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March budget – how it affects you

April 19, 2016

The overriding theme in George Osborne’s latest budget was to help the working individual and small business owners in particular. A number of the changes will benefit lower and middle income earners. This has not been without controversy: The view is that these benefits came at the expense of cuts in benefits, particularly in disability allowances. Also the changes to the taxation of dividends announced last summer, could see tax increases for directors of companies. Whatever your personal thoughts are please take a look at our summary of the main changes that could affect you:

Personal Allowances are going up

Personal allowance (the tax free band) for 2016/17 will increase from £10,600 to £11,000. A further increase to £11,500 is expected for the following tax year, with a commitment to take the personal allowance to £12,500 by 2020.

The higher point at which the higher rate of tax is applied will also increase: From £42,385 to £43,000 in 2016/17 and to £45,000 in 2017/18 with a commitment to taking the threshold to £50,000 by 2020.

Good news for small businesses

Class 2 National Insurance will be abolished from 2017/18. This will save self-employed £145.60 per year. Self-employed will continue to pay Class 4 National insurance at a rate of 9% on all profits over £8,080.

Limited companies can see corporation tax rates fall from the current 20% to 19% on 1 April 2017. In the autumn statement, the Chancellor had committed to taking Corporation Tax down to 18% by 2020. Now he has committed to a further 1% cut effective 1 April 2020, giving a Corporation Tax rate of 17%. This would give UK the lowest corporation tax rate amongst G20 countries.

Further good news on Business Rates:  As of April 2017 many small businesses will see reductions in their business rates. Rate relief, where no rates are payable, will be doubled for properties with valuations from £6,000 to £12,000. Tapered relief will be available for valuations up to £15,000. Furthermore, the threshold at which higher rates are applied will increase from £18,000 to £51,000.

Major changes to dividends

These changes were announced last summer. Most owners of limited companies who take a large proportion of their income as dividends, can expect to pay more tax. Until now all dividends taken were grossed up with a 10% tax credit, which was available to set off against tax due on dividends. Many found the concept of the tax credit confusing, but it did mean that as long as a tax payer was paying the basic rate, there was no tax to pay. Effective 6 April 2016 there will be no tax credit on dividends. Instead every taxpayer is entitled to a tax free allowance on the first £5,000 of dividends. Dividends earned above this amount will be taxed as follows:


For dividend income that falls in the:

7.5 Basic rate band (income less than £43,000)
32.5 Higher rate (between £43,000 and £150,000)
38.3 Top rate (income greater than £150,000)

Although the principles appear straightforward, the effects can vary greatly from individual to individual. Planning the income you take is an important part of our service to clients. We have tried to speak to all our clients who could be affected, but if you would like to discuss the impact of these changes then please get in touch.

And major reductions on Capital Gains tax

Capital gains tax is charged to individuals on profits made when selling assets. Most commonly capital gains tax could be charged on the sale of shares or a second property. Every individual has an annual personal allowance of £11,100. Any profits above this amount will be taxed. Effective from 6 April 2016, the rates of tax were reduced from 18% to 10% for basic rate tax payers and from 28% to 20% for higher rate tax payers. However these changes to do not apply to the sale of residential property.

This was a major surprise and leaves the UK with the lowest capital gains taxes of the OECD countries.

Capital gains tax is a highly complicated area and can leave a nasty surprise for those who get caught out. A common scenario we see is where properties are gifted by parents to their children. These are still considered a “disposal” and could lead to capital gains tax due on the hypothetical profit made. Worse still, it would be the parent who pays the tax even if they received no cash for the property. There are important reliefs available but you must take advice. If you are thinking of disposing of an asset, please speak to us first.

Beware of tax avoidance schemes

Meanwhile the Chancellor announced further measures to attack tax avoidance schemes. Typical targets are so called “marketed tax avoidance schemes” that are aimed at higher rate tax payers. They are often designed by specialist firms. The less scrupulous amongst them will promise high levels of take home pay for “HMRC approved schemes”. Over the years the risks of participating in such schemes has increased considerably and most accountants no longer promote them. Many individuals who participated in such schemes have been left with high back taxes and fines. Likewise we do not promote such schemes as we do not believe they are in the best interests of our clients.

If you are thinking of using any tax arrangement that promises unusually high tax savings, please speak to us first.

As always we are always on hand to answer any questions our clients might have about any aspects of accounting and finance. Just give us a call or drop in to our Warrington or Crewe office for a biscuit and a brew.

Tax Calculator Table

Income tax 2015/16 2016/17
Tax free allowance 10,600 11,000
Basic rate (20%) payable on next: 31,785 32,000
Higher rate (40%) on next: 107,615 107,000
Additional rate (45%) taxed on income over: 150,000 150,000
National insurance
Class 1 (employees and employers):
Tax free allowance £8,080 £8,080
Upper earnings limit (UEL) £42,385 £43,000
NIC rate for employees on earnings:
Between tax free allowance and UEL 12% 12%
Above the UEL 2% 2%
NIC rate for employers on earnings:
Above the tax free allowance 13.8% 13.8%
Employment allowance £2,000 £3,000
Class 2 (sole traders) – to be abolished in 2017:
Tax free allowance 5,965 5,965
Weekly charge if profits exceed tax free allowance £2.80 £2.80
Class 4 (sole traders):
Tax free allowance £8,080 £8,080
Upper earnings limit (UEL) £42,385 £43,000
NIC rate on profits:
Between tax free allowance and UEL 9% 9%
Above the UEL 2% 2%
Capital gains tax
Tax free allowance 11,100 11,100
Tax rate for:
Basic Rate tax payers 18% 10%
Basic Rate tax payers for disposal of residential properties 18% 18%
Higher Rate tax payers 28% 20%
Higher Rate tax payers for disposal of residential properties 28% 28%