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PROPERTY INCOME AFTER APRIL 2016: THE GOOD NEWS AND THE BAD NEWS

I own a buy to let property and/or rent a room in my main residence. What do the new Budget changes from 6 April 2016 mean for me?

Last year’s Summer Budget announced on 8 July 2015 introduced key changes for individuals with property income. If you rent a room in your main residence or own a buy to let property, the following changes are key for your end of year tax return:

Rent a Room: The Good News

For those who ‘rent a room’ to a lodger in your main residence, from 6 April 2016 you will benefit from the budget’s announcement to increase the rent a room allowance (the amount of tax free income you can receive from your lodger) from £4250 to £7500 per annum. Therefore you can receive an additional £3250 income tax free every year from renting a room in your main residence, which represents a substantial tax saving for a basic rate tax payer of £650 per year.

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The New Taxation of Dividends – How will it affect you?

The New Taxation of Dividends – How Will it Affect You?

 

In July 2015, the first budget of the new Conservative Government in the last two decades, announced significant changes to the way dividends are taxed. 

 

The Chancellor George Osborne described this as a “Budget for working people’. The proposed changes to the taxation of dividends will undoubtedly affect those the budget was reported to assist. The effect is an acceleration in tax and attack on the people it is looking to assist. 

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National Minimum Wage Increases with effect from 1 October 2015

Following on from recommendations made by the Low Pay Commission (LPC) in March 2015, the National Minimum Wage will increase from today – 1 October 2015.

It has been suggested that the increases imposed will have a positive effect on 1.4 milpon of the lowest paid employees in Britain today. Although an additional cost to employers, this should benefit the economy as a whole.

The government announced a 20p increase in the adult rate (from £6.50 to £6.70 per hour); a 17p increase in the rate for 18 to 20-year-olds (from £5.13 to £5.30 per hour); an 8p increase in the rate for 16 to 17-year-olds (from £3.79 to £3.87 per hour) and a 57p increase in the rate for apprentices (from £2.73 to £3.30 per hour).

However, not all workers qualify for the national minimum wage. It is important to distinguish the difference between apprentices and standard employees. An apprentice is an individual aged 16 to 18 (and aged 19 or over who are in their first year of their apprenticeship). Apprentices qualify for the apprentice minimum wage, and not the standard worker minimum wage. All apprentices aged 19 and over and in the second year of their apprenticeship qualify for the standard national minimum wage rates for their age.

Employees who qualify for the minimum wage are workers of school leaving age (aged 16 the last Friday in June of the school year). Those workers can be part-time, casual workers, agency workers, trainees and workers on probation, disabled workers, agricultural workers, foreign workers, seafarers and offshore workers. It is important to note that contracts for payments below the minimum wage are not legally binding. The worker is still entitled to the minimum wage.

Certain individuals do not qualify for the minimum wage. These include self-employed individuals, company directors, volunteer workers, workers on a government employment program, family members of the employer living in the employer's home, workers younger than school leaving age (usually below 16), higher and further education students on a work placement up to one year, workers on government pre-apprentice schemes, members of the armed forces, share fishermen, prisoners, people living and working in a religious community and people working on a Job Centre Plus work trial for 6 weeks.

Holiday days also need to be taken into consideration when employing a worker/apprentice. Apprentices are entitled to a minimum of 20 days of holiday per annum, excluding bank holidays which is the same as standard employees working a 5 day week.

If you require any further information on the national minimum wage increases, employee classification, or holiday entitlements please contact the team at Spirare.

The Summer Budget 2015: ''Britain is Open for Business''

Further to the conservative victory in May, this budget has been described as the ‘Budget for Working People’. This budget is exactly that for both businesses and individuals. This has also been described as a budget for a ‘’country with big ambitions’’ and it has illustrated this by the measures implemented to strengthen the economy, including significant measures for the NHS, education and military.

