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LITRG finds that while some Budget measures help younger people and those in work, many add to the complexity of the tax system, which is not helpful.

Introduction

The Chancellor’s aims for his Budget 2016 were to “put the next generation first” and to support small businesses and working people. Some of the measures can certainly be viewed as supporting younger people and allowing those in work to keep more of what they earn. Many of the measures will, however, add to the complexity of the tax system, which is not helpful to low income individuals trying to negotiate their tax responsibilities.

The Low Incomes Tax Reform Group (LITRG) has examined all of the Budget announcements, to see how they will affect those on low to modest incomes. Some of the key facts and figures are explored below.

Personal Allowance 2017/18

The personal allowance is the amount of income you can have in a tax year before you become liable to income tax. As previously announced, the personal allowance will increase to £11,000 for 2016/17. The Budget 2016 has announced that the personal allowance will increase again to £11,500 from 6 April 2017.

LITRG welcomes the increase in this allowance as it reduces taxes for many basic rate taxpayers. For example, a typical basic rate taxpayer will be £100 better off in 2017/18 as compared with 2016/17.

The group cautions, however, that raising the personal allowance is not necessarily the most efficient way of improving the financial position of people on low incomes because of the interaction with means-tested benefits. An individual who both pays tax and receives means-tested benefits may find that, as a result of the increased personal allowance, they pay less tax but they also receive less in benefits. For example, basic rate taxpayers in receipt of universal credit will only benefit by £35, not £100, from the increase.

Perhaps more importantly, increasing the personal allowance does not benefit those on the lowest incomes at all – that is those who have income of less than the current personal allowance. This means individuals who have earned only the national minimum wage for 30 hours a week during the 2015/16 tax year will see no benefit from the increased personal allowance. Those eligible for the national living wage from April 2016 will see their income increase, and may have to pay some income tax.

ISA and Lifetime ISA 2017/18

The ISA limit will rise to £20,000 with effect from 6 April 2017 (from a limit of £15,240).

From 6 April 2017, individuals aged under 40 will be able to open a ‘Lifetime ISA’. Eligible individuals will be able to contribute up to £4,000 per year and receive a Government bonus of 25% (one-quarter) of their contributions at the end of the tax year. Only savings put into the ‘Lifetime ISA’ before an individual’s 50th birthday will receive the 25% Government bonus.

Contributions to a ‘Lifetime ISA’ will use up an individual’s overall ISA limit (£20,000 from April 2017). So eligible individuals will be able to have both a Lifetime ISA and a normal ISA, but between them only save up to £20,000 per year.

The funds in a ‘Lifetime ISA’ can be put towards a deposit on a first home worth up to £450,000. After the age of 60, an individual will be able to access their ‘Lifetime ISA’ savings tax free. If they make withdrawals before the age of 60 (other than to fund a first home purchase), they will lose the Government bonus and have to pay a 5% charge.

National Minimum Wage increase

With the new National Living Wage of £7.20 per hour set to come in on 1 April 2016 for workers aged 25 and over, the Government announced in the Budget that the National Minimum Wage (NMW) main rate will be set at £6.95 per hour with effect from 1 October 2016. This rate will only apply to workers aged between 21 and 24 years old following the introduction of the National Living Wage and is in line with the Low Pay Commission’s recommendations.

The other NMW rates will also increase from 1 October 2016: the rate for 18-20 year olds will increase to £5.55 per hour; the rate for 16-17 year olds will increase to £4.00 per hour; and the rate for apprentices will increase to £3.40 per hour. The accommodation offset will increase to £6.00 a day.

Property and trading income allowances 2017/18

From 6 April 2017 there will be two new allowances for individuals with small amounts of property income or trading income. Each allowance will be £1,000.

The allowances will mean that individuals with property income and/or trading income below £1,000 will not have to declare the income to HMRC or pay any tax on it. If their property or trading income exceeds the allowance, they will be able to choose how to calculate their taxable profit – either using the usual profit calculation or by simply deducting the £1,000 allowance.

It is not yet clear exactly how the allowances will operate. A consultation is expected on the details later this year.

Renewals allowance

Landlords will no longer be able to use the renewals allowance from April 2016. From April, landlords of residential property will only be able to deduct costs that they actually incur on replacing furnishings.

The renewals allowance allowed the costs of replacing implements, utensils and articles used in a business. There is a new relief for residential landlords, allowing a deduction for actual costs incurred in replacing items such as furnishings and appliances, which takes effect from April 2016.

Corporation Tax

The rate of corporation tax will be cut to 19% from April 2017 and to 17% from April 2020. This cut will benefit small incorporated businesses as well as larger ones.

