Budget Tax Changes
Mr Hammond’s first and last March Budget was a relatively low-key affair. Once the general election was announced, its profile shrunk even lower, as most proposals were shelved. In theory, from now on there will be Autumn Budgets each year, with the first of the new breed due later this year. However, despite the general election muddying the waters, there are still some measures to bear in mind.
Dividend allowance and business structures
The £5,000 dividend allowance, introduced by George Osborne, was represented as a tax reduction for many people, but was aimed at raising extra tax. The tax rates on dividends above the allowance were increased to claw back revenue from small business owners who sidestep national insurance contributions (NICs) by operating through companies. In March Mr Hammond said that the dividend allowance would be cut to £2,000 from 2018/19. This would have been the biggest Budget tax raising measure, but in the frenetic end of parliament period the necessary legislation was dropped.
Raising Class 4 NICs
The Chancellor had also looked for more money from sole traders and partnerships by proposing to raise class 4 NICs by 1% in 2018/19 and again in 2019/20.
However, backbench opposition to this measure meant it was withdrawn even before reaching the Finance Bill. Given the underlying aim to make the tax and NIC system more consistent, this is very unlikely to be the end of that story.
The dividend allowance cut, which is expected to be reinstated, was aimed at shareholder directors but it has wider ramifications. Far more ordinary investors would find themselves paying tax on their dividends with the allowance at only £2,000. For example, at current average UK FTSE 100 stock market dividend yields, about £57,500 of shares will produce £2,000 of dividends. If you had thought stocks and shares ISAs were becoming a waste of time, the potentially lowered dividend allowance (and new £20,000 ISA contribution limit) should prompt a re-think. Contact us about tax planning
Higher rate income tax threshold
Mr Hammond confirmed the goal of a £50,000 higher rate income tax threshold by 2020/21, but gave no indication of how this will be reached. He left untouched last year’s legislation raising the threshold for 2017/18 to £45,000 (other than for certain income in Scotland). The benefit of this £2,000 increase may not be as significant as it at first appears, as the upper limit for class 1 employee and class 4 NICs has also risen by £2,000. So a saving of £400 in tax could be offset by a near £200 NICs increase. As with the likely dividend allowance change, the higher rate threshold is a reason to revisit the opportunities presented by independent taxation if you are married or in a civil partnership. At present a couple can – in theory, at least – enjoy a £45,000 annual income with no tax liability if they have the right type of income in the right hands. Talk to us
Company cars: two turns of the screw
If you have a company car, the new tax year brought two pieces of bad If news. Firstly, in most instances there was a 2% increase in the car benefit rate – the percentage applied to the car’s list price to calculate its taxable benefit. Because the 2% was almost universal, the highest proportionate tax increases were for the lowest emission vehicles. Secondly, if your company car is part of a salary sacrifice arrangement, then be warned that when you change cars (or April 2020 if earlier), you will be taxed on the salary forgone unless the taxable value of your car is higher.
The Financial Conduct Authority does not regulate tax advice. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate will writing and some forms of estate planning. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.