The key theme of the Chancellor’s Spring Budget 2017 in relation to taxation was the importance of having a fair, sustainable and competitive tax system.
The Chancellor’s Spring Budget 2017 was both Mr Hammond’s first and last Spring Budget, and the first of two Budgets expected in 2017. Having introduced his key theme, he justified several announcements by reference to improving fairness.
LITRG review of the Budget announcements
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. In addition, Mr Hammond reminded his audience of previously announced measures – a quick recap of those that affect the 2017/18 tax year is included.
Changes to National Insurance contributions for the self-employed
As expected the Government announced further changes to National Insurance contributions (NIC) for the self-employed from 6 April 2018. These are additional to changes previously announced, which are also due to take effect in the 2018/19 tax year, such as the abolition of Class 2 NIC.
The new proposals mean that the rate of Class 4 NIC will increase from its current level of 9%: firstly, there will be an increase of 1% from 6 April 2018 (up to 10%), and secondly a further 1% increase from 6 April 2019 (up to 11%). This is intended to align the amount of NIC the self-employed pay with the rate paid by employed workers, and to reflect the fact that there is now little difference in the contributory benefit entitlement of self-employed and employed NIC.
The announcement may have surprised some, given the Government’s 2015 election ‘tax lock’ promise (see Useful Link below), not to raise the rate of certain key taxes for the duration of the current Parliament to 2020. However, the legislation implementing that promise only included Class 1 employees’ NIC and not Class 2 or Class 4 NIC paid by the self-employed.
According to the Treasury, only the self-employed with profits above £16,250 will pay additional NIC. However, some self-employed workers with very low profits are poised to lose out on their benefits entitlement, due to the simultaneous abolition of Class 2 NIC. So, on the one hand, those with low profits will have a saving, but those who currently contribute towards their state pension by opting to pay Class 2 NIC, despite having profits below the Small Profits Threshold, will have to pay voluntary Class 3 NIC, which at £14.25 per week (for 2017/18 tax) is more than five times what they are paying now.
The dividend allowance will be reduced from £5,000 to £2,000 from 6 April 2018. This was originally introduced in April 2016.
The dividend allowance means that dividends within the allowance are taxable at a 0% rate of tax. It should be noted that the allowance uses up the basic rate and/or higher rate band of tax. From April 2018, dividend income in excess of £2,000 will be taxed at the dividend tax rates of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The reduction in the dividend allowance will mean that some people on overall modest incomes will have to start paying tax on their dividend income if it exceeds £2,000. However, a typical investor would need a fairly substantial portfolio of stocks and shares outside an ISA to be affected by this change. Small incorporated businesses may need to review the balance of dividends and salary.
The dividend allowance and the dividend rates of tax also apply to the dividend income of Scottish taxpayers.
Digital measures – Making Tax Digital (MTD)
The Chancellor announced that unincorporated businesses and landlords with turnover below the VAT threshold (£85,000 from 1 April 2017) will have an extra year, until April 2019, to prepare for MTD. Originally, the proposal was for MTD to be mandatory for unincorporated businesses and landlords with turnover above £10,000 from April 2018. This will provide them with more time to prepare for digital record keeping and quarterly updates, obtain appropriate software and seek assistance.
The delay should also allow time for HMRC to ensure that the new system is properly tested for this group of taxpayers. In particular, it will enable the pilots due to start in April 2017 to run a full cycle of four quarterly reports and an end-of-year declaration, and for the software companies to make any changes indicated during the tests, before smaller businesses and landlords face mandation.
During this deferral period, it is hoped that the Government will address the issue whereby universal credit claimants that fall within the MTD reporting obligations could be faced with making at least 16 different reports of business income and expenses to Government departments each year.
The Government has confirmed that the turnover threshold above which businesses will be required to keep digital records and report quarterly to HMRC will remain at £10,000, which is disappointing as MTD will impose a significant administrative burden on very small businesses.
The main timescales for mandation into MTD will therefore be:
- April 2018 – Unincorporated businesses with a turnover above the VAT registration threshold, for their Income Tax obligations.
