Our managing director, Rachel Sestini, examines the impact of the Budget 2016 for personal tax & outlines some measures she’d like to see introduced
Wednesday’s Budget speech was an interesting one, not least because of the sheer length of time it took to get to any actual tax announcements. The bigger surprise, to me at least, was the move from what has become the staple of recent Budgets and Autumn Statements, i.e. income tax changes focused on helping pensioners, to a completely different group, the under 40s.
The new Lifetime ISA
So we had the “Lifetime ISA” which will come into being from April 2017 – effectively a new and improved, bigger, “Help to buy” ISA for individuals between the ages of 18 and 40 at the time the account is opened. The money saved can be used to fund the deposit on a house but there is also the option of keeping it until age 60, which presumably explains how it was announced as part of George’s ongoing pensions reform.
The headlines are that investors can save up to £4,000 per year to which the Treasury will add £1,000. The resulting £5,000 per year is invested until needed for the purchase of a first home or until age 60. Assuming the funds are not withdrawn early/for the wrong purpose, the entire amount can be withdrawn tax free.
This makes it highly attractive, even compared to pension savings, particularly for basic rate taxpayers – as the money invested receives the same basic rate tax uplift but none is taxed on drawing after retirement. For higher rate taxpayers who would receive additional tax relief on a pension contribution the comparison is not so straightforward. However, as individuals can contribute to a Lifetime ISA in addition to their pension, it could be used as a top-up for those affected by the annual or lifetime pension limits.
Individuals who already have “Help to buy” ISAs can move over into the new Lifetime ISA.
All told, a positive measure and one which should get more people interested in long-term savings but a shame to exclude the over 40s, some of whom may be in a position to start saving for their retirement and/or becoming increasingly conscious of the need to do so.
In addition, the annual ISA allowance will increase to £20,000 (which includes any money saved in the Lifetime ISA). And there was a huge sigh of relief at Sestini & Co on hearing that pensions tax relief wasn’t restricted any further.
Tax breaks for the sharing economy
We also had another unexpected measure and the concept of the “Sharing Economy”: two new tax reliefs for entrepreneurs and micro-businesses. Being an entrepreneur with a very small business who has embraced the digital economy, I felt briefly excited… the relief is limited to one allowance of £1,000 against profits from property (already nicknamed the “AirBnB” relief) and a similar allowance against profits from trading.
No paperwork will be required to claim these, so together with abolishing Class 2 NICs from 2018 this will potentially stop a lot of people having to get embroiled in the self-assessment system and avoid lots of unnecessary paperwork on the part of both the public and HMRC. No bad thing… but I couldn’t help thinking that those with the time and energy to run micro-businesses and/or rent out a property to holidaymakers alongside the rest of their work, social and family life might mainly be under-40…
What also occurred to me is that making it legal to earn a modest amount of undeclared property or trading income could ease the transition to digital tax accounts and therefore reduce the number of helpline staff required at HMRC when those are introduced.
At risk of sounding cynical, it will also mean a lot of people may no longer take advantage of quite a simple tax-saving measure in the early stages of a new business. There are quite a number of legitimate deductions allowed against the income of a genuine trade which has been entered into for profit, including the cost of using part of one’s home from which to carry on the business. Often in the early stages, the premises costs, equipment and other set up costs mean that a home-based business with a modest turnover will not make a profit for the first year or so but will instead make a loss for tax purposes which can be offset against the tax being paid on other income, so called “sideways loss relief”. I can’t help thinking that many people will seize the opportunity to avoid engaging with HMRC without realising they may be forgoing a tax saving.
Capital gains tax reduction
Another surprise to me, particularly as discussions in recent years have been around narrowing the gap between the capital gains tax rates and income tax rates rather than widening it (there have always been concerns the less scrupulous may construct financial strategies to recharacterise income into capital gain).
But from this April, the capital gains rates will be reduced from the current 18% and 28% to 10% and 20% respectively.
*This will apply to all gains on assets disposed of with the exception of residential property (another landlord-unfriendly measure, I fear – and one which favours owning investment property through a company rather than directly) and carried interest. There will still be no capital gains tax payable on the sale of an individual’s main residence.
Personal allowances and the higher rate threshold
You can decide whether this one has a particular target age-bracket in mind: the personal allowance will increase to £11,000 in April 2016 and to £11,500 in April 2017. The higher rate threshold will increase from £42,385 to £43,000 in April 2016 and to £45,000 in April 2017.
Fuel and alcohol duties
Fuel duty has been frozen and the assistance for electric/hybrid cars is less generous than before owing to, apparently, market forces.
Cider and beer duty have again been frozen and an additional relief introduced for whisky, because of its export revenues (no, I can’t work that one out either… doesn’t that benefit non-voters?)
But what was missing?
A few things conspicuous by their absence which I personally would have liked to see…
- 1. Enhanced tax-free/tax-deductible childcare: I am certain this would ultimately raise more money for the exchequer than it would cost
- 2. Income-splitting or the option of joint return filing for couples to average out tax rates and availability of allowances
- 3. Increase in the threshold above which child benefit is phased out (or a change to base this on joint income rather than the higher of two)
- 4. Further clarity on the inheritance tax and non-dom changes
- 5. And last but not least: how about a freeze on duty for small/artisan drinks producers like the makers of the fabulous Bath Gin?
If you would like to discuss any of the points detailed above call us on 01761 241861. We would be pleased to advise you or to invite you into our offices in Paulton.