Rises in the personal allowance and the higher rate threshold 2016.
The Personal Allowance will increase from £10,600 in 2015/16, to £11,000 on 6th April 2016. The Chancellor had announced on 8 July last year that the Universal Allowance (previously Lower Personal Allowance) would increase to £11,200 from April 2017. In the budget, he announced that the Universal Allowance would increase to £11,500 from April 2017, a further £300 which will be welcomed by many.
The level of earnings at which an individual will start to pay the higher rate of Income Tax will increase from £42,385 in 2015/16, to £43,000 on 6th April 2016 and then again to £45,000 in April 2017. The National Insurance contributions (NICs) Upper Earnings/Profit Limits is aligned to the higher rate threshold and will therefore also increase.
The Office for Tax Simplification (OTS) have been reviewing the legislation relating to termination payments. The government have announced that legislation will be introduced:
- clarifying and tightening the rules about the taxation of termination payments. This will include introducing legislation to clarify that all payments in lieu of notice and certain damages payments are taxable as earnings and removing Foreign Service relief.
- Aligning the employer NICs and tax treatments of termination payments, so employers will have to pay NICs on the elements of termination payments that exceed £30,000. These changes will be legislated in Finance Bill 2017 and a future NICs Bill and will take effect from April 2018. A consultation will be published over the summer.
In some ways this is good news because of the confusion over how payments such as pay in lieu of notice (PILON) should be treated. The negative aspect is that termination payments will cost employers more.
Of specific interest is the note that termination payments in excess of £30,000 will attract employer NI. We will have to wait to see whether employees will also pay NI on the element above £30,000, although from the information published so far, it would appear not.
Payrolling of benefits in kind 2016
As most of you will know, employers are allowed to voluntarily payroll benefits from April 2016, with three exceptions:
- Beneficial Loans
- Accommodation, and
- Non-cash vouchers
It is understandable that loans and accommodation have been excluded, but it less clear why non-cash vouchers were because they have to be processed through the payroll for Class 1 NI in any case. Subjecting them to PAYE at the same time would actually be easier for employers. It is good to hear that the government are proposing to permit the payrolling of non-cash vouchers from April 2017.
Personal Savings Allowance 2016
Legislation is being introduced, effective 6 April 2016, to provide for a new tax-free Personal Savings Allowance (PSA) for individuals. This will apply on the following basis:
- 0% rate for up to £1,000 of savings income, such as interest, paid to an individual.
- 0% rate for up to £500 of savings for individuals with higher rate income.
- It will not be available to individuals with any additional rate income.
Banks, building societies and National Savings and Investments (NS&I) will also cease to deduct tax from the account interest they pay to customers.
Because Scotland now has its own tax varying powers, legislation will have to be introduced to provide for the application of English Votes for English Laws in respect of income tax rates. The UK-wide savings rates of income tax will be renamed as:
- savings basic, savings additional and,
- savings higher.
The main rates of income tax will then apply to the non-savings, non-dividend income of any individual taxpayer that is resident in the UK and is not subject to the Scottish rate of income tax. A default rate of income tax will apply to the non-savings, non-dividend income of taxpayers who are not subject to either the UK main rates of income tax or the Scottish rates of income tax. These include trustees, non-UK resident companies and non-UK resident individuals.
Employment and benefits in kind 2016
No changes have been made to the taxation of employer provided cars for 2016/2017 other than those already announced. In other words:
- The 3% surcharge for diesel engine cars will remain until at least 2021.
- As announced at Budget 2015, legislation is being introduced in Finance Bill 2016 to increase the appropriate percentage of list price subject to tax by 3 percentage points for cars emitting more than 75 grams of carbon dioxide per kilometre (gCO2km), to a maximum of 37%, in 2019 to 2020.
- The 3 percentage point differential between the 0-50 and 51-75 gCO2km bands and between the 51-75 and 76-96 gCO2/km bands will remain.
- The legislation also modifies the appropriate percentage for cars which have no registered CO2 emissions figure. The appropriate percentage will be increased by two percentage point for each band, these changes apply to 2017 to 2018 and 2018 to 2019.
Car and Van Fuel Benefit
The multipliers used for both company cars and vans will be increased in line with RPI with effect from 6 April 2017. The changes will be introduced by secondary legislation later in 2016, in time for the usual tax code exercise in January 2017.
The van benefit charge for 2017/2018 will be increased by Retail Price Index (RPI), based on the September 2016 RPI figure. This will be introduced by secondary legislation later in 2016 in time for the tax code exercise in January 2017.
