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April 2017
RAYMOND CARTER & CO: APRIL 2017 TAX UPDATE FOR CLIENTS

I wanted to take this opportunity to set out some of the changes you will see in your tax return for 2016/17 and some of the changes to tax coming in from April 6th 2017.

This note is by no means comprehensive – Finance Bills which are introduced every year after the Budget statement run to hundreds of pages – but it hopefully covers key points affecting many taxpayers.  As always if you have any questions about anything in this note or any other taxation matters, feel free to call us.

  1. Changes in your 2016/17 Tax return

Taxation of Interest

From April 6th 2016, banks stopped deducting tax on bank interest.  The Government has introduced a Personal Savings Allowance (‘PSA’).  Under the terms of the PSA, Basic Rate tax payers can receive up to £1,000 interest tax-free, and Higher Rate tax payers up to £500.

The Dividend Allowance

The Government has also introduced a new Dividend Allowance, which isn’t an allowance – it is better thought of as a ‘nil rate band’ of £5,000 (although it will be reduced to £2,000 from April 2018!).

If you receive more than £5,000 in Dividend income, either from shares or from the company you work for, you will probably pay more tax.  The Dividend Nil Rate Band allows the first £5,000 of dividends to be free of tax.  Above that Dividends will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for highest rate taxpayers.  Owner-Managers of companies taking income in the form of a small salary plus dividends will still generally be better off incorporating but the tax advantages will be reduced.

Landlords & property

From April 6th 2016, the Rent-a-Room Relief has increased from £4,250 to £7,500, meaning that the first £7,500 you receive for renting a room out in your house is tax free.  The Government will undertake a review of Rent-a-Room this year to look at the effectiveness of the scheme.  Look out for further changes!

However, taxation on other forms of property continue to increase.  Last year, saw the additional 3% Stamp Duty charge on the sale of properties that are not your principal private residence.  And now, there is reduced scope in reducing tax on rental income as the 10% ‘Wear & Tear’ Allowance on Furnished Properties has been withdrawn.

The ability to obtain Relief on Interest payments on a mortgage for higher rate taxpayers will be reduced from April 2017.  This is covered in more detail in the next section.

Inheritance Tax – ‘Residence Nil-Rate Band’

The Nil Rate Band on the death of an individual has been £325,000 for several years.  An Estate in excess of £325,000 may be subject to Inheritance Tax, charged at 40%, unless an estate passes to the surviving spouse.

From April 2017, a new “Residence Nil Rate Band Allowance” (‘RNRB’) will increase the Inheritance Tax-free threshold on estates including a main residence by £100,000.  It will rise by an additional £25,000 over the next three years.  This will mean that by 2020/21 the first £1,000,000 of the estate of a married couple should be free of Inheritance Tax.  The RNRB will be tapered off however for estates worth more than £2million.

Corporation Tax

Corporation Tax will fall from 20% to 19% for financial years ending after 31 March 2018 and that rate will fall again from 19% to 17% two years later. 

Taxation for Employers

The Employment Allowance on Employers National Insurance is still in place, meaning that the first £3,000 of National Insurance for a company is not collected.

  1. Tax changes for 2017/18

Personal Allowance & Basic Rate Taxation

The Government continue to increase the Personal Allowance – this year by £500 to £11,500 – and also the range of basic rate taxation, which is now £33,500.  This means that no higher rate tax will be applied on gross income of £45,000 or less.

Taxation of Sole Traders

You may remember in the budget that the Chancellor announced that Class 4 National Insurance, which is charged on self-employed business profits above £8,164 at a rate of 9% would rise to 10% in April 2018.  Well he changed his mind, but he, or a successor as Chancellor, may re-visit the situation in the future.  (see FAQ’s below on Class 2 NIC’s)

Higher ISA Investment thresholds and the new Lifetime ISA

If you have money to invest and have confidence in the stock market you can invest £15,240 in an ISA and your income from that will be tax free.  From April 2017, the annual ISA allowance will increase to £20,000.

