxable bands
Starting rate for savings: 0%
Basic rate: 20%
Higher rate: 40%
Additional rate: 45%
The dividend rates are 7.5% (dividend ordinary rate), 32.5% (dividend upper rate) and 38.1% (dividend additional rate). However as the dividend tax credit has been abolished, this changes the effective tax rate for dividends (and the dividend allowance must also be considered, as mentioned above).
In 2016/17 the higher rate will kick in at an income level (before personal allowances) of £43,000 (rather than £42,385 as in 2015/16).
The rates of tax are discussed in more detail in the following guidance notes:
For more detailed information on the need to inform HMRC of a liability to tax (which may be the case for those becoming higher rate taxpayers who have savings or dividend income), see the Notification of chargeability guidance note.
National insurance rates and thresholds
2016/17 (amount per week unless otherwise stated)
Lower earnings limit, primary Class 1
Upper earnings limit, primary Class 1
Upper secondary threshold
Employment allowance (per employer)
£3,000 per year
Employees' primary Class 1 rate between primary threshold and upper earnings limit
Employees' primary Class 1 rate above upper earnings limit
Employers' secondary Class 1 rate above secondary threshold
Class 1A rate on employer-provided benefits
Class 1B rate on amounts included in a PAYE settlement agreement
Class 2 rate
Class 2 small profits threshold
£5,965 per year
Class 3 rate
Class 4 lower profits limit
£8,060 per year
Class 4 upper profits limit
£43,000 per year
Class 4 rate between lower profits limit and upper profits limit
Class 4 rate above upper profits limit
Since 6 April 2015 there has been an exemption from secondary Class 1 national insurance contributions in relation to an employee who is under 21 (until the employee's earnings reach the upper secondary threshold, at which point secondary contributions are due). From 6 April 2016 this exemption is extended to apprentices under 25 years old. This has necessitated the introduction of the upper secondary threshold so that the contributions due on earnings in excess of this limit can be collected via the payroll. It is hoped that this exemption will act as a financial incentive to employers to take on younger workers and tackle the high unemployment figures in this age group.
The state pension will be reformed into a single-tier pension from 6 April 2016, meaning that the state second pension (S2P) is abolished. This means it will no longer be possible for employees to contract-out and so:
- all employees will pay the contracted-in rates of primary Class 1 national insurance (ie 12% between the primary threshold and the upper earnings limit and 2% above the upper earnings limit)
- all employers will pay the contracted-in rates of secondary Class 1 national insurance (ie 13.8% on earnings above the secondary threshold, subject to the under-21 or apprentice under-25 exemptions discussed above)
From 12 October 2015 a new temporary class of voluntary contribution, Class 3A, was introduced to allow people who reach state pension age before 6 April 2016 the opportunity to build up their state pension entitlement by up to £25 per week. Contributions can be made until 5 April 2017. The amount payable depends on the amount of extra state pension wanted and the age of the individual.
National insurance rates and amounts and the state pension (including Class 3A contributions) are discussed in more detail in the following guidance notes:
- National insurance contributions for unincorporated businesses
- PAYE settlement agreements
- State pension
- Employment allowance
Capital gains tax rates and exempt amount
The main rates of capital gains tax have been cut from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate taxpayers, trustees and personal representatives. The 18% and 28% rates will still apply to gains on residential property and carried interest. The rate of tax for ATED-related gains will remain 28%.
The reduction in the rates of capital gains tax is welcome as (unlike companies) individuals, trustees and personal representatives no longer benefit from indexation allowance or any relief which takes into account the length of ownership of the asset. This means that the longer the asset has been held prior to disposal, the greater the amount of the gain which relates to the inflationary increase.
The annual exempt amount for capital gains tax remains frozen at £11,100 in 2016/17. The annual exempt amount for trustees in 2016/17 is £5,550.
The capital gains tax rates remain the same for individuals, personal representatives and trustees.
The nil rate band remains £325,000 and the rate of inheritance tax remains unchanged.
As announced in Summer Budget 2015, the nil rate band will remain frozen until 2021/22 at the earliest (due to the introduction of the residence nil rate band from 2017/18, see below).
2017/18 tax year
Income tax allowances
The Chancellor announced in the Budget that the personal allowance for 2017/18 will be £11,500 (an increase of £500). The transferable tax allowance for 2017/18 will be £1,150.
