Budget 2016

There is a lot more detail in the background and we are still considering the draft Finance Bill clauses just released, and so these are just some of the key announcements.

Personal Taxes

The government proposes to increase the higher rate tax threshold to £50,000 by the end of the current parliament. The income tax basic rate band for 2016/17 is £32,000 with a 0% starting rate band of £5,000 for certain types of savings income. The government previously announced that the 20% basic rate limit would be £32,000 for 2016/17 and £32,400 for 2017/18. The figure for 2016/17 is unchanged; the figure for 2017/18 has been revised upwards to £33,500. As a result, the higher rate threshold (i.e. the personal allowance plus the basic rate band) will be £43,000 in 2016/17 and £45,000 in 2017/18. The National Insurance Contributions (NIC) upper earnings limit will also increase to remain aligned with the higher rate threshold.

RS Comment

This was as previously announced and broadly continues the trend towards helping Britain’s “middle earners”. It would seem that many people will gain, but of course there will always be some who are unaffected.

The ISA limit is to rise to £20,000 from April 2017, and along with the new lifetime ISA for people aged under 40 to save up to £4,000 per year and receive a bonus of £1 from the Government for every £4 invested, seems designed to aid people who have minimal pension provision. There is supposed to be no tax charge on drawing the funds early from the lifetime ISA, unlike a pension.

RS Comment

Whilst these measures appear generous and certainly less complex on the face of it than pensions, it is perhaps questionable how many individuals will be able to save up to the annual limits in order to fully benefit.

From April 2018, the government plans to tighten the scope of the exemption for termination payments and align the tax and NIC rules. This is subject only to a further technical consultation over the summer. The first £30,000 of a termination payment will remain exempt from income tax and the full payment will be outside the scope of employee NIC. Employers NIC will be aligned with the income tax treatment, so the elements of a termination payment over £30,000 will now also be subject to Employer NIC if they are subject to income tax. The rules on which types of payments will be treated as salary and which will be subject to the termination payment rules will be tightened and clarified. The most significant change is that all payments in lieu of notice (regardless of whether they are contractual or not) will be subject to income tax and NIC in the same way as other payments of earnings.

RS Comment

For a while now, the availability of the £30,000 exemption has not necessarily been guaranteed, and depending on the facts of the case, there have been challenges in structuring termination packages tax efficiently. However, there has still often been scope to argue that payments in lieu of notice, if not contractual or expected, fell within the exemption. This future change will put an end to that and seems that most “run of the mill” termination packages will attract more tax and Employers National Insurance.

Capital Gains Tax and Entrepreneurs Relief (ER)">

Following much consultation with two main professional bodies (CIOT and Tax Faculty) the Government agreed to revisit some Entrepreneurs Relief changes that were announced in last year’s Budget, as they were rushed through and had unfavourable consequences for genuine commercial situations. The three areas affected are as follows:

  1. There was a restriction inhibiting Entrepreneurs Relief (ER) or sales of shares by entrepreneurs in companies that in turn held stakes in Joint Venture trading companies. Under last year’s changes, the activities of a joint venture company were not to be treated as carried on by a company which holds shares in it, and also all activities of a corporate partner in a firm were treated as not being trading activities, for ER purposes. There will now be new definitions of ‘trading company’ and ‘trading group’ for ER purposes, and where these apply, a company which holds shares in a joint venture company will be “looked through” and treated as if it carried on a proportion of the activities of the company that it had invested in. Also, the activities of a corporate partner in a firm will be treated as having their true nature (trading or non-trading) when determining whether the company is a trading company. This measure is to be backdated for disposals after 18 March 2015 of shares in companies that hold shares in JV’s.
  2. Following Finance Act 2015, when a business was sold to a family member and there was an associated disposal of a personally owned business asset, ER was not available on the gain on the asset. The good news is that, this change will now be reversed in Finance Bill 2016 and will be backdated to 18 March 2015, the date Finance Act 2015 became effective.
  3. Following Finance Act 2015 the gain on the goodwill of a business sold to a company owned by the owner of the business was not eligible for ER. However, this change also prevented ER being claimed where the company was owned by a member of the family as part of a normal family succession. Finance Bill 2016 will now allow gains on the goodwill to be eligible for ER provided the claimant owns less than 5% of the acquiring company in terms of shares and voting powers. If the transfer of the business to a new company is part of an arrangement to sell it to a new independent owner, ER will be due even where the claimant owns more than 5% of the shares or voting powers. The change will be backdated to 3 December 2014.

