Trick or treat?
Philip Hammond joked that he had avoided giving his speech on Halloween night itself because it would have been simply too tempting for the caption writers, and had avoided Christmas because he did not want to appear in cartoons disguised as Santa Claus. Even so, he was determined to honour the Prime Minister’s recent declaration that austerity was over. He repeated again and again that ‘the British people’s hard work has paid off’ and the fiscal rigour of the past eight years has allowed him at last to share out some of the benefits.
Mrs May had already committed £20 billion of spending to the NHS, but Mr Hammond still managed to raise tax allowances to the level promised for 2020 in the election manifesto a year early, a tax ‘giveaway’ of nearly £3 billion next year. Other big figures include the freeze on fuel duty for the ninth successive year, help for the transition to Universal Credit, a temporary increase for tax allowances on plant and machinery, and extra relief from business rates for small retailers. Very few tax raising measures were announced, even in the small print of the mass of information that is released on the internet when the Chancellor sits down. There really has not been a Budget like this in recent years.
The great unknown, of course – not quite an elephant in the room, because the Chancellor did refer to it – is the outcome of the negotiations with the EU on the terms of our leaving. If we get a good trade deal, as the Chancellor confidently expects, there will be a ‘double dividend’ – an end of uncertainty, and no more need for the reserves he has been holding back in case we do not reach agreement. If ‘no deal’ is…
Personal Income Tax
Tax rates and allowances (Table A)
The Chancellor’s most dramatic ‘rabbit out of the hat’ was the announcement of increases in the Personal Allowance and higher rate threshold to meet a manifesto commitment a year early. For the tax year 2019/20, the main taxfree Personal Allowance rises to £12,500 (up from £11,850), and the basic rate of tax applies – in England, Wales and Northern Ireland – to the next £37,500 of income (up from £34,500). This means that the threshold for 40% tax will be £50,000 for 2019/20 (up from £46,350). These figures will remain the same for 2020/21, after which the intention is to increase them in line with inflation.
The level of income at which the Personal Allowance is withdrawn remains £100,000; the withdrawal of £1 for every £2 of income means that there is an effective marginal rate of tax of 60% in the band of income up to £125,000 in 2019/20, above which the taxpayer will have no Personal Allowance.
The Scottish Parliament has set different tax rates and thresholds for Scottish taxpayers since 2017/18, and the details are yet to be confirmed for 2019/20. From April 2019 the Welsh Government has the power to set a Welsh rate of Income Tax for non-savings, non-dividend income for Welsh taxpayers, but has announced that it will not vary the UK rates.
There were no other significant changes to Income Tax rates and allowances, which are now extremely complicated (see the Table). An individual’s total tax liability on any given amount of income will vary considerably depending on the components of that income (for example, salary, profits, rent, interest, dividends). On a simple salary of £50,000, the Income Tax payable will be £860 less in 2019/20 than in 2018/19. However, the upper limit for 12% National Insurance also…
Company cars and fuel (Table C)
The basis for taxing company cars and fuel provided for private use is set out in the Table. The rates and thresholds continue to change each year as the Government acts to encourage people to make ‘greener choices’.
‘Off payroll’ working
HMRC has been concerned about individuals working through personal service companies (PSCs) and similar arrangements for two decades: they regard this as a way of avoiding PAYE and Class 1 NIC where ‘in reality’ (in HMRC’s view) the individual is acting as an employee. HMRC estimates that the cost to the Exchequer could reach £1.3 billion a year by 2023/24.
The ‘IR35’ rules required PSCs to pay PAYE and NIC on income from engagements that were effectively employments. From 6 April 2017, where the individual behind the PSC works in the public sector, the responsibility for paying this tax was transferred to the person making the payment to the PSC, and the responsibility for deciding ‘what is effectively employment’ was imposed on the public sector engager. HMRC is convinced that this has reduced non-compliance, and has been consulting about extending the same rules to the private sector. Representative and professional bodies have protested that the rules are unclear and complicated, and increase cost and uncertainty for all parts of the professional flexible labour market.
The Chancellor announced that the rules will be extended to the private sector, but he has taken account of representations made. The change will not apply until April 2020, and only ‘large and medium-sized’ engagers will be affected, excluding the smallest 1.5 million businesses. A further consultation will be carried out during 2019 to clarify how the rules should be introduced in detail.
