Budget 2016 – Personal tax

Tax rates

There were no changes to rates of income tax announced in the Budget.

Allowances and tax bands

The tax allowances and bands for 2016-7 had been announced previously, as a reminder: the personal allowance will be £11,000, with the income on which you start to pay tax at 40% increasing to £43,000.

This means that most people with straight forward tax affairs and no benefits in kind (for example, cars or health insurance) should have a tax code of 1100L taking effect in April 2016.

Watch out if you have significant dividend income – HMRC are trying to include it in your tax code to collect the tax earlier.  You don’t have to pay the tax through PAYE (especially if you complete a tax return anyway) – they will amend the code if asked.

Other allowance levels can be found on the HMRC web site here.

The Chancellor announced in the Budget that the personal allowance for 2017-8 will increase to £11,500, with the 40% band starting at £45,000.

From 6 April 2016, there will be one income tax personal allowance regardless of an individual’s date of birth – ie there will be no higher allowances for older people.

Marriage Allowance

A reminder that the Marriage Allowance started from 6 April 2015.  This allows a spouse or civil partner to transfer £1,060 (£1,100 for 2016-7) of their personal allowance to their spouse (where both were born after 5 April 1935).  Neither party can be higher or additional rate tax payers.

The Marriage Allowance is set at 10% of the personal allowance.

This is mainly aimed at situations where one partner is a non-tax payer and the other pays tax at 20%.  However, it may also have benefits where one partner has a salary of less than the tax threshold and dividend income taxable at 10% and the other has income, such as PAYE income, taxable at 20% (eg, shareholder-directors taking a salary of the lower NI limit plus dividends within the 20% band).

Savings

A reminder that the personal savings allowance starts from 6 April 2016.  This will remove tax on up to £1,000 of savings income for basic rate tax payers and up to £500 for higher rate tax payers.  Additional rate tax payers will not receive an allowance.

Tax will no longer be deducted at source on interest paid by banks and building societies.

ISAs

The ISA limit will increase from £15,240 to £20,000 from 6 April 2017.

The Lifetime ISA

A new ‘Lifetime ISA’ will be introduced from 6 April 2017.  This will allow adults under 4o to open a Lifetime ISA and pay in up to £4,000 per annum.  The government will add a 25% bonus to the ISA, so, up to £1,000.

Contributions can continue up to the age of 50.

Funds can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn, with the bonus, from the age of 60.

Savers can make withdrawals at any time before the age of 60, but the bonus element and any interest or growth on it will have to be returned to the government, and an additional 5% charge will be applied if the withdrawal is not for the purchase of your first home.

There will be further consultations as to whether savers will be allowed to borrow against the saved money.

Help to Save

Prior to the Budget, the government announced a new Help to Save scheme for those on low incomes.

The scheme will be open to adults in receipt of Universal Credit with household earnings equivalent to 16 hours at the National Living Wage, or working tax credit.

A 50% bonus will be added on up to £50 per month of savings in a Help to Save account, paid after two years with the option to save for further two years.

Bad debt relief for peer to peer loans

A reminder that tax relief will be allowed for bad debts incurred on peer to peer loans against other peer to peer income.

Tax-free childcare

The tax-free childcare scheme first announced in the 2013 budget will be rolled out from early 2017.  Parents of the youngest children will enter the scheme first, with all eligible parents brought in by the end of 2017.

The scheme will be worth up to £2,000 per child (under the age of 12) each year (£4,000 for disabled children).

The existing scheme Employer-Supported Childcare will remain open to new entrants until April 2018 to support the transition between the schemes

Tax Credits

There are two types of Tax Credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more child.

There were no changes to tax credits announced in the Budget 2016.   The rates of payments remain the same as 2015-6, apart from a reduction in the income rise disregard from £5,000 to £2,500,  and can be found at here.

Child Benefit

There were no changes announced to child benefit in Budget.  Rates for 2016-7 will remain at £20.70 for the first child and £13.70 for subsequent children.

A reminder that rules came in on 7 January 2013 for higher earners which mean that, once the income of one of the parents reaches £50,000, 1% of the Child Benefit award will effectively be lost for every £100 of that parent’s income between £50,000 and £60,000 and at £60,000 of income, any remaining benefit will be withdrawn.

Landlords

A reminder of some announcements from the Summer Budget 2015:

Tax relief on interest

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits if they pay tax at the higher rate. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

  • in 2017-8 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 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
  • in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
  • from 2020-1 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

Wear and tear allowance

From April 2016, the replace the Wear and Tear Allowance (a deduction of 10% of the rent for landlords of furnished properties) with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings.

Rent a room

Rent a Room relief, which provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property, will increase from £4,250 to £7,500 per year from 6 April 2016.

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