On 16th March 2016 the government delivered the 2016 Budget and I highlight in this article some key points for applicable for small businesses.
Some of these announcements will come into effect now and others will be phased in over the next year or beyond.
Income tax
The personal allowance for 16/17 (6th April 2016 to 5th April 2017) is set at £11,000, this will now increase to £11,500 for 17/18, whilst the higher tax band, which is set at £43,000 for 16/17 will increase to £45,000 for 17/18.
Class 2 National Insurance (Self-Employed)
It’s a while off, but from 2018 Class 2 NI for the self-employed will be no more so if you’re self-employed you should only have one category of national insurance to worry about (currently known as Class 4). This is a much needed simplification of the national insurance system for the self-employed.
Directors Loans
The tax paid on directors loan balances that remain unpaid within 9 months of the end of an accounting year, known as s455 tax, will increase from 25% to 32.5% for any loans that are made from 6th April 2016.
VAT registration threshold
The VAT registration threshold which is currently £82,000 will increase to £83,000 from 1 April 2016.
Corporation tax
Corporation tax will drop from the current rate of 20% to 19% from April 2017 (this was already known). However corporation tax was expected to drop again to 18% by 2020 but this has now been reduced further down to 17%. This, along with the increased personal allowance and higher tax band should help mitigate the extra tax payable due to the changes to dividend tax.
Lifetime ISA
This came as a nice surprise, it doesn’t come in for a year, but from April 2017 there will be a new savings structure called the ‘Lifetime ISA’. If you’re under 40 you’ll be able to open a Lifetime ISA and save up to £4,000 per tax year and you will get a 25% bonus from the government. So for every £4 you pay into the Lifetime ISA the government will put £1 in. You will be able to pay into the ISA and get the government bonus 25% until you’re 50. There are various rules about when you can withdraw the cash and potential tax consequences. HMRC have a fact sheet about the Lifetime ISA. Click on link.
The general overall ISA limit (total for all your ISA’s) will also be increasing from April 2017 – from £15,240 to £20,000. Click on link for HMRC factsheet. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508117/Lifetime_ISA_explained.pdf
Capital Gains Tax
This was somewhat un-expected – from 6th April 2016 capital gains tax rates are reducing. The higher rate will reduce from 28% to 20% and the basic rate will reduce from 18% to 10%. There will be various rules and details about this to come out, one of them being that these new lower rates do not apply to residential property (i.e. buy-to-lets) which will continue to be taxed at current capital gains tax rates.
My conclusion
I believe that for many of my clients; sole traders and Ltd Companies, the 2016 Budget has been a positive result. The government has focused on increasing personal allowances and higher rate tax bands whilst also decreasing Corporation Tax rates which will have a huge impact on small businesses and individuals alike.
Also the abolition of Class 2 NIC’s is a welcome change and in my opinion long overdue!
