Q&A: How will Philip Hammond’s 2017 Budget affect your taxes?
Chancellor Philip Hammond delivered several blows to the self-employed yesterday, but they're not the only group impacted.
Here, we've laid out all the ways in which the Budget will affect your tax affairs:
NATIONAL INSURANCE
What’s happening to National Insurance?
National Insurance contributions (NICs) for self-employed workers will be hiked over the next two years, and the tax-free dividend allowance has been slashed. The main rate of Class 4 NICs for the self-employed will be increased by one percentage point to 10 per cent in April next year. By 2019 the rate increase again, by another one percentage point.
What does it mean for self-employed people?
According to one tax expert, the increase in NICs will leave the worst affected £700 out of pocket by 2019, when the 11 per cent rise takes effect. Roy Maugham, tax partner at UHY Hacker Young, said the NICs increases will hit the self-employed for £2.1bn in the next five years.
How did people react to the National Insurance hike?
Sam Dumitriu at the Adam Smith Institute said: “It’s right to bring National Insurance on the selfemployed in line with that paid by employees. But the chancellor must ensure he is not discouraging the selfemployed from investing, and allow them to immediately deduct capital expenditures from their taxable income. We shouldn’t be looking to increase the overall tax burden, especially not on low-income workers. So we should use the extra revenue raised to cut the overall National Insurance rate.”
David Kilshaw, private client services partner at EY said: “For those with profits above £16,250 this will be more than a NIC – this is a deep cut – with Class 4 NICs due to raise to 11 per cent by April 2019.”
Didn’t the Tories promise to leave National Insurance alone in its last manifesto?
Yes. Commentators have pointed out that this proposal goes against a pledge in the Conservative’s 2015 General Election manifesto when the party said it would not increase National Insurance as part of a fiveyear tax lock. “The increase in Class 4 National Insurance contributions for the selfemployed would appear to be a blatant breach of the government’s manifesto pledge from two years ago,” said Craig Harman, tax specialist at Perrys Chartered Accountants.
How did the Conservatives explain this change of tack?
Treasury officials said yesterday that the National Insurance Contributions Act 2015 made it clear that the tax lock would only apply to Class 1 contributions, not Class 4 NICs. “The legislation is the appropriate place for this kind of detail,” a spokeswoman said. “The government is committed to its manifesto commitments.”
The government has expressed for some time that it considers too many individuals are engaging in inappropriate self-employment or quasi-employment arrangements as a means of avoiding tax and NICs. These steps will marginally reduce some of those incentives for certain individuals, but there remain significant National Insurance and employment incentives for those engaging such workers in the private sector to continue to do so in this way.
The Tory manifesto from the 2015 General Election (Source: Getty)
DIVIDEND ALLOWANCE
Did the chancellor announce any other measures that could affect selfemployed workers?
He did indeed. Hammond is slashing the tax free dividend allowance from £5,000 to £2,000. Many selfemployed people provide their services through companies and pay themselves dividends rather than salaries.
What does the tax-free allowance change mean for this group?
For a higher rate taxpayer, it would make up to £975 of difference in the amount of tax paid on dividends over the allowance, according to Mike Gordon at Rutherford Wilkinson, while for a basic rate taxpayer the difference in tax paid could be up to £225. And for married couples holding shares in the same company, these figures could be doubled.
Why is Hammond changing the tax-free allowance?
The Treasury said the allowance was being shrunk so as to “reduce the tax differential between the selfemployed and employed, and those working through a company, to raise revenue to invest in public services, and to ensure that support for investors is more effectively targeted”.
What was the reaction to this policy?
The British Chambers of Commerce accused the Treasury of sending mixed signals by “holding investment largely steady at precisely the time that it is exhorting British businesses to double down”. KPMG said the proposal was a “bitter pill”, adding “it was not a great day to be a small business owner”.
Meanwhile, Hargreaves Lansdown’s Laith Khalaf said the announcement “demonstrates why investors should make the most of their ISA and pension allowances, to protect as much of their wealth as possible from the taxman. “Even when the government appears to relax its tax rules, its policies can turn on a sixpence, and end up costing you an awful lot of money if you’ve been complacent about using your tax shelters in the meantime,” he added.
INCOME TAX
What was said about income tax yesterday?
The government committed to its 2015 manifesto promise to raise income tax thresholds. Chancellor Philip Hammond said the government will raise the point at which people pay tax on their income to £12,500 per year by 2020. Furthermore he pledged that by the same year the 40 per cent tax rate would not kick into £50,000.
How does this differ to the status quo?
At present, the pre-tax personal allowance is set at £11,000, after which a 20 per cent basic rate of tax is applied on all income between £11,001 and £43,000. At the start of the new tax year, the personal allowance will rise from £11,000 to £11,500, while the threshold for paying the higher rate of 40 per cent tax will also rise, from £43,000 currently to £45,000. However, the level at which high earners pay 45 per cent tax is unchanged.
CORPORATION TAX
What corporation tax changes did the chancellor announce?
Hammond confirmed that UK corporation tax will fall to 17 per cent, the lowest rate for any country in the G20. The rate will change over the next three years. Firstly, it will fall to 19 per cent from April this year and then again to 17 per cent in 2020.
How was this received?
“The recommitment to cutting corporation tax to 17 per cent by 2020 will help ensure that the UK remains open for business,” said the Centre for Policy Studies’ head of economic research Daniel Mahoney.
TAXES ON PENSIONS
Did the government change tax relief again?
No. Some of the potentially more drastic changes to restrict pensions tax relief for high earners didn't materialise. Baker McKenzie pensions partner Chantal Thompson said: “It’s good that some of the potentially more drastic changes to restrict pensions tax relief for high earners didn’t come through, as the constant government tinkering with pensions means individuals lose faith in the system. This seems sensible, as the annual allowance taper introduced last year already addresses the issue about pensions tax relief for very high earners.”
What about pension transfers and freedoms?
The one new “under the radar” tax change is a 25 per cent tax charge on certain transfers to overseas pension schemes, which is expected to raise £65m next year. The tax charge doesn’t apply if the pension is being transferred to a country where the individual is resident, so it’s clearly intended to catch scams rather than a genuine reason to transfer overseas.
Thompson said: “Pension schemes already have to do a lot of due diligence at present before transferring a pension overseas, so they won’t welcome the extra burden of having to do even more checks to see if the individual is resident in the overseas country.”
In addition, the Budget confirmed that the Money Purchase Annual Allowance (MPAA) will be cut to £4,000 from the current level of £10,000. The MPAA restricts the level of pension contributions that can be made by over-55s who have accessed pensions flexibly in particular ways under pensions freedom. David Robbins, senior consultant at Willis Towers Watson said: “The government opened this loophole itself, but it understandably wants to limit the damage.”