The Chancellor Philip Hammond surely has enough to think about with managing the economy during the Brexit negotiations, so it wasn’t surprising that his Autumn Statement contained no earth-shattering announcements or wild changes. He did announce that after next March’s budget, the annual Budget will be in the autumn, allowing longer consideration of the announcements and draft legislation before enactment the following summer.
KEY TAX ANNOUNCEMENTS:
- The Personal tax allowance, currently at £11,000, will increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
- The higher rate tax threshold will increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
- The threshold at which employers and employees have to pay national insurance will be aligned at £157 a week, at a cost to employers of around £7 additional employer’s national insurance per employee per year
- The national living wage (which is effectively the national minimum wage for most workers) will rise to £7.50 from 7.20 per hour from April 2017
- Insurance premium tax will increase from10% to 12% from 1 June 2017
- There will be more anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders”
CORPORATE AND BUSINESS TAX CHANGES
Previous announcements about the rate of corporation tax were confirmed, so that the current 20% rate will fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there is talk of a rate as low as 15% in the future.
TAX INCREASES ON DIVIDENDS?
The Chancellor raised concerns that there continues to be a rise in tax-driven incorporations. (There are still tax savings of trading through a limited company when compared to an unincorporated business operating at a similar level of profit.) The changes to taxation of dividends already effective from 6 April 2016 partly addresses this imbalance. We’d been concerned that the Chancellor might do more and his comments suggest he might go further to take away the tax advantage of trading as a limited company in the future, but he made no announcements of firm changes.
HIGHER RATE TAX RELIEF FOR PENSIONS CONTINUES
There has been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.
Currently the net effect of pension tax relief for a higher rate taxpayer means that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers the net cost would be just £5,500.
There is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer. For those with high income this is tapered and can be as low as £10,000.
SALARY SACRIFICE RULES TO BE TIGHTENED UP
Many employers now provide flexible remuneration packages that allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax.
These tax and NIC advantages are to be withdrawn from 6 April 2017 and will affect those with company cars, car parking near your workplace, accommodation, gym membership and school fees, among others. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be excluded; existing arrangements will be protected for a transitional period until April 2018, and existing arrangements for cars, accommodation and school fees will be protected until April 2021.
The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.
“ABUSE” OF THE VAT FLAT RATE SCHEME
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders with minimal costs, who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the flat rate scheme please contact us to check whether this change is likely to affect your business.