The 2016 Spring Budget

One could take the view that we have been ‘spoilt’ in the past year with the number of Budget statements that have taken place. When the Chancellor delivered his eighth Budget to the House of Commons on 16 March, it was effectively the fourth Budget statement to take place within the previous 12 months. Billed as a ‘next-generation Budget’ there were positive announcements for investors, savers and businesses but also a fairly gloomy tone to many aspects including poorer than expected UK economic growth and the Chancellor’s failure to meet his target for reduced debt.

I have summarised a few of the key tax announcements below.  There is more detail in our 2016 Budget Report which is available free of charge from any of our offices or you can email us at mail@pearsonmay.co.uk and we will be pleased to send a pdf of the report to you.

Lifetime ISA

Many commentators expected the Budget to include measures restricting higher rate tax relief on personal pension contributions, or even an overhaul of the current pension system altogether.  Whilst this didn’t transpire, the Chancellor did announce plans for a new Lifetime ISA available from 6 April 2017 for anyone under the age of 40.  It could be described as a ‘hybrid’ between an ISA and pension and will enable eligible individuals to save up to £4,000 each year and receive a 25% ‘bonus’ from the Government for every pound they put in, up to the age of 50.  The funds therein can then either be used to go toward a deposit for first time buyers or, once the individual reaches the age of 60, withdrawn tax-free.  If the savings are withdrawn before the age of 60 (other than to go toward a deposit on a first home) then the Government’s bonus and any interest or growth thereon will be lost.

Capital Gains Tax (CGT) rates

There was welcome news for investors in the form of a reduction to the rates of CGT, which take effect from 6 April 2016.  A rate of 10% will be payable on any Capital Gains where an individual’s total taxable income and gains do not exceed £32,000 in the tax year.  For any Capital Gains over and above that, a rate of 20% will be payable.  This is compared to the existing rates of 18% and 28% respectively.  However, those existing rates (18% and 28%) will continue to apply to any gains on ‘carried interest’ and residential property.

Income Tax Personal Allowance

The standard personal allowance increased to £11,000 per annum with effect from 6 April 2016 meaning that an individual will pay no income tax at all if their total taxable income for the year is £11,000 or less.  The Government has committed to increase the personal allowance further to £11,500 for 2017/18 and further still to £12,500 by the end of the current parliament.

National Living Wage

From 1 April 2016 the new National Living Wage applies to any workers aged 25 and over.  It is set at £7.20 per hour and expected to rise to over £9 by 2020.  The National Minimum Wage will continue to apply to workers under the age of 25.

Corporation Tax

The rate of Corporation Tax remains at 20% for the year commencing 1 April 2016 but will reduce to 19% with effect from 1 April 2017.  Furthermore, it is planned to reduce further to 17% with effect from 1 April 2020.

The Chancellor also announced that an increased rate of tax of 32.5% will apply to loans from close companies to participators (which would include most loans from family owned companies to their directors/shareholders for example).  This tax charge can generally be avoided (subject to meeting other specified criteria) if the loan is repaid within nine months of the end of the accounting period.  This rate is increased from 25% and applies to any loans made on or after 6 April 2016.  The rate has been increased so that it continues to mirror the effective higher rate of dividend tax (further details of which were included in last month’s article).

The above is for general guidance only and no action should be taken without obtaining specific advice