- April 2019 – Unincorporated businesses with a turnover above £10,000 but below the VAT registration threshold for their Income Tax obligations, PLUS all businesses (unincorporated and incorporated) for their VAT obligations.
- April 2020 – All incorporated businesses for their Corporation Tax obligations.
Cash basis – increase in threshold and extension to landlords
Following consultation, the Government has confirmed that it will increase the cash basis entry threshold to £150,000 (£300,000 for universal credit claimants), and exit threshold to £300,000. It will also extend the use of the cash basis to unincorporated landlords. In addition, the Government will simplify the rules on capital and revenue expenditure within the cash basis, with the aim of making it easier for businesses to work out whether their expenditure is deductible for tax.
VAT – changes to registration and deregistration thresholds
From 1 April 2017, the VAT registration threshold will increase from £83,000 to £85,000 and the deregistration threshold from £81,000 to £83,000. The turnover limit for income tax self-assessment ‘3-line accounts’ will also change to align with the VAT registration threshold.
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. So, HMRC will introduce matching increases in the threshold for income tax self-assessment ‘3-line accounts’.
Different forms of remuneration – new consultations
Employers can choose to remunerate their employees in a range of different ways, but the tax system treats these different forms of remuneration inconsistently. The Government has announced three new consultations as part of considering how to make the tax system fairer and more coherent:
- Taxation of benefits in kind – The Government will seek views on exemptions and how to value benefits in kind.
- Accommodation benefits – A consultation will contain proposals to bring the tax treatment of employer-provided accommodation and board and lodgings up to date.
- Employee expenses – The Government will seek views to improve its understanding of the use of the income tax relief for employees’ expenses, including those that are not reimbursed by their employer.
LITRG will contribute to these calls for evidence and consultations where appropriate.
Rent-a-room relief – new consultation
Further to a welcome increase in the rent-a-room relief limit to £7,500 from 6 April 2016, the Government has now said that it will consult on proposals to redesign rent-a-room relief. The aim appears to be to ensure the relief supports longer-term lettings and affordable long-term lodgings.
Rent-a-room relief allows people to receive tax-free income from renting out a room or rooms in their only or main residential property. The relief also applies to someone who rents out rooms in a guest house or bed & breakfast, provided that the property is also that individual’s main residence.
Capital Gains Tax
The Chancellor did not announce this, but within the Budget documents there was confirmation that the annual exempt amount for capital gains tax is increasing to £11,300 from April 2017 (£11,100 2016/17).
There were further announcements on new maintenance loans and loans for postgraduate doctoral studies.
- Further education maintenance loans – from 2019-20 these will be available for students on technical education courses at levels 4 to 6 at National Colleges or Institutes of Technology.
- Maintenance loans for part-time students – following on from the announcements in 2015, these loans will be available from September 2018 for degree level students. From 2019 maintenance loans will also be available for other qualifying courses such as distance-learning. The impact of these loans will be reviewed within five years.
- Post graduate doctoral loans – loans of up to £25,000 for full-time or part-time graduates (for courses lasting up to eight years) will be available from September 2018. However, the loans will not be available for students receiving funding from a Research Council or a NHS Bursary for doctoral study. Repayments will be calculated at 6% of income above the repayment threshold (currently £21,000) and will be paid concurrently alongside existing undergraduate student loans.
Free school transport
The Government will expand the current arrangements for free school transport to children aged 11-16 attending selective secondary schools who receive free school meals or whose parents receive maximum working tax credit. This will be a valuable boost for many low-earning families whose children travel between 2 and 15 miles to reach their selective school.
Nevertheless, this is not a perfect system. Families whose income takes them just over the earnings threshold to get free school meals or maximum working tax credit are going to miss out. And the link between the new free transport benefit – known for this reason as a ‘passported benefit’ – and receipt of either free school meals or of maximum rate working tax credit – the ‘underlying benefits’ on which the passport is based – can create a catastrophic cliff-edge to entitlement should the parent lose entitlement to the underlying benefit. Sometimes in this type of situation there is a rule preserving the passported benefit for a period after entitlement to the underlying benefit is lost (an ‘inbuilt run-on provision’).
