Compared with his predecessor, Chancellor Philip Hammond’s budgets are proving somewhat more staid affairs and the “last Spring Budget” on 8 March 2017 announced relatively few measures of immediate significance to clients and prospective clients of Saunderson House.
Reduced dividend allowance
The measure with the widest impact on investors is likely to be the reduction in the tax-free dividend allowance, itself only introduced in April 2016. This will be cut from £5,000 per annum currently to £2,000 per annum, but only from the 2018/19 tax year onwards, so no immediate action is required.
Though primarily targeted at the earnings of directors of limited companies, the allowance reduction will also make investing outside tax-sheltered wrappers, such as pensions and ISAs, slightly less tax efficient, with an extra tax liability of up to £1,143 per annum on dividends for some individuals. It is worth noting that many Partnerships also utilise this allowance as part of their pay structure.
The negative impact of the cut in the dividend allowance may be somewhat offset by a reduction in the rate of corporation tax from 20% to 19% this April (benefitting directors) and an ISA allowance increasing from £15,240 to £20,000 (benefitting investors). As such, we do not envisage major changes to most individuals’ tax planning, as dividends continue to be taxed favourably compared with other sources of income.
National Insurance changes for the self-employed
Potential changes to class 4 National Insurance contributions (NICs) caught the headlines, not least given Conservative manifesto promises made in 2015.
It was originally proposed within the Budget that the maximum rate of Class 4 NICs increase from 9% currently to 10% in the 2018/19 tax year, and then to 11% in the 2019/20 tax year, with this affecting a band of profits between just over £8,000 per annum and around £45,000 per annum. The 2% rate on further profits was to remain unchanged. Taken together with the abolition of class 2 National Insurance contributions, and increases to the personal allowance and higher rate thresholds for income tax, self-employed individuals could have faced an extra tax liability of up to £450 per annum.
However, under political pressure, the Chancellor swiftly U-turned just a week later, confirming that there will now be no changes to National Insurance rates within the current Parliament, in line with the spirit of the manifesto promises.
The impact of this U-turn on the government’s finances, and a proposed wider review of the rights of self-employed and employed individuals, such as whether parental benefits could be better extended to the self-employed, remains to be seen.
QROPS transfer tax charges
Finally, one change of immediate consequence is the introduction of a 25% tax charge on the transfer of a UK pension scheme to certain overseas pension schemes.
This will apply to transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) initiated from 9 March 2017 onwards, except where (i) the individual is resident for tax purposes (and will remain so for at least five tax years) in a country within the European Economic Area (EEA), and the QROPS is also based within the EEA, (ii) the individual is resident for tax purposes (and will remain so for at least five tax years) in the same non-EEA country where the QROPS is based or (iii) the QROPS is an occupational scheme sponsored by the individual’s employer.
These exemptions mean that most legitimate reasons to transfer to a QROPS will be unaffected, while cracking down on some of the more aggressive tax planning measures associated with transfers to overseas pension schemes. No retrospective measures have been announced relating to transfers that have already completed.
The section on Class 4 NICs above has been updated to reflect developments on 15 March 2017.
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