VAT registration and deregistration thresholds

The VAT thresholds for registration and deregistration will change with effect from 1 April 2016. The turnover limit for income tax self assessment ‘3-line accounts’ will also change to align with the VAT registration threshold, as will the entry and exit thresholds for income tax cash basis accounting.

From 1 April 2016, the registration threshold will increase to £83,000 (currently £82,000). The VAT deregistration threshold will increase to £81,000 (currently £80,000).

If your business makes taxable supplies above the VAT registration threshold, you must register and account for VAT. You can however choose to register voluntarily if your business makes supplies below the registration limit.

If your business is registered for VAT, but your taxable supplies fall below the VAT deregistration threshold, you can deregister. It is set lower than the registration threshold to avoid businesses trading around the threshold level having to frequently register and deregister.

The simplified reporting requirement (3-line accounts) for the income tax self assessment return will continue to be aligned with the VAT registration threshold. Small unincorporated businesses are able to use the simpler income tax cash basis to calculate their trade profits. The eligibility conditions for the cash basis are linked to the VAT registration threshold in place at the end of the relevant tax year. So, HMRC will introduce matching increases in the thresholds for income tax self assessment ‘3-line accounts’ and the income tax cash basis.

Changes to National Insurance contributions

The Government had already announced it proposed to change the way National Insurance contributions (NIC) are paid by the self-employed. It has now been confirmed that as from April 2018, Class 2 NIC will be abolished and payment of Class 4 NIC will contribute towards various state benefits from that date. This has been announced as a tax cut for the self-employed but it could also restrict their entitlement to state benefits.

LITRG is pleased, therefore, that the start date for this change has been delayed until 2018 (from a proposed earliest start date of April 2017) so that the Government can further review the possible impact of this change.

In addition to these changes for the self-employed, the Government announced it intends to reconsider the way NIC are paid by employees. LITRG awaits the proposals but again notes that significant further education is needed in connection with NIC so that people understand the implications of paying or not paying them, or claiming NI credits.

Capital Gains Tax rate reduction

The Chancellor announced a surprise reduction in the rates of capital gains tax in his Budget. Capital gains tax becomes due if you make a profit on the sale of an asset that exceeds the annual exempt amount (£11,100 for 2016/17). From 6 April 2016, if you are a basic rate taxpayer, any profit in excess of the exempt amount will be taxed at 10% (reduced from 18%) to the extent it falls within the basic rate band after any other income is taken into account, and at 20% (reduced from 28%) otherwise.

However, the new reduced rates will not apply in some specific circumstances, most notably to gains on residential property – they will continue to be charged at the 18%/28% rate. It should be noted that most disposals of main residential homes will remain exempt from capital gains tax because of the availability of Principal Private Residence relief.

Unfortunately, this now means there are four possible rates of capital gains tax, which makes what can already be a complicated tax calculation even more complex. LITRG is waiting to see more of the detail surrounding this announcement.

Help with understanding your pension

Measures have been proposed to make more pensions advice available on a tax-free basis to savers. These include enabling employers to pay up to £500 for an employee to be advised in relation to their pensions savings tax-free to the employee. There will also be a consultation on the introduction of a similar right for savers, under pensionable age, to use up to £500 of their pensions savings, without tax charge, to pay for advice in relation to those savings.

These are helpful provisions, but for many people the cost of the advice is likely to be significantly more than £500. LITRG is also concerned that the Government intends to consult on providing a simple definition of financial advice for this purpose. While the group is very much in favour of simplicity, it would be very concerned if this enabled people who are not properly qualified to provide advice.

Digital measures

From 2018 businesses, self-employed people and landlords who are keeping records digitally and providing regular digital updates to HMRC will be able to adopt pay-as-you-go tax payments that will enable them to choose payment patterns that suit them and better manage their cash flow. There is the additional commitment that for such individuals and businesses, the Government will explore options to simplify the tax rules.

The Chancellor has previously outlined and expanded upon his intention that individuals and small businesses would be able to access digital tax accounts that would be used to make tax payments simpler. These accounts, containing all the tax information that HMRC already have about taxpayers, will be available from 6 April 2016. The proposals included one that required individuals, businesses, the self-employed and landlords actively to manage and track their tax affairs digitally, using the digital tax account and apps to provide updates/returns to HMRC at least quarterly.

LITRG has raised concerns that while digital tax accounts may simplify matters for some low income taxpayers, the plans to introduce quarterly reporting introduce a potential compliance burden for businesses, self-employed people and landlords. There is also the major concern that, despite announcements of additional funding through the Broadband Investment Fund to support the growth of the digital infrastructure and access, a very significant proportion of the population, often the most vulnerable, remain digitally excluded. Whilst LITRG welcomes the Government exploring options to simplify the tax rules for those engaging online, whether such simplification will extend to the taxpayer who is unable to engage digitally is not stated.

