The Chancellor, Philip Hammond, presented his first Autumn Statement today. However, there weren’t many surprises for small and medium sized businesses. The Autumn Statement was pitched as pro-business and aimed to reassure firms that the UK is open for business and ready for any turbulence from Brexit. A summary of the main measures included in the Autumn Statement are:
- Raising the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this Parliament.
- Reducing the Money Purchase Annual Allowance.
- Reviewing ways to build on research and development tax relief.
- Tax and National Insurance advantages of salary sacrifice schemes to be removed.
- Anti avoidance measures for the VAT Flat Rate Scheme.
- Autumn Budgets commencing in autumn 2017.
- National Living Wage to rise from £7.20 an hour to £7.50 from April 2017.
- Universal Credit taper rate to be cut from 65% to 63% from April 2017.
The Personal Allowance
The personal allowance is currently £11,000. The allowance will increase to £11,500 for 2017/18 and to £12,500 by the end of this Parliament.
Tax Bands & Rates
The basic rate of tax is currently 20%. The band of income taxable at this rate is £32,000 so the threshold at which the 40% band applies is £43,000 for those who are entitled to the full personal allowance.
The basic rate band will increase to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 in 2017/18 for those entitled to the full personal allowance.
The additional rate of tax of 45% remains payable on taxable income above £150,000.
Dividends
Dividends received by an individual are subject to special tax rates. The first £5,000 of dividends are charged to tax at 0%. Dividends received above the allowance are taxed at the following rates:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers.
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance.
Savings Income
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
In addition, from 2016/17 the savings allowance applies to savings income. Income within the savings allowance is taxed at 0% (the savings nil rate). However, the available allowance in a tax year will depend on the individual’s marginal rate of income tax. Individuals taxed at up to the basic rate of tax will have a savings allowance of £1,000. For higher rate taxpayers, the savings allowance is £500 whilst no allowance is due to additional rate taxpayers.
Individual Savings Accounts (ISAs)
The overall ISA savings limit is £15,240 for 2016/17 but will jump to £20,000 in 2017/18.
Lifetime ISA
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance will be reduced from £10,000 to £4,000 from April 2017.
Universal Credit
Universal Credit is the new state benefit designed to support those on low income or out of work. An individual’s entitlement to the benefit is made up of several elements to reflect their personal circumstances. Their entitlement is tapered at a rate of 65% where claimants earn above the work allowances. The current taper rate for those who claim Universal Credit means their credit will be withdrawn at a rate of 65 pence for every extra £1 earned.
From April 2017, the taper rate that applies to Universal Credit will be reduced from 65% to 63%.
Corporation Tax Rates
The main rate of corporation tax is currently 20%. The rate will then be reduced as follows:
- 19% for the financial years beginning on 1 April 2017, 1 April 2018 and 1 April 2019
- 17% for the financial year beginning on 1 April 2020.
Research & Development
The Autumn Statement also revealed an additional £2 billion a year of R&D funding by 2020/21. There are two types of tax reliefs for eligible expenditure. Under one of these, qualifying companies can claim a taxable credit of 11% in relation to eligible research and development expenditure. This is known as an ‘above the line’ tax credit. The government will review ways to build on this relief.
Class 2 NICs
Class 2 NICs will be abolished from April 2018.
First Year Allowances on Electric Charge Points
Expenditure incurred on or after 23 November 2016 on electric charge point equipment for electric cars will qualify for a 100% first year allowance. This relief will expire on 31 March 2019 for corporation tax and 5 April 2019 for income tax.
National Insurance Thresholds
From April 2017, the threshold above which employer and employee NICs will become payable will be aligned at £157 per week.
National Living Wage & National Minimum Wage (NMW) Rates
The National Living Wage will increase from £7.20 to £7.50 from April 2017. The following NMW rates will also increase from April 2017 for:
- 21 to 24 year olds from £6.95 to £7.05 per hour
- 18 to 20 year olds from £5.55 to £5.60 per hour
- 16 to 17 year olds from £4.00 to £4.05 per hour
- apprentices from £3.40 to £3.50 per hour
Remuneration Review
Employers can choose to remunerate their employees in a range of different ways in addition to a cash salary. The tax system treats these different forms of remuneration inconsistently and the government will therefore consider how the system could be made fairer between workers carrying out the same work under different arrangements. The review will look specifically at how the taxation of benefits in kind and expenses could be made fairer and more coherent. The government will take the following action:
Salary Sacrifice
The tax and employer NICs advantage of salary sacrifice schemes will be removed from April 2017. This change will not apply to arrangements relating to pensions, childcare, Cycle to Work and ultra-low emission cars. This means that employees who exchange salary for benefits will pay the same tax as individuals who buy them out of their post-tax income. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.
