Spring Budget 2017
Chancellor Philip Hammond delivered his Budget speech on Wednesday 8th March 2017. It did not contain as many surprises or major changes as some of George Osborne’s Budgets in the last years, but there were a few (mostly unfavourable) points worth noting with respect to individuals and savers.
Self-Employed NICs to Rise
In spite of earlier promises by the Conservatives to not raise National Insurance Contributions (NICs), the Chancellor has announced an increase in Class 4 NICs. As a result, self-employed individuals can see their tax bill rising by several hundred pounds per year.
Currently, those who are self-employed pay two classes of NICs. Class 2 is a fixed amount (£2.80 per week in 2016-17; £2.85 in 2017-18). Class 4 is a percentage, currently 9% of profits between the Lower Profits Limit (£8,060 in 2016-17; £8,164 in 2017-18) and the Upper Profits Limit (£43,000 in 2016-17; £45,000 in 2017-18), and 2% of anything above the latter.
In April 2018 Class 2 will be abolished, as previously announced by George Osborne. This will reduce the tax bill by £146 per year. At the same time, as Philip Hammond announced today, Class 4 NICs will increase from the current 9% to 10% in April 2018 and again to 11% in April 2019. Above the Upper Profits Limit the rate will remain at 2%.
The combined result will be higher NICs for anyone earning above approximately £16,000. The increase will be greatest for those earning at or above the Upper Profits Limit, who will pay approximately £600 per year extra (the exact amounts will depend on the Lower and Upper Profits Limits, which rise every year proportionally to inflation).
Dividend Tax Allowance Cut to £2,000
Another negative surprise in the Budget is reduction of the dividend tax allowance from the current £5,000 to £2,000 per year, effective from April 2018.
Besides company owners, who are the main target of the measure, it will also affect those with larger share portfolios held outside a pension or ISA. Depending on average dividend yield, equity portfolios from about £50,000 net asset value could fall below the new reduced allowance.
Make sure you maximise the use of tax wrappers such as pensions or ISAs. If dividend tax is a concern, you may also want to consider shifting part of your equity holdings from dividend stocks to growth stocks and use the generous capital gains tax allowance to extract profits (of course, taxes are only one of the many things to consider when deciding investment strategy and portfolio structure).
Tighter Rules on Overseas Pensions
With immediate effect (from 9 March 2017) a new tax charge of 25% applies to transfers from UK pension schemes to QROPS (Qualifying Recognised Overseas Pension Schemes). The measure is aimed at those transferring their pensions overseas solely for tax optimisation purposes. Exceptions apply in cases where a “genuine need” exists, e.g. when you are moving to live and work in a different country and taking your pension pot with you.
Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:
- both the individual and the QROPS are in the same country after the transfer
- the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
- the QROPS is an occupational pension scheme sponsored by the individual’s employer
- the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
- the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation
UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.
UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.
Overall, the new measures will make transfers to overseas pension schemes more difficult and less advantageous in some cases. Careful consideration of all tax and other consequences of such move is as important as ever.
Tax Allowances and Thresholds
Besides the main points discussed above, the Budget also confirmed tax allowances and thresholds for the next year, most of them previously known. Some of the most important figures are listed below:
- The personal allowance rises to £11,500 in 2017-18.
- The higher rate threshold goes up to £45,000.
- The Chancellor has reiterated the Government’s commitment to increase the above to £12,500 and £50,000, respectively, by 2020-21.
- The annual ISA allowance jumps to £20,000 for 2017-18.
- Capital Gains Tax allowance rises to £11,300.
We will discuss these in greater detail, as well as possible last minute actions, in our traditional tax year end planning checklist, due next week.
In spite of the unfavourable changes discussed above, the Budget speech has not changed the overall course of the Government’s financial and tax policies, which in light of the upcoming Brexit negotiations can be considered good news. Here you can find the full Budget speech.