RS Comment

These three measures are very good news for genuine commercial structures where the owner exits, sells business assets to a continuing family member, or there is the succession of the family business. Standing back and looking at the commercial reality of these scenarios, it is only fair that the shareholder selling should benefit from ER.

It is particularly helpful that the proposed amendments to the legislation will take effect from the date(s) of the original Finance Act 2015 measures, or in the case of the goodwill measure, from 3 December 2014, thereby ensuring that taxpayers who were caught out by the unintended effects will no longer be adversely affected.

There were some unpredicted announcements on Capital Gains Tax rates for disposals on or after 6 April 2016, of assets other than properties which are not one’s principal residence (i.e. investment properties). Clarification for mixed use properties is to be included in the final rules. The headline rate will be cut to 20% from 28% and there will be a cut to 10% from 18% for basic rate taxpayers.

RS Comment

The broad aim here seems to be an incentive for people to invest in companies over property. For some time the Government has been on the offensive towards owners of second properties. Whether it will have the desired effect on the housing market is open to debate. Some commentators predict that it may just result in landlords retaining, rather than selling properties, and that rents might rise.

A new 10% rate of CGT for gains will apply on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10 million of gains.

RS Comment

This was unpredicted and billed as an “Entrepreneurs Relief” for longer term investors in unlisted companies. Whilst there seems some merit in extending the 10% tax rate to longer term investors in shares, who will no doubt be happy, entrepreneurs who are genuinely involved in the day to day to day running of their business might feel a little aggrieved.

Businesses

In keeping with the longer term aim of gradually reducing corporation tax over the next few years, to make the UK one of the lowest tax jurisdictions for businesses, it was announced that Corporation Tax will be cut by a further 1% to 17% in April 2020. This follows the previously announced rate of 18% that was to apply.

RS Comment

Whilst this is good for some small companies, particularly those that make good profits and retain them, the additional tax on dividends that was announced last year may mean that the overall net tax saving for owner managers who have to extract most of their profits to live on, may not benefit much in net tax terms. This also seems part of a wider aim to attract foreign investment into the UK.

For losses incurred on or after 1 April 2017, companies will be able to use carried forward losses against profits from other income streams or from other companies within a group.

RS Comment

This may benefit those companies that have income streams other than trading income or a group structure, but for the simpler business it will have no meaningful impact.

In contrast to the future cut in corporation tax mentioned above, the rate of additional corporation tax on loans made by owner managed companies to their shareholders/directors will increase to 32.5% from the long standing rate of 25%. It applies to loans made on or after 6 April 2016.

RS Comment

This was designed apparently to ensure that the rules continue to prevent business owners gaining an unfair tax advantage by taking loans from their companies rather than remuneration or dividends. We actually think this is a fair change, and it effectively mirrors the new effective personal tax rate that will apply to dividends in the higher rate band from 6 April 2016.



The government will extend the 100% first year allowance (FYA) for low emission cars for a further three years from April 2018 to April 2021. However, the carbon dioxide emission threshold below which cars will be eligible for the FYA is to be reduced from 75g/km to 50g/km from April 2018. The main rate threshold for capital allowances for business cars will reduce to 110 grams/kilometre of CO2.

RS Comment

This is supposed to reflect the general fall in vehicle emissions and for certain businesses, and depending on sourcing a suitable vehicle, the 100% FYA in particular can yield a useful tax saving and upfront cash-flow benefit. And for plant intensive businesses that might already use the 100% Additional Investment Allowance, this represents an extra 100% deduction, along with other specific assets such as energy saving items.

Class 2 National Insurance has been around for many years, but from 2018 it is planned to be abolished, with a new “merged” Class 4 charge taking its place for self-employed individuals.

RS Comment

This has been coming for a while and will be a small step to simplify the regime for self-employed individuals.

Some predictions which didn’t materialise

  • Many insolvency practitioners had rushed to push through voluntary liquidations before Budget Day as it was expected that Capital gains treatment on distributions upon a voluntary liquidation would be abolished with immediate effect, where for example, money had been built up in the company and not distributed. The Budget speech was silent on this. However, the draft Finance Bill clauses suggest that with effect from 6 April 2016, certain distributions on a winding up will be subject to income tax rather than capital gains tax. We need to consider further what sort of situations might be caught as the legislation appears to be drafted in quite general, non-specific terms.
  • It was thought that the government might make salary sacrifice ineffective for tax and NIC purposes in the Budget. Instead, no change has been announced.
  • No major changes to tax relief on pension contributions.