Consultation is expected on the options to simplify the payment of taxes, such as the alignment of payment dates and bringing them closer to the point when profits arise, so that taxpayers make a single or regular payment that covers all their tax affairs.

LITRG would also expect there to be consultation and full impact assessments in relation to the additional reporting burdens for the self-employed. The need to report quarterly would potentially be an unwelcome burden on smaller businesses, and any kind of quarterly reporting for partnerships which is intended to give an accurate picture of the final liabilities would be almost impossible.

Self-employed

Self-employed working tax credit claimants are to be given access to business support, and the mentoring currently offered under the existing New Enterprise Allowance scheme will be extended to self-employed universal credit claimants. The Budget sets out the Government’s intention to trial face to face support, provided by Jobcentre advisers, for self-employed working tax credit claimants.

The aim is to help low earning self-employed workers grow their businesses. LITRG believes that changes are needed to the financial support that low earning self-employed workers get too.

There will be a new dedicated HMRC helpline to help new businesses, in particular providing support in relation to filing returns and paying tax. Other HMRC phone lines will be funded to stay open seven days a week. LITRG recommended the introduction of a dedicated helpline for new businesses to the Office for Tax Simplification (OTS) in its submission to their review of the taxation of small companies.

Students

Additional support to enable mature students who wish to continue their studies from level 3 training to post-graduate degrees has been announced. From 2018/19 new student loans will be available to English doctoral students without a Research Council living allowance. The loans can be up to £25,000 and the repayment rate will be 9% (there will be a combined repayment rate of 9% for graduates who are also repaying a Master’s loan).

The availability of Master’s loans will be extended to include part-time courses over three years where there is no equivalent full-time course.

Tax-Free Childcare – roll out in 2017

The Government announced in the Budget that the new Tax-Free Childcare (TFC) scheme, originally due to start in autumn 2015, will roll out in early 2017. Parents of the youngest children will enter the scheme first and it will be open to all eligible parents by the end of 2017. The Government also confirmed today that the existing scheme, Employer-Supported Childcare, will close to new entrants from April 2018.

The TFC scheme will operate through online accounts and for every 80 pence paid in, the Government will add 20 pence up to a maximum of £500 (£1,000 for disabled children) per child for each three-month entitlement period.

Since the scheme was first announced, LITRG has raised many concerns about the interaction between TFC and other childcare schemes. People will face extremely complex and difficult financial decisions about whether to join the new TFC scheme or stay in existing schemes including childcare vouchers, tax credits and universal credit.

Real Time Information and welfare benefits

HMRC’s Real Time Information (RTI) system is to be used by the Department for Work and Pensions (DWP) to reduce fraud and error in the benefits system. The data from RTI is already used by HMRC to check tax credit awards and by the DWP to process universal credit claims. This measure means an extension of the use of RTI to other benefits payments.

This may help to reduce the number of incorrect benefit payments and the overpayment problems that these can create. There is a need to be cautious when using RTI data, though, since it is based on a different measure of income from the benefits it is used to check. If the data is used uncritically, it can lead to officially-generated errors when setting benefit awards.

Shared Parental Leave and Pay for grandparents

The various types of statutory parental leave are set for a review as the Chancellor announces a consultation in May 2016 on how to extend Shared Parental Leave and Pay to also cover working grandparents. This is a further step in the Government’s plan to widen the options of support systems for working families.

Given the variety and options currently in place are beginning to get very complicated to understand, LITRG is glad to see the Government are planning to consult on not only extending provision, but also options for streamlining the whole policy and simplifying eligibility requirements.

Help to Save

The Government intends to introduce a Help to Save scheme to assist some lower paid working households to save. The scheme will be aimed at universal credit recipients with earnings above a set threshold or working tax credit claimants who want to save a regular monthly amount. Claimants can save up to £50 a month and the Government will top up those savings by 50% after two years, effectively meaning claimants will earn a Government bonus worth up to £1200.

Conclusion

LITRG has welcomed a number of the measures announced in the Budget, but the group have also noted that a number of the proposals introduce additional complexity. It would welcome a more holistic approach to the tax and welfare systems and also an approach that endeavours to minimise the creation of more complexity, whether that is in the application of tax rates, bands and allowances, the choices available to savers or the options for benefits claimants. Where LITRG has concerns about announcements, it will raise them in due course when the Government consults on them.