For investors between 18 and 40, a new Lifetime ISA is to be introduced in 2017, which enables savers to put £4,000 into an ISA, and the ISA will be topped up by one quarter by the Government.  The first top-up will be paid at the end of 2017-18 and monthly thereafter.

Landlords & property

From 6 April 2017 HMRC will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This restriction will be introduced gradually.  ‘Finance costs’ include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.  The key change is that Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction;
  • in 2018 that restriction will be lowered from 75% to 50%, and further 25% reductions will follow in the two years after that.

New Allowances for certain types of income

The Government has introduced two new allowances (which are allowances unlike the Dividend one!), covering small profits from property (the ‘Property Income Allowance’) or from online and other forms of trading (the ‘Trading Income Allowance’).  Net income below £1,000 from these sources will not need to be included on a tax return.

Capital Gains Tax

The annual allowance for Capital Gains for individuals rises from £11,100 to £11,300 from April 2017.  This means that the first £11,300 of capital gains in any tax year for an individual will be free of tax.  For Trusts, the allowance rises from £5,550 to £5,650.

VAT Changes

Back in November the Chancellor announced changes to the VAT Flat Rate Scheme.  The Flat Rate Scheme was introduced around 15 years ago with the express purpose of making the reporting of VAT much simpler for businesses with a turnover of £150,000 or less.  Rather than adding up all VATable sales and deducting VATable costs, under the Flat Rate scheme a VAT registered business pays a percentage of turnover (between 8% and 14.5%) over as VAT.

HMRC believe that this process may have been misused as in some cases business owners with few VATable costs  are able to pocket the difference between the 20% VAT on Sales and the lower Flat Rate Scheme rate.  Therefore a new rate of 16.5% is being introduced for businesses where VATable costs are less than 2% of turnover.

  1. Frequently Asked Questions

I wanted to add a section covering some of the most common queries we have been asked by clients in the last 12 months.

Why Have HMRC Changed my PAYE Code and what can I do about it?

We have seen several instances of HMRC changing PAYE codes ‘mid-year’, often after the submission of tax returns.  The usual reason for the change is that HMRC are looking to use amended PAYE codes to collect tax that is not usually deducted at source (such as rental income and investment income).  The justification for this is that HMRC are looking to reduce the need for additional tax payments on the following 31 January Self-Assessment deadline.  It also has the effect of HMRC collecting more tax on a monthly basis.

There is the opportunity to appeal changes to PAYE codes, via the P2 Online PAYE Appeal form.  As agents, we are able to make PAYE Coding appeals and these appeals have usually been successful.

Class 2 National Insurance for Sole Traders

HMRC no longer collects Class 2 National Insurance Contributions (NIC) from those who are registered as Self-Employed via a monthly direct debit.  Class 2 NIC of £148.20 will still be collected, alongside Income Tax and Class 4 NIC, as part of the year end Self-Assessment payment. However, Class 2 NIC will be abolished from April 2018.

Transfer of Personal Allowance for Married Couples

In 2015-16 the Government introduced a ‘Transferable Tax Allowance’ enabling married couples to transfer 10% of any unused Personal Allowance.  This only applies in the situation where one spouse has income below 90% of their personal allowance (£9,900 in 2016-17) and the other spouse is a basic rate taxpayer.  The Allowance can be claimed in arrears, so if you think you might have missed out, please shout!

Of more concern perhaps is a not very frequently asked question …

  1. What is “Making Tax Digital”

I flagged the onset of ‘Making Tax Digital’ (‘MTD’) this time last year.  Making Tax Digital started as a grand plan from George Osborne (remember him?) that we would see the end of the Tax Return by 2021. He appears to have been as wrong in that assumption as he was about the Brexit vote.

In the last 12 months, the Government has published six consultation papers on what MTD might involve, who it might affect and when.  The accountancy profession and the Treasury Select Committee have challenged those papers, and given the lack of clarity on some crucial issues, it was re-assuring to hear that the Chancellor has delayed the implementation of MTD for some by a year to April 2019, and that he has not yet changed his mind on that decision.