This type of support – a passported benefit – is tremendously helpful as a supplement. But it cannot be overstated that once this approach is adopted, any change in the rules to the underlying benefit needs to consider the effect on the passported benefit as well. The more support is linked to receipt of an underlying benefit, the greater the impact if that underlying benefit is lost.
The Chancellor announced a green paper to examine markets that are not working efficiently or fairly, with the aim of strengthening consumer protection. LITRG believes that this examination should include the tax refund market, following a rise in correspondence to the group from individuals who seem to have been misled into claiming their tax refund via a tax refund company.
Every year, HMRC pay out hundreds of millions of pounds in tax refunds, on everything from mileage claims for care workers to professional subscriptions for teachers and nurses. While it is preferable that those due tax refunds should receive them rather than not, tax refund companies sometimes charge fees of up to 40% or 50% of the value of the refund. This in itself is not illegal, but it is entirely possible and generally more beneficial for individuals to engage an accredited agent for a fraction of that amount, or even apply for their refund in person without paying any fee.
Recap of previously announced changes that affect 2017/18
Personal Allowance 2017/18
As previously announced, the personal allowance will increase to £11,500 for 2017/18. The personal allowance is the amount of income you can have in a tax year before you become liable to income tax.
The Government will shortly roll out the new Tax-Free Childcare scheme. This is for working families with children under 12, and provides up to £2,000 a year for each child to help with childcare costs. From September 2017, the free childcare offer will double, from 15 to 30 hours a week for working families with 3- and 4-year-olds in England.
Child element of child tax credits and universal credit
The child element in universal credit and the individual element in child tax credit will be payable to a maximum of two children from April 2017. As confirmed on 20 January 2017, however, the Government will provide exceptions to limiting support to two children for the child element in child tax credits and universal credit. These exceptions are for third and subsequent children where parents face particular circumstances, such as multiple births.
Universal credit taper rate
The universal credit taper rate on earned income will reduce from 65% to 63% with effect from April 2017. This is a small step in the right direction, in that it not only increases the universal credit received by the claimant, but it also reduces the disincentive faced by those on high marginal deduction rates to make financial progress through work.
ISA and Lifetime ISA 2017/18
The ISA annual investment limit will rise to £20,000 with effect from 6 April 2017 (from a limit of £15,240). The limit for Junior ISAs and Child Trust Funds will increase to £4,128 a year.
The Lifetime ISA is available from 6 April 2017 to individuals aged under 40. It allows them to save up to £4,000 each year and receive a Government bonus of up to £1,000 a year on these contributions at the end of the tax year. The funds can be withdrawn tax free if they are used to put towards a first home or after they have turned 60.
The nil rate band limit will remain at £325,000 for 2017/18, but the residence nil rate band limit will be introduced for deaths on or after 6 April 2017. This is worth £100,000, but can normally only be used against a residence left to a direct descendant on death.
The Chancellor confirmed that the interest rate offered on the new NS&I Investment Bond (announced at Autumn Statement 2016) will be 2.2%. The three-year savings bond will be available to those aged 16 and over, for a period of 12 months from April 2017. Individuals may save up to £3,000 each in the account.
National Minimum Wage and National Living Wage
All the rates for the National Living Wage (NLW) and the National Minimum Wage (NMW) will rise with effect from 1 April 2017. Previously, the NMW rates used to rise annually on 1 October, so it is important that employers are aware of this change.
The NLW, for workers aged 25 and over, will increase to £7.50 per hour (from £7.20).
The NMW rates will also increase: the rate for 21-24 year olds will increase to £7.05 per hour; the rate for 18-20 year olds will increase to £5.60 per hour; the rate for 16-17 year olds will increase to £4.05 per hour; the rate for apprentices will increase to £3.50 per hour.
