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The main rate of class 4 NIC will increase from 9% to 10% in April 2018 and to 11% in April 2019. This will impact self-employed and partners.
Class 4 NIC is payable by the self-employed including partners in partnerships and members of LLPs. Two rates apply with a main rate of 9% and a higher rate of 2%. From April 2018, this main rate will increase to 10%. A further 1% increase will apply from April 2019 taking the main rate to 11%.
The Chancellor’s reasoning for this increase was to ensure the disparity in NIC rates for the self-employed and employees are reduced. It was felt that this disparity was likely to increase with the abolition of class 2 NIC (payable by the self-employed) from 6 April 2018. Further to this, state pension benefits have been aligned for the self-employed and the employed from April 2016.
It is perhaps worth noting that class 4 NICs were not included in the 'triple lock'; the Government’s legislative promise not to increase certain taxes during the life of this Parliament.
As such, given the reasons, it is perhaps unsurprising that we are seeing an increase on these rates.
The Government has confirmed that the personal allowance will rise by £500 to £11,500 for 2017/2018. It was also re-confirmed that the basic rate band would increase to £33,500, leading to the higher rate threshold increasing to £45,000 in 2017/18, compared to the current level of £43,000 for 2016/17.
The personal allowance will rise by £500 to £11,500 for 2017/2018.
The basic rate band will increase to £33,500, leading to the higher rate threshold increasing to £45,000 in 2017/18, with tax rates staying the same.
The basic rate band will apply when considering:
The planned increase in the personal allowance is welcome and represents an above inflation increase for the seventh consecutive year. It reflects the government’s pledge to increase the personal allowance to £12,500 and higher rate threshold to £50,000 by the end of this parliament.
However, not all taxpayers benefit from the increases to the personal allowance. Those with income above £100,000 will generally continue to see the personal allowance restricted by £1 for every £2 earned above this threshold, leading to an effective 60% tax rate, subsequently dropping back to 40%. In addition, those on low incomes under the current personal allowance will not benefit from the rise.
Note that from April 2017 some income tax rates and thresholds for Scotland are being set by the Scottish parliament for the first time, although these do not apply in all cases, so, for example, for savings income and the interest allowance the UK rates and thresholds apply.
The level of dividend income received tax-free will be reduced from £5,000 to £2,000 from 6 April 2018. The tax rates applying outside this band remain unchanged.
The Government has announced that the amount at which dividends can be received tax-free will be reduced from £5,000 to £2,000 from 6 April 2018. The tax rates applying to dividend income exceeding this allowance remain unchanged.
The dividend allowance was only introduced from 6 April 2016, so it was a surprise to see it cut by 60% after less than a year in operation. The Chancellor’s rationale was that the cut would help to address the disparity between tax rates for the self employed and employees, in particular director-shareholders.
The change will apply to any shareholder with dividends of over £2,000 in any tax year, but the Chancellor noted that in practice only those with relatively large holdings will be affected.
While those affected will be disappointed, the change will go only so far in addressing the Government’s aims. It does not address the underlying fact that corporation tax rates are significantly lower than personal tax rates and that the greatest benefit in operating a personal company occurs when income is ‘rolled-up’ within the corporate environment. The Government is still consulting in this area and therefore we may see further measures introduced in the future to address the perceived disparity.
Two new income tax allowances of £1,000 each, for trading and property income, will be introduced from 6 April 2017 as previously announced at Budget 2016.
These two new allowances, previously trailed at the Budget 2016 and Autumn Statement 2016, are primarily targeted at ‘micro-entrepreneurs’ such as those occasionally letting property through digital platforms or selling goods via online auction sites.
The allowance will also be available to those individuals with property and/or trading income in excess of £1,000 having the choice to deduct either the allowance or the actual expenditure incurred. The allowance will also apply to certain miscellaneous income.
Further to comments on the draft legislation, revisions will be made to improve the clarity of the changes and to include an anti-avoidance measure to prevent the allowances applying to the income of a participator in a connected close company or a partner in their partnership.