For businesses, particular positive implementations include the permanent amount for annual investment allowance set at £200,000 from January 2016 onwards, and the reduction in corporation tax to 18% from 2020. The tax lock to ensure no increases in the main rates of VAT, NIC and income tax for the next five years are key factors which will allow for better business future planning.

However, this budget has had significant negative implications for those smaller businesses operating via owner-managed limited companies using a mix of the dividend and salary remuneration strategy. This is due to the dividend rate and calculation changes which will result in tax payable from a personal aspect for shareholders if they exceed certain limits, which in the majority of cases, owner managed limited company directors shall. At this stage the detail is limited, and we shall be publishing a further article on this as soon as the details are available.

Key points from the Chancellor’s budget were as follows:

 

Personal tax

 

• A tax lock to prevent increases in main rates of income tax, national insurance or VAT for five years will be introduced into legislation.

• A new National Living Wage to reach £9 per hour by 2020, compulsory for those over 25 - that is 60% of median earnings. It will start at £7.20 next April, and be set then on by the Low Wage Commission, in line with the £9 target. This compares with the National Minimum Wage of £6.50 for over-21s currently.

• Tax-free personal allowance will be raised from £10,600 to £11,000 next year, eventually to be raised to £12,500. The threshold will also rise in line with the minimum wage.

• Threshold for 40% rate raised from £42,385 in this tax year to £43,000 in 2016-17, eventually to be raised to the £50,000 target.

• Buy to let landlords will get less tax relief on their mortgage interest payments. Tax relief is restricted to the basic rate of tax only for mortgage interest paid on buy to let residential properties. This will be phased in over 4 years from April 2017.

• Home owners with lodgers will be able to earn £7,500 tax-free per annum via rent a room relief from April 2016 (an increase from the £4,250 per annum).

• From 2017 there will be an extra £175,000 inheritance tax allowance for those who leave their homes to their children or grandchildren, on top of the £325,000 standard inheritance tax allowance currently. The relief is tapered away for those with estates of more than £2m.

• The threshold and new allowance are both twice as high for married couples and civil partners, meaning they will now be able to inherit up to £1m tax-free from each other.

• Non-domiciled tax status will no longer be inheritable (based on the parents’ status)

• Those earning more than £150,000 will have their tax-free contributions allowance for pensions tapered away from its current £40,000 per year to a minimum of £10,000.

• The Government is consulting on a new ISA-style pension where savers pay tax on the income they put in, but not when they take it out.

• Dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance.

• Dividend tax rates are going up from zero to 7.5% for basic rate income tax payers, from 25% to 32.5% for higher rate taxpayers, and from 30.56% to 38.1% for additional rate payers. The current 10% tax credit is being abolished and the first £5,000 of dividend income is to be tax free. Basic rate tax payers will then pay 7.5% on dividend income, 32.5% by higher rate payers and 38.1% for super rate tax payers.  This means that someone taking dividends only from their companies will no longer be able to receive that income tax free.

 

 

Corporation/Business tax

• Corporation tax will be cut to 19% in 2017, and then 18% from 2020. That is down from 28% when he took over as Chancellor in 2010 and the 20% at present.

• Small firms' NI contributions will fall, with a £3,000 employment allowance. Therefore a small firm can hire four staff on the national Living Wage and pay no national insurance.

• The annual investment allowance, which was a temporary tax break for firms, will be set at £200,000 permanently from January 2016.

• There is no longer corporation tax relief on goodwill purchased from third parties effective from 8 July 2015 unless it is later sold.

• Corporation tax payment dates have been brought forward for companies with profits exceeding £20 million.

• Mr Osborne stated "too many large companies leave the training to others and take a free ride on the system". Therefore there is now an introduction of an apprenticeship levy on large firms, by which those firms which train apprentices receive more money than they put in.

 

Welfare reform

• £12bn of welfare savings will be found, with spending focused on the elderly and disabled.

• Disability benefit will not be taxed or means tested, while more money is going to women's refuge centres.