Salary sacrifice changes
The tax and National Insurance advantages of salary sacrifice schemes will be removed from April 2017, except for certain arrangements that the Government wants to promote such as childcare vouchers, pensions, Cycle-to-Work and ultra-low emission cars. Employees will be able to continue to enjoy favourable tax and National Insurance treatment in respect of these benefits in kind at a reduced cost at the expense of the Exchequer.
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 by deducting actual expenses or by simply deducting the £1,000 allowance.
VAT Flat Rate Scheme
The simplified Flat Rate Scheme (FRS) for VAT used by many small businesses allows businesses to work out their quarterly VAT bills by taking a percentage of their VAT-inclusive income only, and ignoring VAT paid on their expenses. The percentage ranges from 4% –14.5% according to the type of business.
However, the Government will introduce a higher rate of 16.5%, which will apply to FRS businesses that have negligible expenditure on day-to-day goods or materials with effect from 1 April 2017. This is likely to remove the cash advantage of being in the FRS for those businesses with limited costs.
The Budget confirmed that the tax treatment of foreign pensions will be changed from 6 April 2017 so that it is more closely aligned with the UK’s domestic pension tax regime. This includes removing the rule under which currently only 90% of foreign pension income is charged to income tax. So, those in receipt of a foreign pension will in future pay tax on 100% of the income received.
The changes will mean that for a £1,000 foreign pension with tax due in the recipient’s hands at the basic rate of 20%, there will be an extra £20 a year tax. Also, for those who claim tax credits, the extra 10% of income brought into tax will fall into their tax credits income calculation, so they may suffer a further cost.
Pensions – Money purchase allowance
Following an Autumn Statement 2016 consultation, the Government has confirmed that the pensions ‘money purchase annual allowance’ will be reduced from £10,000 to £4,000 with effect from April 2017.
The measure is aimed at deterring people from manipulating the pension flexibility rules to engage in ‘tax-free cash recycling’, which might mean that people seek to get further tax relief on money they have just taken out of a pension.
Life insurance policies
As previously announced, the Government will legislate regarding the very large and unfair tax charges that arise in certain circumstances from life insurance policy part-surrenders and part-assignments. This will allow taxpayers to ask HMRC to recalculate the gain on a ‘just and reasonable’ basis, leading to fairer outcomes for policyholders. The changes will take effect from 6 April 2017.
Digital measures – tax credits
New claims for tax credits can be made from digital devices from April 2017.
Public sector – off payroll
These changes mean that if a person is working through their own limited company in the public sector then they are no longer in charge of determining if IR35 applies (rules that affect your tax and NIC if you work for a client through an intermediary, such as a limited company). This task now falls to the public body and if IR35 applies, PAYE tax and NIC is withheld at source on any payments to the limited company. HMRC have developed a tool to help public sector bodies make the IR35 decision.
These changes, coupled with the changes to the FRS VAT system, mentioned above, mean that there may be little benefit, from a tax perspective, for contractors to continue to work through a limited company in the public sector.
While LITRG thinks that these changes are more likely to impact people such as locum doctors or supply teachers, i.e. not necessarily those on low incomes, one consequence is likely to be a move of such people to umbrella companies (if they generally get work through an agency, then some agencies will push people into umbrellas themselves, in other instances, workers will choose to go, perhaps attracted by the ‘benefits’ that umbrella companies can provide over and above working through an agency). Due to the group’s interest in agency workers and umbrella companies, this is something that LITRG will be keeping an eye on.
The rate of corporation tax will fall to 19% from April 2017 and then again to 17% from April 2020.
LITRG welcomes a number of the announcements in the Budget, in particular the one-year deferral of the introduction of MTD for those businesses with turnover of less than the VAT registration thresholds. But MTD is still likely to increase administrative burdens on the smallest businesses overall, particularly universal credit claimants who will soon have to report monthly to the Department for Work and Pensions on a different basis from that on which they report quarterly to HMRC. And a possibly unintended effect of the reforms to National Insurance is that traders with very low profits may have to pay five times more than they do now to secure their state pension entitlement. LITRG urges the Government to use the time between now and April 2018 to fix these anomalies which could otherwise damage the small business sector in later years.