This is the largest single revenue-raising measure in the Budget, expected to bring in well over £1 billion in 2020/21 when…
National Insurance Contributions
Thresholds and rates (Table D)
From 6 April 2019, the National Insurance Contributions (NIC) thresholds for employers and employees rise from £162 to £166 per week (£8,632 per year). The Upper Earnings Limit will increase to £962 per week (£50,024 per year, or £50,000 where a single annual calculation is carried out) in line with the threshold for 40% Income Tax.
Two years ago it was announced that Class 2 NIC would be abolished in April 2018, and entitlement to the State Pension would be built up by paying Class 4 NIC. Increases in the rate of Class 4 NIC were proposed at the March 2017 Budget but were withdrawn following protests; as a result the abolition of Class 2 NIC was deferred to April 2019, and in September it was announced that it will remain in force during the life of the current Parliament. Class 2 NIC rises from £2.95 to £3 per week for 2019/20.
Savings and Pensions
The ISA investment limits for 2019/20 remain £20,000 for a standard ISA and £4,000 for a Lifetime ISA. The limit for Junior ISAs and Child Trust Funds rises from £4,260 to £4,368. The Government will consult on regulations to deal with what happens when the very first Child Trust Funds mature in the near future.
Pension contributions (Table B)
There has been some speculation that the Chancellor would take steps to reduce pension tax relief, which he himself recently described as ‘eyewateringly expensive’. In the event, he did not mention the subject in his speech, and no changes were hidden in the documents – apart from the second annual inflation-linked increase in the Lifetime Allowance (LA).
The LA is the maximum amount that a person can save in tax-advantaged pension schemes. The value of benefits is measured against the LA when benefits are first taken from a pension, and also on some other occasions, including the individual’s 75th birthday. The LA will increase in line with inflation from £1.03 million to £1.055 million from 6 April 2019.
The limit on contributions to tax-advantaged pension schemes remains £40,000 per year for those with income up to £150,000 (£110,000 if the pension contribution is paid directly into the scheme by an employer). The limit is tapered away as income increases above £150,000, until it is only £10,000 when income reaches £210,000. The limit is also reduced to £4,000 for anyone who has drawn more than the tax-free lump sum from an existing money-purchase pension fund.
Capital Gains Tax
The annual exempt amount rises from £11,700 to £12,000 for 2019/20. The rates of tax are unchanged at 10% (total income and gains within the taxpayer’s basic rate limit) or 20% (gains above the basic rate limit) on assets in general, but 18% or 28% on residential property that is not eligible for the main residence exemption, and also on ‘carried interest’ of investment fund managers.
Most trusts enjoy half the annual exempt amount (£6,000) and pay tax at 20% or 28% on chargeable gains.
Main residence exemption
The exemption of gains on a taxpayer’s only or main residence is one of the most generous tax reliefs of all. For disposals from April 2020, there will be two changes to restrict what the Chancellor considers to be unintended effects. First, the ‘final period exemption’, which allows exemption to continue after a person has moved somewhere else, will be reduced from 18 months to 9 months. The final 36 months of ownership remain exempt where a disabled owner is living in a care home. Second, ‘letting relief’, which can exempt up to an additional £40,000 of gain where a property has been let during the period of ownership, will be restricted to periods during which an owner was in ‘shared occupancy’ with a tenant. At present, this relief is very favourable for someone who moves and lets out the former main residence. The Government will consult on both these measures.
Entrepreneurs’ Relief (ER)
ER reduces the tax on disposals of qualifying assets to 10%. The Chancellor commented that he has noted recommendations that he should abolish it. However, he considers it an important incentive to encourage economic growth. To prevent ‘misuse’ of the relief, the definition of a ‘personal company’ will change, for disposals on or after 29 October 2018, to require the…
As previously announced, the nil rate band remains frozen at £325,000 until the end of 2020/21. A ‘residential nil rate band (RNRB) enhancement’ began to take effect for death transfers from 6 April 2017, applying an additional nil rate band (initially £100,000; £150,000 from 6 April 2019 to 5 April 2020; and rising to £175,000 by 2020/21) where a taxpayer’s residence (or assets representing one following a sale) is left to direct descendants. A married couple will potentially then be able to leave £1 million free of IHT to their descendants (£325,000 plus £175,000 from each parent), but the rules are complicated. Minor changes have been made to the RNRB rules to ensure that they work as intended.