The government is also intending to extend the van benefit charge support for zero emission vans so that from 6 April 2016 the charge will be 20% of the main rate in 2016 to 2017 and 2017 to 2018, and will then increase on a tapered basis to 5 April 2022.
The government intends to review the van benefit charge for zero emission vans again at Budget 2018.
Alignment of dates for 'making good' payments
Many employees receive benefits from their employer where they are required to make good the cost of the benefit. A simple example is an employer agreeing to provide family medical insurance cover to an employee but on condition that the employee makes good the additional cost of spouses/partners/children.
The government is in discussions about aligning the dates by which an employee has to ‘make good’ the cost of their benefit-in-kind to reduce their tax liability. This is intended to simplify and clarify the current range of dates for ‘making good’ payments.
The consultation will be published in the summer and will run for 12 weeks.
Salary Sacrifice for Provision of Benefits in Kind
There has been a lot of discussion in the press concerning plans limiting the range of benefits that attract income tax and NIC savings when provided as part of a salary sacrifice arrangement. However, the government’s intention is that the following will continue to be available:
- pension saving,
- childcare, and
- health-related benefits such as Cycle to Work schemes
This is very welcome news, especially when considering all of the changes that have been implemented around pension savings in recent weeks.
Specific methods of calculating a tax liability
We are all aware of tax avoidance schemes introduced where advisers/employers use different methods of calculating a tax liability compared with the specific statutory provisions, for example with employer provided cars and fuel for those cars.
The government intends to introduce preventative measures to ensure that if there is a specific statutory provision for calculating the tax charge on a benefit-in-kind, this must be used.
This will mean that where an employee gets something from their employer on the same terms as a member of the public, there will still be a taxable benefit based on the statutory provisions for calculating the charge.
Legislation is to be introduced to providing new powers allowing HMRC to carry out an assessment of an individual’s income tax or capital gains tax liability without them being required to complete a self-assessment return first. This can only be done where HMRC has sufficient information about that individual to make the assessment.
The time limit for “customers” to dispute the amount due in their assessment will be 60 days, and HMRC has clarified the arrangements for interest and late payment penalties to bring these in line with interest and late payment penalties for Self-Assessment.
This measure will have effect on and after the date of Royal Assent to Finance Bill 2016.
Employee share schemes
Legislation is to be introduced in the Finance Bill 2016 to simplify tax-advantaged and non-tax-advantaged employee share scheme rules. For:
- non-tax-advantaged schemes – the changes will clarify the tax treatment for internationally mobile employees of certain employment-related securities (ERS) and ERS options; this will come into force on 6 April 2016. Any charge to tax will arise under the rules that deal with ERS options, rather than earnings
- Share incentive plans – the changes will reinstate rules for Share Incentive Plans (SIPs) to enforce the principle that shares with preferential rights cannot be issued to selected employees only. This will have effect from the date that the Finance Bill 2016 receives Royal Assent.
- Reasonable excuse – the changes will permit late notification of tax-advantaged share schemes where the taxpayer had a reasonable excuse. This will have effect in relation to notifications made on or after 6 April 2016.
Employment Intermediaries and travel expenses
The government is introducing legislation in Finance Bill 2016 to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary.
Following consultation, the early draft of the legislation has been changed to allow grouped companies to second workers within the group, and to prevent the organised misuse of Personal Service Companies in order to avoid the restrictions.
Pensions Advice Allowance
The government will consult over summer 2016 on introducing a Pensions Advice Allowance, permitting people to withdraw £500 tax free, before the age of 55, from their defined contribution pension to redeem against the cost of financial advice.
The government is to bring forward a package of changes to ensure that those who have used disguised remuneration tax avoidance schemes have to pay their fair share of tax and NICs.
These schemes may involve individuals being paid in loans through structures such as offshore Employee Benefit Trusts, and the proposal is that the changes will apply retrospectively as well as to future schemes. not only tackle schemes in the future, but also in the past. As this is a technically complex area, the legislation will be amended over two Finance Bills (2016 and 2017) with one type of scheme being closed down from Budget day, effectively 16 March 2016.
One of the changes being implemented will be a charge on loans paid through disguised remuneration schemes which have not been taxed, but are still outstanding on 5 April 2019.
Pension Changes in Budget
Various changes are being made to the taxation of pensions
- Bridging pensions changes – the new single tier pension comes into effect on 6 April 2016. Following its introduction legislation will provide for the pension tax rules on bridging pensions to be aligned with Department for Work and Pensions legislation.
