Following the Chancellors third red case appearance in a year, the March 2016 Budget brought help for businesses and investors. Following the earlier announcement of the new saving allowance and dividend regimes commencing on 6 April 2016, the news of a reduction in the capital gains tax rates and a new Lifetime ISA were welcomed. Business Tax rates are also set to reduce in the future. A summary of the latest changes are detailed below.
Capital Gains Tax
From 6 April 2016 the higher rate of Capital Gains Tax (CGT) will drop from 28% to 20% and the basic rate from 18% to 10%. This is positive news for existing investors. The 28% and 18% rates will continue to apply for chargeable gains on residential property.
HMRC indicated in the Autumn statement that CGT due on the sale of residential property will no longer be payable on 31 January following the end of the tax year in which the sale took place, but within 30 days of the transaction. Following the latest rate change announcement it would seem the aim is to separate property gains from other gains in more ways than one.
This is extended to external investors in unlisted trading companies for newly issued shares purchased after 17 March 2016. To qualify they must be held for at least three years and gains are limited to a lifetime limit of £10m.
ISAs and the new ‘Lifetime ISA’
The ISA allowance will remain at £15,240 for the tax year 2016/17, but will increase to £20,000 from April 2017.
A new ‘Lifetime ISA’ for those aged between 18 and 40 will become available from April 2017, with a government bonus of 25% available. Total contributions are limited to £20,000, and the bonus will be limited to an annual contribution of £4,000 per tax year, and an overall maximum bonus of £5,000. The bonus will be payable at the end of each tax year, and will be paid on contributions made by an individual until they reach the age of 50. It will be possible to transfer from an existing ISA to a lifetime ISA.
Funds can only be withdrawn “free” in the event that 12 months have passed since the ISA was opened, the funds are being used to purchase a first home in the UK, worth up to £450,000, or they are being used for retirement and are withdrawn once you reach at least 60 years of age. A 5% charge will be applied to withdrawals for any other purpose.
Despite anticipation of further change in the March Budget, it wasn’t to be. Previously announced changes will proceed and a tapered annual allowance will affect individuals with ‘adjusted income’ over £150,000, effective from 6 April 2016.
Personal Allowances will increase to £11,000 from 6 April 2016, and £11,500 from 6 April 2017. The higher rate tax threshold will rise to £43,000 from 6 April 2016, and £45,000 from 6 April 2017.
Class 2 National Insurance contributions for the self-employed will be abolished from April 2018.
Tax on Savings – New Personal Savings Allowance (PSA)
From April 2016 anyone with earnings under £16,800 will no longer have to pay tax on interest on savings at all. Basic rate taxpayers will be entitled to a PSA of £1,000 a year and higher rate taxpayers will receive a reduced PSA of £500. Bank and building societies will no longer deduct tax at source from interest paid.
Taxation of Dividends
The dividend tax credit will be replaced by a new tax free dividend allowance. The dividend allowance will remove the first £5,000 of your dividend income from the taxation system. You will pay tax on dividend income over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in ISA accounts will continue to be tax free.
A further reduction to the rate of Corporation Tax to 17% from April 2020 was announced in this latest Budget.
Insurance Premium Tax
A 0.5% increase in Insurance Premium Tax was announce bringing the rate to 10%, from 1 October 2016. The increase will affect both individuals and companies.