Corporation Tax rates
There are no changes to the Corporation Tax rates previously announced: the present 19% rate continues for the year commencing 1 April 2019, then will fall to 17% from 1 April 2020.
Capital Allowances on plant
The Annual Investment Allowance, on which a business can claim 100% relief on the cost of purchasing plant and machinery, will increase to £1 million from its current £200,000 for two years from 1 January 2019. There are complex rules where a period of account straddles the change of AIA rate, so those planning to spend more than £200,000 per year on plant should take advice to make sure that they qualify for the best relief.
The rate of writing down allowance on the ‘special rate pool’ (mainly ‘long life assets’, integral fixtures in buildings and cars with emissions ratings over 110g/km purchased since April 2018) will be reduced from 8% to 6% from April 2019. The main rate of writing down allowance remains 18%.
Enhanced Capital Allowances (currently 100% First Year Allowances) were introduced in 2001 for expenditure on qualifying plant which uses energy efficiently or is environmentally beneficial. As is common, the list of qualifying technologies is being updated for 2019/20; however, the scheme is being abolished with effect from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses. It will clearly be beneficial to consider advancing planned expenditure before those dates, if total expenditure on plant would otherwise exceed the Annual Investment Allowance for the period. However, Enhanced Capital Allowances for electric vehicle charge points will continue to 31 March 2023.
Capital Allowances on buildings
A new Structures and Buildings Allowance is to be introduced for expenditure on new non-residential structures and buildings where the contracts for the construction works are entered into on or after 29 October 2018. Relief…
Last year the Chancellor announced that the VAT registration threshold will remain frozen at £85,000 until 5 April 2020. He has now confirmed that it will stay unchanged for a further two years after that, until 5 April 2022. The deregistration limit (£83,000) will also stay unchanged. The Budget releases note that the Office of Tax Simplification has recommended a reduction in the threshold because it distorts the behaviour of businesses: they may be restricted from growing by fear of exceeding the limit. The Government prefers to keep a large number of businesses out of VAT altogether by maintaining the threshold at its current level, but will look again at the question once the terms of the UK’s exit from the EU have become clear.
The Government has already published a number of statements about the possible VAT and customs consequences of a ‘no-deal Brexit’, while negotiations continue in the hope of a favourable agreement. There is nothing in the Budget about international trade at all, presumably because it is all too uncertain or sensitive for any meaningful statements to be made.
Significant changes will be made to the VAT treatment of ‘face value vouchers’ that are issued on or after 1 January 2019. ‘Single purpose vouchers’, which can only be used to buy a single category of goods or services (standard rated, lower rated, zero rated or exempt) will be treated as the underlying item when bought and sold. ‘Multi-purpose vouchers’, where the liability of the supply on redemption is uncertain, will be outside the scope of VAT until they are redeemed, when in most cases the face value will be used by the retailer to calculate the output tax. This is a big change from the existing rules for anyone who issues and redeems vouchers, and also…
Income Tax relief for interest against rental income is being restricted to the basic rate of tax, with the restriction phased in over four years. This began in 2017/18; in the third year of the new rules, 2019/20, only 25% of interest paid will be allowed as a deductible expense. The remainder will be eligible for a reduction in tax liability at 20%. The rules are complicated and can produce unexpected results.
Annual Tax on Enveloped Dwellings
The annual tax charges on residential properties worth more than £500,000 that are owned through companies and other ‘envelope’ arrangements will go up for 2019/20 in line with inflation. The charge on a dwelling worth between £500,000 and £1 million will be £3,650 (up from £3,600); the maximum charge on a dwelling worth over £20 million will be £232,350 (up from £226,950).
Stamp Duty Land Tax
A relief from SDLT was introduced in the November 2017 Budget to exempt purchases by first-time buyers of properties costing up to £300,000. This is being extended to shared ownership properties valued at up to £500,000. The exemption will apply to the initial share purchased up to £300,000 (any excess over that figure will be charged at 5%). Further shares will not qualify for the exemption. This relief is being backdated to the introduction of the original first-time buyers’ relief on 22 November 2017.