- Serious Ill Health Lump Sums - under 75 – Legislation is going to be introduced to enable a serious ill health lump sum to be paid out of remaining funds once pension savings have been accessed. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
- Serious Ill Health Lump Sum - 75 and over - Legislation is going to be introduced providing for the replacement of the 45% tax charge on serious ill-health lump sums paid to individuals who have reached age 75, with tax at the individual's marginal rate. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
- Dependant's Flexi-Access Drawdown – Currently, dependants with drawdown or flexi-access drawdown pension have to take one lump sum before age 23. Legislation will be introduced to enable these dependents to continue to access their funds as they wish. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
- Charity Lump Sum Death Benefits – Legislation is going to be introduced which will align the tax treatment of charity lump sum death benefits, whether they are paid out of drawdown and flexi-access drawdown funds or uncrystallised funds. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
- Trivial Commutation of Defined Contribution pensions in payment - Legislation is going to be introduced to enable money purchase scheme pensions in payment to be paid as a trivial commutation lump sum. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
- Top ups to Dependants' Death Benefits - Legislation will be introduced to enable the full amount of dependants’ benefits to be paid as authorised payments where there are insufficient funds in a cash balance arrangement when the member dies. It is proposed that the changes will be effective from the date the Finance Bill 2016 receives Royal Assent.
Lifetime Individual Savings Account
The government will be introducing legislation to provide a Lifetime Individual Savings Account (Lifetime ISA).
The Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the government. Funds from the Lifetime ISA, including the government bonus, can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60.
The annual ISA subscription limit will be increased to £20,000 from 6 April 2017. This applies to all savers.
Downsizing and the residence nil-rate band – The government intends to introduce legislation to ensure that the residence nil-rate band will be available in cases where a person downsizes or ceases to own a home and other assets are passed on death to direct descendants. Following consultation, the draft legislation will be revised to clarify when a disposal has occurred, to ensure that certain disposals made by trustees will also be taken into account, and to ensure that the provisions relating to cases involving conditionally exempt assets work as intended. These changes will apply for deaths on or after 6 April 2017 where the deceased downsized or disposed of a property on or after 8 July 2015.
Inheritance Tax: exemption for compensation and ex-gratia payments to victims of persecution during World War II - As announced at Autumn Statement 2015, the government will legislate Extra Statutory Concession F20, which gives an inheritance tax exemption in respect of certain compensation and ex-gratia payments for World War II claims.
The legislation will also extend the scope of the existing concession to include a payment made under a recently created compensation scheme known as the Child Survivor Fund. Following consultation, the legislation has amended to extend the power for the Treasury to add additional payments from particular schemes so that it includes prisoners of war and civil internees as well as victims of National Socialist persecution. The legislation will apply to deaths on or after 1 January 2015.
Higher rate of Stamp Duty Land tax (SDLT) on additional residential properties - As announced at the Spending Review and Autumn Statement 2015, legislation will be introduced in Finance Bill 2016 to apply higher rates of SDLT, 3 percentage points above the existing rates, for purchases of additional residential properties on or after 1 April 2016. Those considering buying second properties need to be aware!
Air Passenger Duty (APD) - Rates for 2016 to 2017 - As announced at March Budget 15, legislation will be introduced in Finance Bill 2016 to increase air passenger duty rates in line with RPI from 1 April 2016. Does this mean that your holidays abroad will now be more expensive?
Vehicle Excise Duty (VED) rates for cars, vans, motorcycles and motorcycle trade licences - Legislation will be introduced to increase VED rates in line with the Retail Price Index (RPI) with effect from 1 April 2016.
Vehicle Excise Duty (VED) 40-year rolling classic vehicle exemption - Legislation will be introduced to extend the existing VED exemption for classic vehicles permanently so that on the 1 April each year vehicles constructed more than 40 years before the beginning of the year will automatically be exempt. This change will have effect from 1 April 2017.
Alcohol duty rates 2016 - The following alcohol duty rates will rise in line with inflation (based on RPI):
- sparkling cider and perry exceeding 5.5% alcohol by volume (abv) but less than 8.5% abv
- all wine and made-wine rates at or below 22% abv
These changes will take effect from 21 March 2016.
The duty rates on beer, spirits, wine and made wine exceeding 22% abv, still cider and perry, and sparkling cider and perry of a strength not exceeding 5.5% abv have been frozen.
Large Business – Large businesses will be required to publish tax strategies and special measures.
- To provide a requirement for large businesses to publish their tax strategy as it relates to or affects UK taxation
A ‘special measures’ process narrowly targeted to tackle the small number of large businesses that persistently engage in aggressive tax planning and/or refuse to engage with HMRC in an open and collaborative way