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Personal Income Tax

The previous three Budgets saw the Chancellor make a raft of changes to reduce the amount of Income Tax that people pay, which should ultimately lead to less reliance on benefits.

Today’s Budget saw the continuation of the government’s objective to plan for the future and support working people.  Although there were no significant changes to any of the rates that have previously been announced, the government made a further step towards their target of a £50,000 higher rate personal Income Tax threshold within this Parliament.

The main allowances and tax rates for individuals from 5 April 2016 onwards are as follows:

Personal allowance

April 2016 sees the first time that the tax free personal allowance for those over and under aged 65 is brought in to line.  The personal allowance for all (income dependant) will be £11,000 for the upcoming 2016/2017 tax year.

However, as part of the government’s plan to reduce the amount of tax that lower earners pay, the 2017/2018 tax free personal allowance will increase from the previously announced amount of £11,200 up to £11,500 from April 2017.

Income Tax bands

As part of the government’s objective to raise the higher rate tax threshold to £50,000 by the end of the current parliament, Mr Osborne announced in his 2015 Interim Budget that the higher rate tax threshold would increase up to £43,000 for 2016/2017 and up to £43,600 for 2017/2018.  Today, he announced that from April 2017 the higher rate threshold will instead increase further from £43,600 up to £45,000, thus meaning more working people will have their income taxed at the basic rates of Income Tax.

Dividends

Following the Summer Budget 2015, there have been no further changes to the new dividend tax system that is being brought in from April 2016.

This will see a change in the way that dividends are taxed with the introduction of a new £5,000 dividend allowance and the removal of the 10% tax credit.

Dividends received which exceed this new £5,000 allowance will be taxed as follows:

  • 7.5% if they fall within the basic rate tax band
  • 32.5% if they fall within the higher rate tax band
  • 38.1% if they exceed the higher rate tax band

Although a majority of people who receive dividend income will see no change to their tax position, (the government predict this will be 85% of people who receive dividend income), the introduction of these new rates, and the removal of the tax credit, means that those with significant dividend income, or those with owner managed businesses, may see an increase in their tax liabilities.

Tax allowances from the sharing economy

From April 2017, the Chancellor has introduced two new tax free allowances of £1,000.

The rapid growth of the digital economy means that although it is easier for people to become ‘micro-entrepreneurs’, the administrative tax burdens placed on them can be overwhelming.

These new allowances have been brought in to help those making small amounts of income from selling goods, providing services or letting a property more straight forward.

People who meet the criteria will, from April 2017, not be required to declare or pay tax on this income, which is fantastic news.

Those with income over the £1,000 limit will still be able to benefit as they will be able to deduct £1,000 from their income instead of calculating their exact expenses.

Rental property – restricting loan interest relief for landlords

Back in the day, taxpayers used to be able to claim interest relief on the interest that they paid on their own home against their taxable income.  This relief was abolished.

However, obtaining tax relief was not abolished for people who had loans on residential rental properties and they have still to this day been able to claim tax relief against their rental income for any loan interest incurred on loans or mortgages.

To make the tax system fairer, the government will restrict the amount of relief that landlords can claim on finance costs to the basic rate of tax.  This means that landlords will no longer be able to deduct all of their finance costs from their property income when calculating their taxable rental profits.

This measure will be phased in gradually over a 4 year period from 6 April 2017 onwards.

  • In 2017/2018 they will be able to deduct 75% of the finance costs incurred with the remaining 25% being available as a basic rate tax deduction.
  • In 2018/2019 they will be able to deduct 50% of the finance costs incurred with only basic rate tax relief being given on the remaining 50%
  • In 2019/2020 they will be able to deduct 25% of the finance costs incurred with only basic rate tax relief being given on the remaining 75%
  • In 2020/2021 all finance costs incurred will be given as a basic rate tax reduction

Although at first glance this may seem worrying, this measure will not affect all landlords.  It will in fact only affect higher rate taxpayers whose rental profits fall above the basic rate tax band.

Rental property – rent a room relief

The rent a room scheme is in place for individuals who let out a furnished room or floor in their own main residence.  This allows a tax-free income of up to £4,250 per year for the property owner, which has stayed the same for 18 years.

The Chancellor announced in his July 2015 Interim Budget a welcome increase in this limit up to £7,500 from April 2016. This will provide an increase of £3,250 tax-free income.  There have been no further changes to this in the Budget 2016.

If you have any Income Tax queries, please do not hesitate to contact one of our Tax specialists on 01228 711888.