Budget 2017: Chancellor cuts tax-free dividend allowance
The Chancellor, Philip Hammond, has unveiled the Budget for 2017.
In a largely technical Budget containing few giveaways, the Chancellor reduced the amount shareholders and company directors can earn tax-free in dividends from £5,000 to £2,000.
He also made changes to the way self-employed workers pay National Insurance Contributions and introduced a range of measures to clamp down on tax avoidance and evasion.
April will also see changes announced in the previous Budget being introduced for ISAs, inheritance tax, and income tax bands.
Here are 11 things you should know about the Budget and other changes that could affect you and your finances.
1. The outlook for the economy
Almost a decade after the outbreak of the financial crisis, the UK economy continues to recover. The independent Office for Budget Responsibility has upgraded its growth forecast for 2017 from 1.4% to 2.0%.
Inflation is expected to rise to 2.4% over the course of the year, before falling to 2.3% in 2018 and returning to the target rate of 2.0% the year after. At £51.7bn in 2016-17, Government borrowing was more than £16bn lower than expected at the time of the Autumn Statement.
2. A reduced Dividend Allowance for directors and shareholders
The Dividend Allowance, which currently allows directors or shareholders to take £5,000 of dividends tax-free on top of their Personal Allowance, will be cut to £2,000 from April 2018.
The Chancellor said the Dividend Allowance and the difference in how employed and self-employed workers pay tax was “a key driver” of increasing numbers of people choosing to work via their own companies, while also providing “an extremely generous tax break” for those with substantial share-based portfolios.
3. Changes to National Insurance for the self-employed
Self-employed workers will see changes to their National Insurance Contributions (NICs) to bring the rates of self-employed and employed workers closer into line. This reflects recent changes in how workers build up their entitlement to benefits like the State Pension.
Class 2 NICs are to be abolished by April 2018, while Class 4 NICs for the self-employed will rise from 9% to 10% at the same time, and then to 11% from April 2019 – a move the Chancellor said would cost the equivalent of around 60p a week for each self-employed worker. However, self-employed people earning less than £16,250 may see a reduction in their NIC bill.
4. Charges on overseas pensions transfers
The government will introduce a 25% charge on transferring pension savings into Qualifying Recognised Overseas Pension Schemes (QROPS), to deter some savers from attempting to cut their tax bill by moving their pension savings to another country.
However, charge-free transfers will be allowed for people who have a genuine need to move their pension, including when the individual and the pension are both located within the European Economic Area.
5. A clampdown on tax avoidance
The Chancellor also unveiled measures to tackle tax avoidance and evasion. These include introducing legislation to stop those promoting tax avoidance using ‘arms length’ company structures to get around existing rules.
Following consultation, the government will also introduce penalties against people who promote tax avoidance arrangements that are later defeated by HMRC. Companies will also no longer be able to convert capital losses into trading losses from 8 March 2017, closing a loophole exploited by some businesses.
6. State Pension Increase
Every year, the State Pension rises by whichever rate is the highest of average earnings growth, inflation or 2.5%, under what is called the 'triple lock'. For 2017-18, the new State Pension for those who reached State Pension age from 6 April 2016 will increase from £155.65 per week to £159.55. People who reached State Pension age before this date will see the weekly State Pension rise from £119.30 to £122.30.
7. Personal Allowance increase
The personal allowance – the amount you can earn before you start paying income tax – rises from £11,000 to £11,500 from 6 April, while the higher rate (40%) income tax threshold will rise to £45,000 from £43,000. If your income is over £100,000, your personal allowance reduces by £1 for every £2 you earn above this limit, so if you earn £123,000 or more, your personal allowance will be £0. The threshold for additional rate income tax (45%) remains unchanged at £150,000.
8. IHT changes affecting your family home
Changes to Inheritance Tax (IHT) rules could remove your home from your estate for IHT purposes if you leave your home to your direct descendents. A new residence allowance is being introduced, starting at £100,000 and rising in increments to £175,000 in 2020/21, which can be passed on for widowed couples. This means a home worth up to £350,000 would be exempt from IHT in many cases. You can already pass on an estate worth up to £325,000 (up to £650,000 for married or widowed couples) without incurring IHT.
9. Lifetime ISA
The new Lifetime ISA, open to savers aged 18 to 39, also launches in April. It is designed to help people buy their first home and/or save for retirement. You can save up to £4,000 a year in a Lifetime ISA until you turn 50, which counts towards your overall ISA allowance, and receive a government bonus worth 25% of your contribution, up to £1,000 a year.
Some or all of the balance can be used to buy your first home, or be accessed tax-free from age 60 to help fund your retirement, although government charges usually apply if you want to get hold of your money earlier.
10. Increased ISA allowance and flexibility
From 6 April the annual ISA limit rises to £20,000. You can split your annual ISA savings between a Cash, Stocks & Shares, Innovative Finance and Lifetime ISA. For example, you could save £15,000 in a Cash ISA and invest the remaining £5,000 of your allowance in a Stocks & Shares ISA. Some ISAs also let you pay in and withdraw throughout the year without affecting your limit – check with your ISA provider if this is the case.
11. The Budget is moving
This is the last spring Budget. The Chancellor has moved the traditional Budget from spring to autumn in order to announce tax changes further in advance of the start of the tax year. This means banks, building societies and financial advisers will have more time to get to grips with incoming changes that affect your finances.
If you think the measures in the Budget 2017 might affect you and you'd like to speak to someone about your savings or take financial advice, visit your nearest branch
or call 0345 607 9746.
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