Blind person's allowance, the maximum and minimum married couple's allowance and the income limit for the married couple's allowance will remain at 2016/17 levels.
The income limit for the personal allowance remains £100,000, meaning this has not been uprated since it was introduced in 2010/11.
The Chancellor announced new allowances for property and trading income which will apply from 2017/18. The allowances are targeted at micro-entrepreneurs and will be of little use to those with higher levels of property or trading income. It appears that the first £1,000 gross income (before expenses) will be exempt from tax and it will apply regardless of the taxpayer's marginal rate of tax. However, those with property or trading income above £1,000 can either:
- deduct the £1,000 from their gross income and be taxable on the excess, or
- deduct allowable expenses in the normal way
Budget 2016 report, para 2.25
Income tax rates and taxable bands
The basic rate band limit for 2017/18 will be £33,500 (an increase of £1,500). This means that the higher rate will kick in at £45,000 (rather than £43,000 as in 2016/17). This is the biggest above inflation cash increase to the threshold since it was introduced in 1989.
Budget 2016 report, para 1.85
The higher rate band limit for 2017/18 will remain £150,000.
National insurance thresholds
The upper earnings limit for Class 1 (and presumably the upper profits limit for Class 4) will be aligned with the higher rate threshold, ie £45,000. Although this continued alignment is welcome from an administration point of view, it does mean that more earnings are taxable at the main rates of national insurance.
Budget 2016 report, para 2.21
As announced in Summer Budget 2015, the residence nil rate band is to be phased in from 2017/18. The residence nil rate band will apply to reduce the inheritance tax payable on death but is restricted to the value of residential property included in the death estate which is passed to direct descendants.
The amount of the residence nil rate band available where the date of death falls in 2017/18 is £100,000. For full details, see the Residence nil rate band guidance note.
2018/19 tax year
Class 2 contributions are to be abolished from April 2018.
Budget 2016 report, para 2.23
Employers' national insurance contributions will apply to the excess of termination payments over £30,000 (ie those payments falling within ITEPA 2003, s 401).
Budget 2016 report, para 2.26
The amount of the residence nil rate band available where the date of death falls in 2018/19 is £125,000. See the Residence nil rate band guidance note.
Planning for 2016/17 for owner-managers of companies
Normally the continuation of generous tax-free allowances would be beneficial to owner-managers of companies who have adopted a low salary / high dividend strategy for profit extraction. However, with the changes to dividend taxation from 6 April 2016, this method of profit extraction may prove more expensive, although this depends on the level of dividend income as the interaction with the £5,000 dividend allowance may mean that those with lower levels of dividends will pay less income tax.
Even with the dividend changes, a business owner could conceivably extract profits of £16,000 in 2016/17 (£11,000 of salary plus £5,000 interest on capital loaned to the company) for no tax charge. Although a small amount of primary Class 1 national insurance would be due, the secondary contributions may be covered by the employment allowance. If the business owner is a basic or higher rate taxpayer then greater levels of loan interest could be extracted due to the savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers).
HMRC is likely to challenge anything that does not represent a commercial rate of interest, therefore in order to justify this level of interest a significant loan account would be required.
Nonetheless, where a business owner has not previously considered paying interest on loans or undrawn remuneration, this measure might provide a useful discussion point to review the situation.
It is also worth considering maximising tax efficient employment benefits for business owners, particularly pension contributions (see below).
Certain investments give rise to tax reductions:
- the seed enterprise investment scheme (SEIS), see the Seed enterprise investment scheme — tax relief guidance note
- the enterprise investment scheme (EIS), see the Enterprise investment scheme tax relief guidance note
- venture capital trusts (VCTs), see the Venture capital trusts tax relief guidance note
- social investment tax relief, see Simon's Taxes Division E3.9
These investments may be attractive to individuals as a way of reducing their tax liability.
Tax efficient remuneration packages
With the current level of income tax and national insurance rates, tax-efficient remuneration packages are attractive to employers and employees. You may wish to contact clients who are employers to discuss non-taxable benefits packages and salary sacrifice arrangements.
See the Non-taxable benefits guidance note for some of the more popular tax and NIC free benefits. The benefits and mechanics of salary sacrifice arrangements are discussed on the GOV.UK website and in the Setting up a salary sacrifice arrangement guidance note. There are some practical points raised in Simon's Taxes E8.269F and E4.1219. Remember, a salary sacrifice arrangement cannot reduce the employee's salary to below the national minimum wage.
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