At a high level MTD requires businesses, initially in April 2018, unincorporated businesses, sole traders and partnerships with turnover above the VAT Threshold and/or landlords with property income to report details of their turnover, expenses and profits in a digital form every three months.  At the end of every financial year there will be a fifth return allowing year end adjustments and determining the final tax payments or repayments due.

Sole traders and landlords below the VAT thresholds will follow on a year later in April 2019 and then businesses paying Corporation Tax will join MTD from April 2020.

The devil of Making Tax Digital lies in the rather incomplete detail.  Responsibility for submission will be that of the taxpayer.  Agents like Raymond Carter & Co will be able to assist in the preparation of returns but it is the taxpayer who must press the submit button.

And that button will be part of a computer-based process, at a minimum the inputting of numbers on an Excel spreadsheet.  The switch to computer-based data capture, processing and storage may have a dramatic impact on business owners who have habitually used manual ledgers, paper-based bank statements and carrier bags of receipts.

At Raymond Carter & Co, we will be looking to support that process change and we have signed up with Xero and Thomson Digita accounting software providers that we believe will deliver a Making Tax Digital reporting solution for our clients.

We have signed up for ‘beta testing’ of MTD and will be hoping that some of our clients can take part so that we and they can generate a complete understanding of the processing and reporting requirements.

The initial conversion to new processing and quarterly reporting will inevitably be painful but hopefully a by-product of that change will be better quality data that will help you make better decisions about your businesses.

  1. Key Tax Rates for 2016/17 and 2017/18

In these tables we are publishing some key tax rates for both 2016/17 and 2017/18.  The 2016/17 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2018.  The 2017/18 rates will be relevant for any income and expense you have from next week.

 

2016/17

2017/18

Notes

 

Your next Tax Return

This tax year

 

INCOME TAX

 

 

 

Personal Allowance

£11,000

£11,500

£12,500 by 2020/21

20% Basic Rate Upper Limit

£43,000

£45,000

£50,000 by 2020/21

 

 

 

 

Dividend Tax Rates

First £5,000:        0%

Basic Rate:     7.5%

Higher Rate:   32.5%

Highest Rate:   38.1%

First £5,000:        0%

Basic Rate:     7.5%

Higher Rate:   32.5%

Highest Rate:   38.1%

Unused Personal Allowance can increase the 0% band

 

 

 

 

Personal Savings Allowance

(‘PSA’)

First £1,000 0%

£500 for higher rate payers

First £1,000 0%

£500: High rate taxpayers

 

 

 

 

 

LANDLORDS

 

 

 

Rent-Room

£7,500

£7,500

Deduction from rental income

 

 

 

 

COMPANIES

 

 

 

Employment Allowance on Employers

£3,000

£3,000

per Company

NI thresholds:

-       Class 1 Employee

-       Class 1 Employer

 

12%  -   {between £676 &

13.8%   { £3,583 per month

 

12%  -   {between £676 &

13.8%   { £3,583 per month

 

National Living Wage

£7.20 per hour

£7.50 per hour

if 25 or over

Corporation Tax

20%

20%

19% from April 2018

 

 

 

 

VAT

 

 

 

VAT Threshold for registration

Over £83,000

Over £85,000

De-registration: below £81,000

Flat Rate Scheme

For Companies with Turnover <£150,000

 

Up to £230,000 turnover

 

 

 

 

CAPITAL GAINS TAX

 

 

 

Annual Allowance

£11,100

£5,550 for Trusts

£11,300

£5,650 for Trusts

 

CGT Rates

20% higher rate

10% basic rate

Except Property

20% higher rate

10% basic rate

Except Property

18% basic / 28% Higher rate for property sales

 

 

 

 

INHERITANCE TAX

 

 

 

IHT Rate

40%

40%

 

Nil Rate Band

£325,000

£325,000

 

Residence Nil Rate Band

nil

£100,000 from April 2017

Rising by £25,000 per annum for the next 3 tax years