Personal tax measures overview
16 March 2016
The Chancellor walked a steady line over a fiscal and political tightrope today as he delivered his 2016 Budget. Bound by a commitment to a surplus by 2020, and tethered to his manifesto promise not to increase headline tax rates, his moves could be seen as tinkering rather than transforming. He used the little money he had to take more people out of the 40p tax band, a reminder to middle England that he is looking out for them. He then used the last remaining pennies down the side of his fiscal sofa to try and encourage a more flexible savings regime for the less well-off and the under 40's, as well as cutting CGT on assets other than second homes and increasing the tax free personal allowance by an above inflation amount - a now familiar trick.
The Chancellor once more hiked the personal allowance by an above inflation number (to £11,500 from April 2017), as he pushes to £12.500 by 2020. Since 2010, the allowance has risen by over 40% above the rate of inflation, taking significant numbers of workers out of income tax. However, he has now raised the allowance so significantly that the impact and cost of raising it further decreases each time he does it. Arguably, significantly raising the national insurance lower earnings limit, which is running a distant second behind the tax free personal allowance, could have been a more effective option for targeting the lowest earners.
Basic rate band
The chancellor took hundreds of thousands of taxpayers out of the 40p tax band by increasing the 20p band upper limit to £45,000 from 6 April 2017.
This rise will be a welcome tax cut for many taxpayers. The rise in this band has been underindexed for many years, dragging many more taxpayers into the higher rate of tax. The Chancellor has made good progress in this budget as he drives towards a £50,000 limit by 2020.
This new Lifetime ISA for under 40s came as a surprise, and sits alongside more flexible pensions, ISA's and the help to buy ISA as yet another new product to support saving for home ownership or retirement. Taxpayers will be wary, however, that this new approach appears to penalise savers who want to take money out for any reason other than retirement or buying a home. With rainy days that require us to dip into our savings being all too frequent, it remains to be seen whether savers are prepared to tie up their hard earned money in this way.
The annual amount for ISA saving was increased substantially to £20,000 per year, another eye catching above inflation increase in the annual amount that can be saved each year. With such a significant annual ISA allowance, and other tax reforms to savings income, the vast majority of taxpayers should be able to benefit from tax free savings income, not only a good tax break for savers but also a welcome simplification to the tax system.
Capital Gains tax
The headline rates of Capital Gains tax was cut to 10% for basic rate taxpayers and 20% for higher rate taxpayers. Capital Gains tax rates on residential property will remain at 18 and 28% respectively.
The cut in CGT for assets such as shares is a welcome move to encourage investment in areas other than buy to let, but it will be seen as a tax cut for the baby boomer generation in middle England. Very few taxpayers under 40 pay Capital Gains Tax, a reflection of the lack of assets plump with profits owned by younger taxpayers. In addition, last year over 50% of CGT paid by taxpayers in the UK was paid by taxpayers in London and the South East. Taxpayers living in Wales, for example, contributed only 2% of the total CGT paid by UK taxpayers.
Trading and property income allowances
From April 2017, the Chancellor announced a new allowance of £1,000 for those receiving income from renting out their property and a new allowance of £1,000 for trading income.
These two new allowances are both more and less than they seem. They will be welcomed by people renting out their properties or running micro-businesses online if they are taken out of tax. However, most of those earning more than £1,000 will no doubt prefer to deduct expenses from their income instead of using their allowance. Whilst it is a helpful recognition of the way our economy has changed, it will be interesting to see whether the introduction of these new allowances will help with the Chancellor's stated mission of tax simplification.
Abolition of Class 2 NICs
The Chancellor announced that Class 2 NICs will be abolished from April 2018. Class 4 NICs will be reformed and the Government will set out its proposals in due course.
The abolition of Class 2 NICs is a welcome simplification of the tax system for the self-employed, removing one of the many different taxes that they pay. The self-employed will welcome the removal of this outdated levy, currently paid via direct debit at a flat rate unrelated to profits.
Help to Save
The Chancellor announced a new savings bonus scheme for low earners, which will allow savings of up to £50 a month to receive a Government contribution of 50% of what is saved.
This new savings product, which will cost relatively little in practice, is a welcome move and shows that the Chancellor can be innovative. He has especially shown this on his reforms of savings in the past three years, with reforms to ISAs, cash savings and dividends. Alongside the help to buy ISA and the new Lifetime ISA, he is showing that he is prepared for the state to intervene to help to try and address the decline in our savings rate in the past two years. It will be interesting to see if this measure does achieve its objective, given the pressure on family finances and other changes to the welfare system impacting the ability of less well off households to save.