This report summarises the major changes that have been proposed following the 2016 budget. Some of these changes have been announced previously whereas others are new proposals which will come into effect from April 2016 or at a later date.
Introduction of dividend tax
From 6th April 2016 the existing system of grossing-up dividends by a notional tax credit will be abolished
and will be replaced by a new tax on dividends.
Dividends will be taxed as follows:
First £5,000 will be tax-free
Dividends in the basic rate tax band 7.5%
Dividends in the higher rate tax band 32.5%
Dividends in the additional tax rate 38.1%
Currently, basic rate tax payers have no tax to pay on dividends as the tax credit covers their liability to
basic rate tax. The effective rate of tax for higher rate taxpayers is 25% and the additional rate 30.6%.
The point at which the individual starts to pay higher rate tax is increased however under the new regime
as the dividends will no longer be grossed up.
Individuals who are basic rate taxpayers and receive dividends of more than £5,001 will be required to
complete self-assessment tax returns from 2016/17.
We would encourage you to maximise your tax-free dividends in the current tax year subject to profits
being available in your company
Loans to participators
The rate of tax charged on loans to participators that are not repaid will increase from 25% to 32.5% to mirror the increase in the higher rate tax on dividends.
The increased rate will apply to loans made on or after 6 April 2016.
The employment allowance which reduces the employer?s NI liability is to be increased from £2,000 to
£3,000 from April 2016.
The allowance will however be withdrawn for companies where the director is the sole employee of the
If you are caught by IR35 you are not entitled to claim the employment allowance.
Employee benefits and expenses
The tax treatment of employee benefits in kind and expenses will change from 6 April 2016.
The current system which requires employers to apply for a dispensation to avoid having to report non-taxable expenses on the P11D form will be replaced by a statutory exemption for certain expenses such as travel and subsistence.
The current £8,500 threshold below which employees do not pay tax on certain benefits in kind will be removed.
Travel and subsistence expenses
As previously announced, the government will introduce legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary.
The restrictions only apply to workers that are under the supervision, direction and control
of their end-client which is essentially those caught by IR35.
Contractors working outside of IR35 will not be affected by the proposed changes however the temporary location rules will continue to apply.
Personal service companies (PSCs) working in the Public sector
From April 2017, changes will apply to personal service companies operating in the public sector. The government has put forward proposals to ensure that public sector bodies and agencies will have a duty to apply employment tests to PSC’s.
Where employment is found then PAYE will be applied to the PSC’s fee. There will be a 5% allowance for expenses, but generally taxation will be broadly similar to employment.
The Employer’s NI will no longer be the responsibility of the PSC but will be met the agency or the client.
The government will consult on a simpler set of test and online tools that will provide a clear answer as to whether the rules should apply.
The current main rate of corporation tax rate of 20% will continue to apply for the financial year starting in April 2016.
The main rate of corporation tax will be reduced to 19% for the financial years beginning on 1 April 2017, 1 April 2018 and 1 April 2019, with a further reduction to 17% for the financial year beginning on 1 April 2020.
From April 2016, legislation will introduce a new targeted anti-avoidance rule which would prevent some distributions in a liquidation being taxed as capital, where certain conditions are met, and there is an intention to gain a tax advantage.
The legislation will remove the tax advantage created when companies are wound up to release profit accumulated in the company which would be taxed at 10% by claiming entrepreneur?s relief, and then start another company.
The legislation is aimed at discouraging phoenix companies that are closed and restarted to gain a tax advantage.
Capital allowance on business cars
The 100% first year allowance available to businesses purchasing low emission cars is to be extended to April 2021. A low emission car has CO2 emission of 75gm/km or less with the threshold falling to 50gm/km from April 2018.
The main rate of capital allowances for business cars will also reduce from April 2018 to reflect the falling vehicle emissions from 130gm/km to 110gm/km.
Tax bands and allowances
From April 2016 the personal allowance will increase to £11,000 and the basic rate limit to £32,000. The higher rate threshold will therefore be £43,000 for those entitled to the full personal allowance.
From April 2017 the government will increase the personal allowance to £11,500, and the basic rate tax limit to £33,500, making the higher rate threshold £45,000.
Capital gains tax
From April 2016 the higher rate of capital gains tax will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.
The current rates of 28% and 18% will continue to apply on carried interest and for gains on residential property.
Private residence relief will however continue to ensure that capital gains tax is not payable on the disposal of an individual?s main home.
A new Personal Savings Allowance is being introduced for basic rate and higher rate taxpayers from April
If you are a basic rate taxpayer you will be able to earn interest up to £1,000 tax-free. If you are a
higher rate taxpayer the allowance is £500.
Banks and building societies will therefore no longer deduct tax from interest at source. If you are
required to pay tax on interest it will be paid either through your tax code or included in your self-assessment tax return.
The VAT registration threshold will increase from £82,000 to £83,000 from April 2016.
The deregistration threshold will increase from £80,000 to £81,000.
Abolition of Class 2 NIC
From April 2018, Class 2 NIC will be abolished.
The government will reform Class 4 NIC so that self-employed individuals continue to build entitlement to the State Pension and other contributory benefits. The contributory benefits test will be set out following consultation on this reform.
Property and trading income allowances
From April 2017 the government will introduce a new £1,000 allowance for property income and trading income.
Individuals with property income or trading income below £1,000 will therefore no longer be required to declare or pay tax on that income.
Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.