• For those aged 18-21, they must Mr Osborne stated they must "earn or learn", and will lose their automatic entitlement to housing benefits

• From 2017, all working parents of three- and four-year olds must work if they want universal benefit, but also get more free childcare per week.

• The cap on benefits will be cut from £26,000 to £23,000 in London and £20,000 in the rest of the UK.

• Those on higher incomes in social housing will have to pay the market rate for their homes. That applies to those earning above £40,000 in London and £30,000 elsewhere in Britain.

• Working-age benefits will be frozen for four years, including tax credits and housing benefit. Maternity payments will be excluded from the freeze.

• Rent payments for social housing will be cut by 1% per year for each of the next four years.

• Working benefits will be stripped from those who are not disabled and have no children, and will be withdrawn at a faster pace as a claimant's earnings rise.

 

Child benefit

• Tax credit and universal credit support to be limited to first two children from April 2017.

• Housing benefit will also be affected by removing family premium for new children from April 2016.

• But multiple births like triplets will be excluded from the limit.

 

 

General

• The Chancellor will add an 8% additional tax on banks' profits from January 2016. The tax will apply to banks' entire annual profits, with no relief given for losses made in previous years.

• In return, he will start to cut back the bank levy, reducing it from 0.21% to 0.18% next year, then gradually reducing it to 0.1% in 2021.

• After 2021 the levy will only apply to the UK balance sheet of UK-based banks, rather than being applied to their global operations.

• Overall, the changes will still cost banks more the OBR predicts lenders will pay an additional £415m in 2016-17, £555m more in 2017-18 and £365m more in 2018-19.

• The Chancellor praises tuition fee reforms as "a triumph of progressive reform" to get more students from poor backgrounds into university, and is now removing the cap on student number.

• From 2016-17, maintenance grants will be replaced by loans for students to be paid back when they earn more than £21,000. Loans of up to £8,200 will be available.

• New cars will not need an MOT until they are four years old, rather than three at the moment.

• Fuel duty has been frozen for another year.

• Mr Osborne says he is giving power over fire services and childrens’ services to Manchester’s mayor, as well as establishing a land commission.

• He is working with Sheffield on a similar deal, in exchange for the introduction of a directly elected mayor.

• The BBC will adopt the cost of the TV licences for individuals aged over 75.

• Britain will meet the NATO commitment to spend 2% of GDP on defence each year.

• Public sector pay rises will be capped at one pc per year until 2019.

• The NHS is being offered another £8bn by the Chancellor.

 

If you require further information on any of the above, please do not hesitate to contact a member of the Spirare team.

 

 

Should you be using the Fuel Scale Charge? New fuel scale charge rates applicable from 1 May 2015

The fuel scale charge allows a business (primarily sole traders and partnerships) to reclaim the input VAT on all fuel expenses, and account for the private use element using the fuel scale charge.

The fuel scale charge will depend on the CO2 emission rate of the vehicle.

Therefore in some scenarios, it may be advantageous to use the fuel scale charge, whereas in other scenarios the input VAT reclaimable may be less than the output VAT payable on the fuel scale charge, therefore utilising the fuel scale charge would not be advisable.

The VAT road fuel scale charges are amended with effect from 1 May 2015. Businesses must use the new scales from the start of the next prescribed accounting period beginning on or after 1 May 2015.

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The Budget 2015 Summary: The Aspirational Budget

As the pre-election budget commenced, there were some surprises. This budget is being described as an ‘aspirational’ budget, predominantly because some of these new changes are ‘aspirational’ and to a fair extent they are dependent on a conservative victory in May’s general election.

Therefore it is worth noting that some of these could be overturned by the next budget if a different party win May’s election.

The budget witnessed some positive changes towards savings and pensions for the majority, as well as some positive personal taxation changes, especially for farmers. Whereas for businesses the budget had a mix of positive and negative deviations.

Key points from the Chancellor’s budget were as follows:

 

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