As noted when this measure was announced, this pragmatic change will simplify the tax affairs of those making modest trading and rental profits (potentially removing them from self-assessment altogether), but is unlikely to be of much relevance for those with significant letting or trading income. Such individuals are more likely to benefit from a greater tax reduction by opting to deduct the actual expenditure incurred.
The Government has again reiterated that major reforms to the taxation of non-UK domiciled individuals ('non-doms'), offshore trusts and indirectly-held UK residential property will come into force from 6 April 2017. The details of the new rules, to be included within Finance Bill 2017, are yet to be finalised and the latest announcement contains some further clarifications.
The Government has announced a consultation into the workings of rent-a-room relief with the aim to ensure it is better targeted towards supporting longer-term lettings.
There is currently little detail on what this consultation will focus on and the proposals that might arise from the redesign of rent-a-room relief.
At this stage it is unclear what the government has in mind and what aspects of the relief might change, but any changes could be targeted at reducing the availability of the relief to set against short-term letting via through digital platforms - a growing sector.
As announced in January 2017, the Government will legislate to increase to the turnover threshold, for the self-employed or partnerships, to be able to use the cash basis from £83,000 to £150,000 and brings in
a ‘simple’ list of disallowed expenditure to simplify the rules for allowable deductions under the cash basis.
Self-employed and partnerships of individuals that meet certain requirements can elect to be taxed on the ‘cash basis’, rather than a traditional accruals accounting basis, under which profits are calculated based on income and expenses accrued during the accounting period. Under the cash basis, businesses are only taxed on income when it has been received and can claim a deduction when they actually pay for an expense.
It was announced in January 2017 that the following changes to the cash basis will be made, with effect from 6 April 2017:
As part of the first change above, the exit threshold, above which those on the cash basis must switch to traditional accounting will be increased from £166,000 to £300,000.
Both changes follow consultation and the Government is to amend the original draft list of disallowed expenditure.
Whether the cash basis of accounting is beneficial will depend very much on the nature of a particular business and the availability of reliefs. For example, relief for losses against other income are not available to those using the cash basis. Nevertheless, for certain traders the cash basis can prove a simple method of accounting. Any moves to simplify and broaden the availability of the cash basis are therefore to be welcomed.
This legislation will take effect from 6 April 2017, and will allow unincorporated property businesses with rental receipts of £150,000 or less to calculate their taxable profits using a cash basis of accounting as opposed to using the Generally Accepted Accounting Principles (GAAP) otherwise known as the accruals basis.
Certain unincorporated property businesses will be excluded, including limited liability partnerships, trusts and partnerships with corporate partners.
Unlike the cash basis for trading businesses, which have to opt in to the cash basis, landlords will have the option to opt out of the cash basis and continue to use the accruals basis. Landlords will be able to elect this for each property business (UK and overseas property businesses are treated separately for tax purposes). Landlords who jointly own a rental property will also be able to decide individually which method to use, provided they are not spouses or civil partners.
In an effort to align the treatment between the cash basis and people who elect to use the accruals basis, the initial cost of items used in a dwelling house will not be an allowable expense under the cash basis. The replacement of domestic items relief will continue to be allowed when the expenditure is paid.Following a consultation announced in August 2016, the Government will look to legislate to allow most unincorporated property businesses to calculate their taxable profits using a cash basis of accounting.
Although another change to property taxation may seem unwelcome, the apparent effort to simplify the accounting for straight-forward taxpayers should be applauded. The cash basis of accounting will require fewer adjustments to be made to rental accounts by taxpayers and thereby simplify the record keeping process.
However, there are a number of factors to note. The different opt in/opt out approaches for this basis and the main cash basis may cause confusion. In addition, for landlords facing the new rules on restriction of interest relief from April 2017, where the flow of rent receipts is uneven they could face higher rate tax and lose interest relief one year, while having unused basic rate band in another, giving rise to an additional tax cost, not just a timing difference.
This measure is part of the drive towards Making Tax Digital when landlords will need to file on a quarterly basis making any simplification both appreciated and necessary.