Valuation of Benefits in Kind
The government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.
Employee Expenses
The government will publish a call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.
Employer Provided Cars
The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. Most cars are taxed by reference to bands of CO2 emissions. There is a 3% diesel supplement. The maximum charge is capped at 37% of the list price of the car.
From 6 April 2017, there will be a 2% increase in the percentage applied by each band with a similar increase in 2018/19. For 2019/20 the rate will increase by a further 3%.
From 6 April 2017, the appropriate percentage for cars which have neither a CO2 emissions figure nor an engine cylinder capacity, and which cannot produce CO2 emissions in any circumstances by being driven, will be set at 9%. From 6 April 2018, this will be increased to 13% and from 6 April 2019 to 16%.
For 2020/21, new lower bands will be introduced for the lowest emitting cars whilst the appropriate percentage for cars emitting greater than 90 g/km will rise by one percentage point.
Capital Gains Tax (CGT) Rates
The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains; mainly chargeable gains on residential properties that do not qualify for private residence relief.
The rate for disposals qualifying for Entrepreneurs’ Relief is 10% with a lifetime limit of £10 million per individual. Entrepreneurs’ Relief is targeted at working directors and employees of companies who own at least 5% of the ordinary share capital in the company and the owners of unincorporated businesses. In 2016/17, a new relief, Investors’ Relief, was introduced which also provides a 10% rate with a lifetime limit of £10 million per individual. The main beneficiaries of this relief are external investors in unquoted trading companies.
Inheritance Tax (IHT) Nil Rate Band
The nil rate band has remained at £325,000 since April 2009 and is set to remain frozen at this amount until April 2021.
IHT Residence Nil Rate Band
An additional nil rate band is being introduced for deaths on or after 6 April 2017 where an interest in a main residence passes to direct descendants. The amount of relief is being phased in over four years; starting at £100,000 in the first year and rising to £175,000 for 2020/21. For many married couples the relief is effectively doubled as everyone has a main nil rate band and will potentially benefit from the residence nil rate band.
The additional band can only be used in respect of one residential property which does not have to be the main family home but must at some point have been a residence of the deceased. Restrictions apply on estates over £2 million.
Where a person dies before 6 April 2017, their estate will not qualify for the relief. A surviving spouse may be entitled to an increase in the residence nil rate band if the spouse who died earlier has not used, or was not entitled to use, their full residence nil rate band. The calculations involved are potentially complex but the increase will often result in a doubling of the residence nil rate band for the surviving spouse.
Making Tax Digital
On 15 August 2016 HMRC published six consultation documents on Making Tax Digital. The six consultations set out detailed plans on how HMRC propose to fundamentally change the method by which taxpayers, particularly the self-employed and landlords, send information to HMRC. Two key changes proposed are:
- From April 2018, self employed taxpayers and landlords will be required to keep their business records digitally and submit information to HMRC on a quarterly basis and submit an end of year declaration within nine months of the end of an accounting period.
- HMRC will make better use of the information which they currently receive from third parties and will also require more up to date information from some third parties, such as details of bank interest. Employees and employers will see the updating of PAYE codes more regularly as HMRC use the data received from the third parties.
The government has announced it will publish its response to the consultations in January 2017 together with provisions to implement the changes.
VAT Flat Rate Scheme
The Autumn Statement introduced a new anti-avoidance measure to be included within the Flat Rate Scheme. A new 16.5% rate will apply from 1 April 2017 for businesses with limited costs, such as many labour-only businesses, using the Flat Rate Scheme. Businesses using the scheme, or considering joining the scheme, will need to decide if they are a ‘limited cost trader’.
A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
There will be exclusions from the calculation to prevent attempts to inflate costs above 2%.
Insurance Premium Tax
The Autumn Statement also introduced a further increase in Insurance Premium Tax from 10% to 12% from 1 June 2017. This regressive tax was 2.5% when first introduced but has seen five increases since its introduction.
Autumn Statement 2016 (see also Budget Review 2016)