George Osborne’s 2016 budget: No mention of ‘fixing the roof whilst the sun shines’ but more of a focus on putting the next generation first and investing into the future.
On Wednesday 16th March, the Chancellor delivered his 8th budget. Below I have outlined some of the key announcements which are likely to impact many Asian Voice readers.
The Chancellor used the back drop of the slowdown in the world economy to justify the reduction in the Office of Budget Responsibility’s (OBR) growth rate for the UK economy.
He also highlighted how well placed the UK is to weather the storm and stated that the UK economy is forecast to grow faster than any other major advanced economy in the world.
Many seasoned tax professionals expected a more muted budget. However, the Chancellor made a raft of changes in areas which were unexpected but were generally well received. A key theme amongst the changes seems to be ‘investing in the future’ and supporting SMEs (at the expense of larger, global companies).
As Mike Cherry, policy director at the Federation of Small Business stated “I’m a very happy man. This is very clearly the Chancellor listening to what small businesses want.” For small businesses, the Government announced that from 1 April 2017 they will be more than doubling the Small Business Rate Relief resulting to over 600,000 businesses paying no business rates and another 250,000 seeing a reduction. To help business acquire their business premises, effective from midnight on 16th March the Chancellor reformed the stamp duty rules on commercial property from a distortive slab system to a much simpler slice system. So previously if a retail unit cost £270,000, you would pay £8,000, going forward it will be £3,000. The corporation tax rate is set to be reduced even further to 17% from 2020, which is a further 1% reduction to the already lowered rate of 18% announced in July 2015. These measures are likely to offset some of the pain owner managed businesses will face when the new higher dividend taxes come into effect from April 2106.
For individuals it was announced thatthepersonal allowance threshold will be increasing to £11,500 and the basic rate limit increase to £33,500. According to the Government’s analysis this will reduce the income tax paid by over 28 million people. What this effectively means is that from April 2017, you will only fall into the higher rate band of 40% if you earn more than £45,000 (as opposed to £42,385 in tax year 2015/16).
For savers and the investment community there were also many positive announcements. From April 2017 the total amount you can save each year into all ISAs will increase from £15,240 to £20,000. The Chancellor also made an unexpected change to the Capital Gains Tax rates. From 6 April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10% (although this will not apply to the disposal of residential properties). This move increases the divide between income tax and capital gain tax.
There was also an interesting announcement extending the rules on Entrepreneurs’ relief (ER), a 10% rate of Capital Gains tax on disposal of shares. The Chancellor stated that the ER may also apply to individual external investors of unlisted companies subject to various conditions being met including: the shares have to been purchased on or after 17 March 2016 and the shares are held for a minimum of three years from 6 April 2016. This is a positive development for those investing in AIM listed companies as these shares are regarded as unlisted shares.
Current pension rules were broadly left unchanged, despite the significant speculation about further reforms such as taxing the lump sum and limiting tax relief. However, the Chancellor did introduce the Lifetime ISA offering anyone under 40 from April 2017 to invest up to £4,000 and receive 25% bonus from the Government on this money. These funds can be saved until an adult is over 60 and used as retirement income, or can be withdrawn to help buy their first home. The Lifetime ISA is likely to be popular but it will be interesting to see how this will work alongside Auto-enrolment and the existing pension legislation.
For micro entrepreneurs from April 2017 there will be two new £1,000 allowances for property and trading income, mainly targeting those selling on sites such as eBay and renting their property/drive-way via sites like Airbnb. Taxpayers with property and income or trading income below the level of allowance will no longer need to declare or pay tax on that income. In addition, self-employed people will no longer have to pay Class 2 NIC from April 2018.
However large corporates were thrown a couple of big punches as George Osborne said he wanted ‘to create a modern tax code that better reflects the reality of the global economy’ and stop large companies from artificially shifting profits out of the UK. The cuts he announced included i) introducing a 30% cap on relief on interest payments, ii) restricting tax relief on historic company losses for companies with profits of more than £5 million and iii) taxing outbound royalty payments better. The Government expects to raise £9 billion over next five years from these measures, which will dwarf the decline in tax receipts from the 1% decrease in corporation tax rates and reduction in business rates for SMEs. A sugar tax was also announced to soft drinks manufacturers to help tackle childhood obesity and the taxes raised will be used to fund sports projects in primary school.
Overall it seems this Budget had many winners and some losers with a strong focus on helping SMEs. Low-income earners, savers and investors also received positive news, whilst large corporates and sugar addicts would have been disappointed.
Disclaimer: This article is intended to be a general guide and cannot be a substitute for professional advice. Neither the authors nor Godley & Co Ltd accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this article.
Yogesh Patel is a tax and business adviser to entrepreneurs, SMEs and private clients at Godley & Co. (@GodleyCo).
Key Budget announcements by George Osborne:
- Corporation tax reduced to 17% by 2020
- Small Business Rates relief more than doubled
- Stamp Duty Land Tax reform on commercial property
- Personal allowance threshold increased to £11,500
- Basic rate income tax band increased to £33,500
- Annual ISA limit to increase from £15,240 to £20,000
- Capital gains tax cut from 28% to 20% for non-residential disposals
- Extending the rules on Entrepreneurs’ relief to investors
- Under 40s Lifetime ISA introduced
- Class NIC 2 to be abolished
