There were no significant changes to either income tax or pensions legislation in the Budget, aside from the reduction in the Dividend Allowance. However, it appears that a manifesto pledge was broken with the increase in National Insurance contributions for the self-employed.
The annual dividend allowance, which was only introduced last year, will reduce from £5,000 to £2,000 from April 2018.
This will predominantly impact upon small and medium sized business owners who take a proportion of their income as dividends. It will also have an impact on private investors by bringing dividends on smaller investment portfolios into taxation. For example, an equity portfolio valued at £60,000 yielding 3.5% will now start to attract income tax.
Due to the upcoming increases in the Personal Allowance and the Basic Rate tax threshold, combined with the reduction of Corporation Tax to 18% by 2020, the impact on small business owners is less than the headlines may suggest.
The increase in the ISA allowance to £20,000 in April 2017 will help offset some of the damage of the reduced dividend allowance, and Capital Gains Tax has already been reduced to 10% or 20% on gains, excluding property gains.
The Treasury expects the reduction in the dividend allowance to cost those in receipt of dividend income an average of £315 each.
Self Employed National Insurance Contributions (NICs)
The previous Budget confirmed that from April 2018, self-employed individuals will no longer have to pay Class 2 NICs, but that they will still have to pay Class 4 NICs.
Currently, the self-employed may have to pay both Class 2 and Class 4 NICs:
- Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
- Class 2 NICs are paid on profits of £5,965 or more at a rate of £2.80 per week
From 2018, Class 2 NICs will be abolished. The class 4 National Insurance contribution rate will increase from 9% to 10% in April 2018, with a further increase to 11% in April 2019.
The Chancellor stated that only a self-employed person with profits over £16,250 will have to pay more as a result of these changes.
Self-employed individuals are now eligible for the same flat rate State Pension as employed individuals and these increases will go towards funding this. Previously, self-employed people paid less NI but did not accrue SERPS. Under the new Flat Rate State Pension, self-employed and employed people accrue pension at the same rate.
Money Purchase Annual Allowance
It was confirmed that the Money Purchase Annual Allowance will reduce from £10,000 per annum to £4,000 per annum form April 2017. Aside from this reduction there are no changes to how the Money Purchase Annual Allowance operates.
In summary, if you access your pension using the new Flexible Access options available since April 2015 and the introduction of Pension Freedoms, you are effectively limited to an annual contribution limit of £4,000. This does not apply if you take tax free cash only.
QROPS Tax Charge
Legislation will be introduced in Finance Bill 2017 so that certain transfers to Qualifying Recognised Overseas Pension Schemes (QROPS), requested on or after 9 March 2017, will be subject to a 25% overseas transfer charge.
Currently, when a member’s benefits or rights are transferred to a QROPS, their pension funds are tested against the available Lifetime Allowance and a tax charge of 25% is applied on any excess. If the transfer value is below the available Lifetime Allowance, then there would be no excess tax charge.
However, in the Budget the Chancellor announced that in addition to any Lifetime Allowance charge, the whole transfer value of certain transfers to QROPS, requested on or after 9th March 2017, will be subject to an additional 25% overseas transfer charge.
Payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident. HMRC will provide guidance setting out how the new tax charge will work and the new obligations.
Other Rates and Allowances from April 2017
The ISA allowance will be increasing from £15,240 to £20,000 from 6th April 2017.
The Lifetime ISA (LISA), is being launched on 6th April 2017, this has the following features:
- Includes a 25% Government top up at the end of each tax year
- Only available to the under 40s
- Contributions will be limited to £4,000
- The top up will cease at age 50.
- LISA contributions will count towards the total ISA savings limit.
- Funds can be accessed tax free after the age of 60 without losing the “bonus”.
- The funds can also be used to buy a first home with the Government “bonus” at any time from 12 months after opening the account.
Income Tax & National Insurance
In April 2017, the Personal Allowance will rise from £11,000 to £11,500.
The level of income at which Higher Rate tax will apply will rise from £43,000 to £45,000.
Corporation Tax will be cut form 20% to 19% with effect from April 2017, with a further cut to 17% in 2020.