Making Tax Digital for VAT
The majority of businesses with VATable turnover above the £85,000 registration threshold will be required to maintain their VAT records using ‘functional compatible software’ from the first VAT return period starting on or after 1 April 2019. It was announced during October that a limited range of ‘more complex’ businesses will not be required to comply with the new rules until 1 October 2019. Concern has been expressed by Parliamentary committees and professional bodies that full-scale testing of the system has only recently started and awareness of the requirement among businesses is still patchy, but the Chancellor has not made any further announcements on the subject. It must therefore be assumed that the rules will be implemented as planned, another significant change to VAT three days after the UK leaves the EU.
Avoidance and evasion
There are as usual measures in the Budget to try to close loopholes. These include legislation targeted at businesses attempting to avoid UK tax by arranging for their UK business profits to accrue to entities resident in lower-tax territories (‘profit fragmentation’). The UK profits will be increased to the commercial level for tax purposes.
From April 2020, the amount of payable Research & Development tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NIC liability for that year. This is described as a measure to prevent abusive and fraudulent claims.
The time limit for assessing unpaid tax involving ‘offshore non-compliance’ (concealing undeclared income and gains, and amounts chargeable to Inheritance Tax, outside the UK) is to be increased to 12 years in cases not involving deliberate errors by the taxpayers. This is not retrospective in effect: the present four year time limit is not extended back to 2006.…
Income Tax Rates and Allowances
Income Tax Rates and Allowances (Table A)
|Personal Allowance (PA)*†||£12,500||£11,850|
|Blind Person’s Allowance||2,450||2,390|
|Rent a room relief §||7,500||7,500|
|Trading income §||1,000||1,000|
|Property income §||1,000||1,000|
*PA will be withdrawn at £1 for every £2 by which ‘adjusted income’ exceeds £100,000. There will therefore be no allowance given if adjusted income is £125,000 or more (2018/19: £123,700).
†£1,250 of the PA (2018/19: £1,190) can be transferred to a spouse or civil partner who is no more than a basic rate taxpayer, where both spouses were born after 5 April 1935.
§ If gross income exceeds it, the limit may be deducted instead of actual expenses.
|Basic Rate Band (BRB)||£37,500||£34,500|
|Higher Rate Band (HRB)||37,501-150,000||34,501-150,000|
|Additional rate||over 150,000||over 150,000|
|Personal Savings Allowance (PSA)|
|– Basic rate taxpayer||1,000||1,000|
|– Higher rate taxpayer||500||500|
|Dividend Allowance (DA)||2,000||2,000|
BRB and additional rate threshold are increased by personal pension contributions (up to permitted limit) and Gift Aid donations.
|Tax Rates||2019/20 and 2018/19|
|Rates differ for General, Savings and Dividend income within each band:|
General income (salary, pensions, business profits, rent) usually uses personal allowance, basic rate and higher rate bands before savings income (interest). To the extent that savings income falls in the first £5,000 of the basic rate band, it is taxed at nil rather than 20%.
The PSA will tax interest at nil, where it would otherwise be taxable at 20% or 40%.
Dividends are normally taxed as the ‘top slice’ of income. The DA taxes the first £2,000 of dividend income at nil, rather than the rate that would otherwise apply.
High Income Child Benefit Charge (HICBC)
1% of child benefit for each £100…
National Insurance Contributions
National Insurance Contributions (Table D)
|Class 1 (Employees)||Employee||Employer|
|Main NIC rate||12%||13.8%|
|No NIC on first||£166pw||£166pw|
|Main rate* charged up to||£962pw||no limit|
|2% rate on earnings above||£962pw||N/A|
|Employment allowance per qualifying business||N/A||£3,000|
*Nil rate of employer NIC for employees under the age of 21 and apprentices under 25, up to £962pw.
Employer contributions (at 13.8%) are also due on most taxable benefits (Class 1A) and on tax paid on an employee’s behalf under a PAYE settlement agreement (Class 1B).
Class 2 (Self-employed)
|Flat rate per week||£3|
|Small profits threshold||£6,365|
Class 3 (Voluntary)
|Flat rate per week||£15|
Class 4 (Self-employed)
|On profits £8,632 – £50,000||9.0%|
|On profits over £50,000||2.0%|