BREAKING: Budget Review

The main tax changes announced by Spreadsheet Phil in today’s Budget are as follows:

Making Tax Digital

The Government will provide an extra year, until April 2019, before Making Tax Digital compulsory for unincorporated businesses and landlords with turnover below the VAT threshold. This will provide them with more time to prepare for having to keep digital records and provide quarterly updates to HMRC.

- Advertisement -

Businesses, self-employed people and landlords with turnovers under £10,000 will be exempt from these new rules.

Other businesses, self-employed people and landlords will be required to start using the new digital service from April 2018.

National Insurance – the Self Employed

The main rate of Class 4 national insurance paid by self-employed business owners will increase from 9% to 10% in April 2018 and then to 11% in April 2019.

Tax-Free Dividends

The tax-free dividend allowance will be reduced from £5,000 to £2,000 in April 2018. This is designed to raise more tax from small company owners who pay themselves dividends instead of salaries.

Sundry

From 1 April the VAT registration threshold is being increased from £83,000 to £85,000.

From 6 April the annual CGT exemption is going up from £11,100 to £11,300.

Apart from today’s announcements, it’s worth reminding ourselves of some of the other tax changes coming into force at the start of the new tax year in April:

Income tax rates

The income tax personal allowance is going up from £11,000 to £11,500 and the higher-rate threshold (where 40% tax kicks in) is going up from £43,000 to £45,000.

This means a full-time landlord with rental income of £50,000 will pay £500 less tax in 2017/18. An employee with a salary of £50,000 will pay £313 less tax – some of the income tax saving is watered down by having to pay 12% national insurance on a bigger chunk of income.

The Scottish Band Arrives!

Nothing to do with the Proclaimers, I’m afraid. In the Socialist Paradise of Scotland, the decision has been made to freeze the higher-rate threshold at £43,000, compared with £45,000 in the rest of the UK. So workers with income that falls into the ‘Scottish band’ (£43,000-£45,000) face a marginal tax rate of 52%. This is because they’ll be caught between two tax systems, paying “Scottish income tax” at 40% and “Westminster national insurance” at 12%. Most Scots who earn more than £45,000 will pay £400 more tax than other UK taxpayers.

Landlord Interest

Thankfully we’re shot of Boy George Osborne… but not his dodgy property tax policies. Starting on 6 April, landlords will have the tax relief on their mortgages reduced. Fortunately, in 2017/18 just one quarter of your interest will be denied full tax relief.

What does this actually mean? If you’re a higher-rate taxpayer with a £20,000 interest bill, £5,000 will no longer enjoy 40% tax relief (costing you £2,000). Instead you’ll receive a 20% ‘tax reduction’ (saving you £1,000). So your tax bill will increase by £1,000.

As a very broad-based rule of thumb, to estimate how much extra tax you’ll pay in 2017/18 take your total interest bill and multiply by 5%. More tax will be payable if your taxable income jumps into a higher tax band because some of your interest is no longer deductible.

Landlords still have time to prepare for this iniquitous change. Those who have big but heavily mortgaged portfolios are the most exposed and could eventually end up paying a huge amount of tax on profits they haven’t made.

Extending the ‘Cash Basis’

From April the Government is increasing the entry threshold for the cash basis from £83,000 to £150,000. The exit threshold will be set at double the entry threshold, so will increase to £300,000.

Businesses that use the cash basis are taxed simply on the difference between the income they actually receive during the year and the expenses they pay during the year.

In contrast, under the traditional accruals basis, income is included when it is earned, even if it hasn’t been received, and expenses are included when they are incurred, even if they haven’t been paid.

The Government is also simplifying the rules on capital and revenue expenditure within the cash basis to make it clearer which expenses are tax deductible.

Cash Basis for Landlords

Starting on 6 April 2017 the Government is also extending the cash basis to landlords.

The cash basis will be the default method of calculation unless you opt out or have cash receipts above the £150,000 threshold.

