In the last budget before Brexit the Chancellor, Philip Hammond, seeks to pave the way for a brighter future, whilst delivering his plans for tax rates for the 2019/20 tax year. He said, “The last 8 years of tax changes have been driven by necessity not ideology, however, we have reached a defining moment – the era of austerity is coming to an end!”. Many changes will not come into effect immediately & some details are not yet known.
2019 tax rates & proposed changes at a glance
Personal Taxation – 2019/20
- Income Tax – 20/40% rates with the basic rate band up to £37,500 in 2019/20 with personal allowances up to £12,500, so taxpayers hit the 40% rate if income exceeds £50,000 (£46,350 in 2018/19) but lose their personal allowance if income exceeds £100,000. The increase in rates comes a year earlier than the manifesto.
- National Insurance contributions (NICs) – Continues with rates of 12/2% for employees and self-employed rates (Class 4 NICs) continue at 9%/2% from April 2019.
- Property income – Interest relief was restricted for residential buy-to-lets (excluding furnished holiday lettings) from April 2017 and down to basic rate (20%) by April 2020. Rent-a-room relief remains at £7,500pa.
- Dividend income – Dividend Tax continues to be at a rate of 7.5% above £2,000pa, 32.5% for higher rate taxpayers & 38.1% for income above £150,000pa. The tax-free dividend allowance remains at £2,000.
- Capital Gains Tax – Entrepreneurs’ Relief continues with tax rate of 10% for lifetime gains of £10 million per individual however the minimum holding period is being extended from 12 months to 24 months as of 6 April 2019. In addition from 29 October 2018 shareholders must also be entitled to at least 5% of distributable profits and net assets of the company to claim the relief.
- Inheritance Tax – Nil rate band frozen at £325,000 until 2021 but the exemption extended from April 2017 for family homes. Exemption for pension funds transferred on death before age 75.
Business Taxation – 2019/20
- Annual Investment Allowance – Will be increased from £200,000 to £1,000,000 from 1 January 2019 to 31 December 2020 to help stimulate business investment.
- Corporation Tax – Rates for all companies 19% from April 2017 & confirmed will be reduced to 17% from April 2020. Loans to shareholders taxed at 32.5%.
- Structures and buildings allowance (SBA) – New buildings allowance for non-residential structures will be eligible for a 2% capital allowance where all contracts for the physical construction works are entered into on or after 29 October 2018.
- IR35 – Off payroll working rules that apply to the public sector will apply to the private sector large and medium sized businesses from April 2020.
- Research and Development – From 1 April 2020, the amount of tax credits that a loss making company can use will be restricted to PAYE/NIC liability for that year for small and medium sized companies in an attempt to tackle abuse.
- VAT – standard rate – Standard rate maintained at 20% and registration threshold frozen at £85,000 for another two years.
- Stamp Duty Land Tax – Abolished for first time house-buyers up to £300k & only on top slice up to £500k has been extended to shared ownership buyers with retrospective effect back to 22 November 2017.
Ellacotts Top Ten Tax Tips
- The personal allowance advanced increase by £650 (to £12,500) from 6 April 2019 and the basic rate band will be increased to £37,500 so the 40% tax rate applies to chargeable annual income exceeding £50,000. Family businesses should consider how each member withdraws profits from the business to maximise use of the tax allowances and lower rate bands.
- A 60% Income Tax rate applies to those whose income falls between £100,000 and £125,000 in 2019/20. Anyone who believes their personal income may exceed £100,000 per annum should consider whether they can claim tax relief (e.g. pension payments) or share income with other members of the family. Please ask for advice about your pension planning.
- The company Corporation Tax rate is now 19% and will reduce to 17% in April 2020. So, some partnerships and sole traders could consider incorporating into a limited company to benefit from lower tax rates. The government plans a review of incorporation so beware!
- The annual limit for individual savings accounts (ISAs) remains at £20,000. ISAs are very tax-efficient and the increased limit and simplified structure will make it easier to make investments that save Income Tax. Please ask for advice on this if relevant.
- Tax relief is restricted for higher income individuals (>£150,000pa) from 6 April 2016 but radical changes for pension schemes in 2015 allow more access to funds. Access to pension funds will be much more flexible although Income Tax will be payable on these amounts. Inherited pension funds and income from joint annuities will no longer suffer a tax charge. Pension planning will be even more important especially for those at or approaching retirement.
- Entrepreneur’s Relief continues to reduce the rate to 10% for qualifying gains up to £10 million on trading asset disposals. Business owners should check carefully whether they qualify for Entrepreneurs’ Relief as this relief could be worth up to £1,000,000 in tax savings per individual. However, beware of new rules requiring the minimum holding period to be 24 months not 12 months for disposals from 6 April 2019. From 29 October 2018 shareholders must also be entitled to 5% of the distributable profits and net assets in addition to the voting rights.
- The increase of the Inheritance Tax nil rate band from £325,000 to £500,000 (for family homes) per individual (£1 million per couple) will allow more wealth to pass to the next generation without tax being payable at 40%. This encourages longer-term planning to start at an earlier age and the use of family trusts to protect assets for younger beneficiaries. So what’s your family succession strategy?
- Significant capital allowances at 100% on £1,000,000 of equipment purchases provide a major tax payback for capital-intensive businesses (e.g. farmers, hauliers & manufacturers). Timing of planned capital expenditure is crucial to ensure tax relief falls into the best tax year. However, the special rate pool allowance will be reduced from April 2019 from 8% down to 6% to more closely match depreciation.
- The employer’s National Insurance (NIC) rebate of £3,000 for most employers (excluding director-only companies), however, this will be restricted to employers with NIC below £100,000 in their previous tax year from April 2020. Make sure that your business claims this allowance by reducing your NIC payments in the next tax year.
- Capital Gains Tax exemptions for private residences is to be restricted. From April 2020, the government will reform Lettings Relief so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant. The final period of exemption will also be reduced from 18 months to 9 months. Consider bringing forward any potential sales of property before April 2020.