Personal tax

Dividend allowance changes again

It was only with effect from April 2016 that the dividend allowance was introduced by the previous Chancellor, George Osborne, as part of wider changes to the taxation of dividends.

Now the picture is changing again. In line with the theme of reducing the tax differential between various potential business structures, the Chancellor announced a reduction in the dividend allowance to £2,000 from April 2018.

This announcement is surprising given the relatively recent introduction of the allowance.

Rates and allowances

The Chancellor confirmed the Government’s commitment to increasing the income tax personal allowance to £12,500 and the higher rate (40%) threshold to £50,000 by 2020. Again, as previously announced, the personal allowance and higher rate threshold for 2017/18 will increase to £11,500 and £45,000 respectively.

However, one of the main changes announced in the Budget was the increase in the main rate of Class 4 national insurance paid by the self-employed. This will increase from 9% to 10% from April 2018 and to 11% from April 2019. Philip Hammond said that the purpose of this measure is to reduce the tax advantages enjoyed by self-employed individuals compared to employees earning the same income.

As part of the Government’s strategy to reduce the tax advantages of those working through their own companies over the self-employed and employees, the Chancellor also announced that the tax-free dividend allowance (which came into effect from April 2016 as part of wider changes to the way dividends are taxed) would be reduced from £5,000 to £2,000 from April 2018. This limits the tax advantages for those who could pay themselves dividends from their own companies and those with large share portfolios outside an ISA.

Capital gains tax rates remain unaffected by any new announcements made in the Budget. The annual exempt amount for individuals and personal representatives rises from £11,100 to £11,300 for 2017/18; the amount for trustees rises from £5,550 to £5,650.

NIC change for the self-employed

One of the most far-reaching changes announced in the Budget was the increase to the national insurance rate paid by the self-employed.

Taxpayers affected by the move include partners and members of limited liability partnerships. The Chancellor justified these changes by highlighting the reduced rate paid by these workers compared to employees earning the same amount.

In the current 2016/17 tax year, the self-employed pay Class 4 national insurance contributions (NICs) at a rate of 9% on income between £8,060 and £43,000, and 2% over £43,000. In addition, Class 2 national insurance is paid at a flat rate of £2.80 per week where income for the year is above £5,965. These rates are in keeping with recent years.

As previously announced, Class 2 national insurance will be abolished from April 2018. However, the main Class 4 rate will now increase to 10% from April 2018 and to 11% from April 2019.

The changes to Class 4 national insurance are expected to raise £325m in 2018/19, increasing to £645m in 2019/20, before dropping back to £595m and £495m in 2020/21 and 2021/22 respectively.

Whilst being a source of increased revenue for the Government, the measure will have the biggest impact on the self-employed individuals incomes under the 40% higher-rate tax band. Higher earners will be proportionally less affected, as the 2% higher rate remains unchanged. This could therefore be viewed as a regressive tax increase. Immediate media reaction has also focused on how this measure appears to contradict the Conservative Party manifesto at the last General Election, which promised not to increase a range of taxes, including national insurance.

However, if the measure is judged a success, there is plenty of scope to increase the Class 4 NIC burden further. The equivalent rate of Class 1 national insurance for employees is currently 12%; it would be tempting for the Government to increase Class 4 further to harmonise the rates. In addition, the Budget made no mention of the 13.8% national insurance rate paid by employers on their employees’ income and how this could possibly be replicated for the self-employed in the future.

Additional points

• Trading and property income allowances:
from April 2017 there will be two £1,000 income tax allowances for trading and property income.
• In July 2015, extensive reforms were announced to the taxation of long-term non-domiciled individuals from 6 April 2017. There has been extensive consultation in the intervening period and no substantive changes were announced in the Budget. However, issues are still being identified and one minor amendment was announced. There will be a two-year period to 5 April 2019 when it will be possible to segregate funds held offshore to enable tax-efficient remittances to be made to the UK. It was originally intended that only income or gains received after 6 April 2008 could be segregated in this way. However, the Budget announced that income or gains received before that date will now be included.