Sustained economic growth and strong tax receipts mean the pressure was off the Chancellor to raise taxes in his first Spring Budget. However, as he made clear in his round of television interviews last weekend, the welcome fiscal boost these two factors provide, around £30 billion, will be used for a Brexit safety net fund.
So, there was still some medicine for us all to take, especially the self-employed and small business owners. Let’s start with the two political stories the Chancellor had to address, adult social care and business rates.
Adult social care
The Chancellor received some criticism after his Autumn Statement in November for making no mention of this issue. It hasn’t gone away and has moved to the top of the news agenda the closer we get to the Budget.
The issue is that local authorities carry the burden for local care, particularly for the elderly. As we age, the number of people in the population requiring help continues to grow and several local authorities are planning large Council Tax increases to pay for it. To offset the political storm and to support local authorities, the chancellor will provide an additional £2 billion in funding over the next three years. An initial £1 billion will be available in 2017/18, allowing local authorities to act now to commission care packages.
We have looked at planning for long-term care previously in an article you can read by clicking here.
Mr. Hammond had little choice than to act on the business rate changes. Like social care, this has been a slow burn issue that has come to the fore in the last few weeks. It’s genesis is the update to business rates that comes into effect in April. Many firms, hospitality businesses especially, have said the sharp increases will threaten their very survival.
The Chancellor announced three measures for England. He will cap rates so that they don’t rise more than £50 a month for small businesses that are losing their rate relief. Then, a £300m fund will be available for local authorities to provide discretionary relief. Specific provision was made for pubs. Any pub with a rateable value under £100,000 will get a £1,000 discount on their business rates. This amounts to a £435m cut and applies to around 90% of all pubs.
While we’re on business, there were two important changes for the self-employed and those that are paid via their own limited company.
Self-employment National Insurance
One of the government’s quiet concerns about the growth in employment over the last five years has been the nature of the work created. 45% of the employment growth since 2008 has been driven by rising self-employment, now representing 15% of the UK workforce.
Parliament is looking into the fairness of the gig economy and whether some self-employed roles should in fact be employed. In the meantime, to ensure the increasing number of self-employed are making the same contribution to their state pension as employed people, there are some significant changes to National Insurance.
So, contrary to the government’s 2015 election manifesto, the self-employed will pay more in National Insurance contributions, netting the Treasury an extra £145 million by 2020/21. The rate will rise by 1% to 10% from April 2018 and again to 11% in April 2019. Self-employed people earning less than £16,250 will pay less in National Insurance because of the change.
Employed workers paid through the PAYE system pay National Insurance at a rate of 12% on annual earnings between £8,164 and £45,000, and 2% on earnings above £45,000 per year.
The Chancellor said an employee earning £32,000 pays £6,170 National Insurance along with their employer, whereas a self-employed person earning the same salary would only pay £2,300.
The Chancellor made no announcements about auto-enrolment for the self-employed.
Paying tax on dividends
The Chancellor has taken another step towards making it even less attractive to be a company director and to take a dividend as a salary. The current tax-free dividend allowance, introduced just two years ago, will fall from £5,000 to £2,000 a year from April 2018.
But this affects more than just directors. Dividends are annual cash payments made to holders of certain shares, to provide income. The changes mean the size of investment portfolios that can be held tax-efficiently will be halved.
The Chancellor’s rationale is that the reduction offsets the increased ISA allowance of £20,000 that applies from April. The government says the £2,000 dividend allowance will continue to mean that 80% of personal investors will pay no dividend tax, even if you have investments up to £50,000.
Accountancy firm, Blick Rothenberg, said, “The cut will cost basic-rate taxpayers £225, higher-rate taxpayers £975 and additional-rate taxpayers £1,143” on their dividend payments from investments.
Although you should never invest according to tax rates, this change does reinforce the importance of making sure your savings are held in a tax-free wrapper like an ISA or pension. You can read more about this in our tax-free investing article by clicking here.
Duties or sin taxes
Before we look at personal allowances, let’s review the usual suspects: there are no changes to petrol, car tax (vehicle excise duty) for hauliers and HGVs, or tobacco.There is a new minimum excise duty introduced on cigarettes, based on a retail price of £7.35 for a packet of twenty from May. Alcohol duty rates rise in line with inflation from March 14.
A new sugar tax will come into effect in April 2018. A tax on drinks with more than five grams of sugar per 100ml will be levied at 18p per litre, while those with eight grams or more of sugar per 100ml will have an extra tax of 24p per litre.
Personal tax allowances and living wage
The amount you can earn annually before paying income tax will rise in April 2017 from £11,000 to £11,500. The point at which you start paying the higher tax rate will increase from £43,000 to £45,000. The level at which you start to pay the additional rate, 45%, is unchanged at £150,000.
The government estimates over 400,000 people will be taken out of tax entirely as a result of the allowance increases. The average higher and additional rate payer will also see real term gains but 1.6 million will have an average loss of £23.
Confirming what Mr Hammond said in November’s Autumn Statement, the National Living Wage will increase to £7.50 on its current trajectory to meet the target of £9 by 2020.
News for women
Given the budget was timed for International Women’s Day, the Chancellor couldn’t get away without making a clear reference to equality, not least because the Prime Minister had announced two of the measures on Mumsnet the day before. There will be a £20 million fund to combat violence against girls, £5 million for helping people back into work after a career break and £5 million for projects to celebrate the Representation of the People Act 1918.
Learn more about how women can approach financial planning by clicking here.
Pension reliefs were unchanged. However, pension top up allowances are extremely costly and Mr Hammond’s predecessor made several moves to reduce the benefits of pension saving, especially for top earners. So, we expect this to feature in the next budget in November 2017.
As we revealed last week, following a recent consultation, the Treasury is allowing you to withdraw £1,500 from your pension tax-free to pay for general financial and tax advice relating to your pension. Just ask your adviser for more details on this.
From 9 March, a new 25% tax charge will be applied to transfers of pensions to overseas schemes if you’re not living in that country. The charge will not apply if you and your scheme are within the European Economic Area or if the overseas scheme is provided by your employer.
If you have any questions about the outcome of the budget and how it affects you, get in touch today.
The Financial Conduct Authority does not regulate taxation and trust advice.