Under the cash basis landlords will not have to declare rental income unless they have actually received it. If a tenant should have paid rent but hasn’t, it will not be taxable.

Those with more than one property business will be able to choose separately whether to use the cash basis or accruals accounting for each of their property businesses.

Landlords using the cash basis will be able to claim tax relief on their interest payments in a similar way to landlords who use the accruals basis. However, there will be a further restriction for interest where the loans exceed the value of the properties when first let.

Business Rates

Business rates are different in England, Scotland, Wales and Northern Ireland.

Starting in April 2017 small business rate relief is being extended in England. A business whose property has a rateable value of £12,000 or less will receive 100% relief, i.e. it won’t pay any business rates.

Scotland operates a ‘Small Business Bonus Scheme’ which provides 100% relief in 2017/18 for properties with a rateable value of up to £15,000 (25% for rateable values between £15,001 and £18,000).

Corporation Tax

The rate falls from 20% to 19% on 1 April. It will then fall to 17% in 2020.

Inheritance Tax

For deaths occurring after 5 April 2017, a new additional nil rate band of £100,000 is available for the ‘family home’. The exemption only applies where the property is passed, on death, to a direct descendant. It will rise to £175,000 by 2020/21.

Lifetime ISAs

From 6 April 2017 those aged 18 to 39 can open a Lifetime ISA which can be used to save for a first home or for retirement. Any money you put in (up to £4,000 per year) will receive a 25% Government bonus. So if you put in £4,000, the Government will add £1,000. It will be possible to continue making contributions until you’re 50.

Apart from first-time homebuyers, Lifetime ISAs will be an attractive alternative to pensions for many basic-rate taxpayers. Like pensions they will attract a top up from the Government but, unlike pensions, all the money you take out will be tax free.

Pension Recycling

To prevent pension savers recycling their pension savings and enjoying two rounds of tax relief, the so-called ‘money purchase annual allowance’ is being reduced to £4,000 on 6 April. If you withdraw income from your pension, the maximum contribution you can make from that point on is just £4,000 (normally £40,000). Withdrawing your tax-free lump sum doesn’t count – you can withdraw 25% and carry on making pension contributions just like anyone else.

Salary Sacrifice

From 6 April  the exemption for many employment benefits will be taken away when they are provided as part of a salary sacrifice arrangement. Employer pension contributions, employer-provided pensions advice, employer-supported childcare, cycle to work schemes and ultra low emission cars will not be affected and will continue to benefit from income tax and national insurance relief. This is excellent news because salary sacrifice pensions, in particular, are arguably the best tax saving tool for salaried employees.

Non Doms

From 6 April 2017 any individual resident in the UK for more than 15 of the past 20 years will be deemed to be UK domiciled for all tax purposes. Thus they will be subject to UK tax on their worldwide income and capital gains and UK inheritance tax on their worldwide assets.

Tax-Free Childcare

A new Tax-Free Childcare scheme is being rolled out from early 2017. For every 80p you pay in the Government will top up your account with an extra 20p of basic-rate tax relief. The maximum amount of childcare costs that will qualify for tax relief is £10,000 per child, with £8,000 coming from the parents and £2,000 from the Government.

Property & Trading Income Allowances

Two new allowances of £1,000 each will be available to exempt small amounts of property or trading income from 2017/18 onwards. Individuals with property or trading income below the level of the allowance will no longer need to declare or pay tax on that income.

VAT Flat Rate Scheme

The flat-rate scheme allows small businesses to pay VAT at a rate lower than 20%. In return, they are not allowed to recover VAT on any of their expenses. HMRC has been concerned that some businesses that have very limited spending on goods (e.g. some service businesses) have been able to save significant amounts of VAT under the scheme. Therefore a new higher 16.5% rate is being introduced, with effect from 1 April 2017 for these ‘limited cost traders’.

by Nick Braun, founder of Tax Cafe which publishes tax saving guides for landlords and business owners.

LEAVE A REPLY

Please enter your comment!
Please enter your name here