The Finance Bill will have a profound impact on the way UK contractors, limited company directors and shareholders structure their tax affairs. The Bill came into force on 6 April 2016, read on for a summary of what this means for your tax bill.
Restrictions on travel and subsistence charges for contractors
Contractors who fall within IR35, or are under HMRC’s definition of “supervision, direction, or control”, will have their travel and subsistence allowances restricted. Around 430,000 contractors will be affected by these restrictions.
Important changes for contractors, and limited company director-shareholders
Personal tax allowance to increase to £11,000.
The Personal Allowance is currently set at £11,000 (previously £10,600), but this is reduced by £1 for every £2 you earn over £100,000. These rates do not apply to income from dividends.
The £3,000 annual Employment Allowance has been restricted.
From April 2016 companies with a single director who is also the sole employee will not be able to claim the £3,000 Employment Allowance provided by National Insurance contributions.
Changes to the dividend tax credit
This will mostly affect directors and shareholders of limited companies. The 10% basic rate tax credit is replaced by a £5,000 tax-free allowance.
Any dividends above £5,000 will be subject to 7.5% dividend tax up to the basic rate band. Larger dividends and additional rates will be taxed at 32.5% and 38.1%, respectively.
Value Added Tax
The following changes will be applied to VAT registration thresholds:
- 20% – the standard rate of VAT, applied to all invoices if you are VAT registered.
- £83,000 – registration threshold (from 1 April 2016).
- £81,000 – de-registration threshold (from 1 April 2016).
- £150,000 – turnover threshold limit to be a part of the Flat Rate VAT Scheme.
These tables will help you understand how the Finance Bill will affect your Income Tax, Dividend Tax, Capital Gains Tax and pension contributions for the 2016 -2017 tax year.
|Tax band||2015-16 (effective) rate||2016-17 rate|
|Basic rate||0%||7.5% (first £5,000 tax-free)|
|Tax band||2015/16 income||2016/17 income||Rate|
|Basic||£0 – £31,785||£0 – £32,000||20%|
|Higher||£31,786 – £150,000||£32,001 – £150,000||40%|
|Additional||£150,000 +||£150,000 +||45%|
Capital Gains Tax
|Tax Band||2015/16 Rate||2016/17 Rate*|
|Annual Exempt Amount||£11,100||£11,100|
*Residential property is still subject to the previous tax rates.
|Category||2015/16 rate||2016/17 rate|
|Lifetime allowance||£1.25 million||£1 million|
|Tapered annual allowance||N/A||£150,000 (incl. pension contributions)|