The 2017 budget explained: how will it affect you?
You've seen the headlines, but do you know how the tax changes will impact your income?
The 2017 spring budget made a welter of changes to tax limits and allowances. Although the proposed change to national insurance contributions for the self-employed was swiftly reversed, there are plenty of other adjustments that pharmacists should be aware of, be they contractors, locums or employees.
From April 6, personal allowances (the amount people can earn tax-free) will increase to £11,500. Beyond that, tax is payable as follows:
- Taxable earnings up to £33,500 (ie earnings up to £45,000 for those entitled to the full personal allowance) will have a tax rate of 20%
- Taxable earnings of £33,501 to £150,000 will have a rate of 40%
- Taxable earnings from £150,001 upwards will have a rate of 45%.
Pension and savings
The personal savings allowance will remain the same – at £1,000 for basic rate tax payers, and £500 for higher-rate tax payers.
The lifetime investment savings allowance will continue to be available for adults under the age of 40. These individuals can contribute up to £4,000 per year and receive a 25% bonus from the government. These funds can be used to buy a first home and to save for their retirement. Funds can be withdrawn from the age of 60 completely tax-free.
From April 6, the annual limit for investment savings allowance will increase from £15,240 to £20,000.
While the pension scheme lifetime allowance will remain at £1 million, it will be indexed annually in line with inflation. Unprotected pension pots exceeding £1m will be subject to a 55% tax rate.
As of March 9, individuals who transfer pensions offshore will face a tax charge of 25%.
There will be no change to inheritance tax death duties of 40% (or 36% if you leave a tenth of your estate to charity), or to the 20% chargeable lifetime transfers rate. The nil rate band of £325,000 remains unchanged.
As previously announced, a new inheritance tax residence nil-rate band of £100,000 will come into effect on April 6. This is an additional allowance of £100,000 for people who own a house and wish to pass it on to their descendants.
This allowance will eventually rise to £175,000 by 2020-21, meaning that a married couple, or civil partners, will have an inheritance allowance of £1m between them by 2020-21.
Capital gains tax
Capital gains tax rates remain at 20% for top rate taxpayers and 10% for basic rate tax payers. However, the annual exemption limit will increase from £11,100 to £11,300.
The 20% and 28% tax rates will continue to apply for carried interest (a profit share in a private equity fund) and for chargeable gains (capital gains made over and above the cost of an asset) on residential property that does not qualify for private resident relief.
Entrepreneurs’ relief (ER) remains at 10%, with a lifetime limit of £10m for each individual. This relief applies to entrepreneurs running a business and selling it with a capital gain. So if a pharmacy contractor sells his or her pharmacy for £1m and the original base cost was £500,000, there is a gain on sale of £500,000. The contractor will then pay tax at 10% on the gain of £500,000, after claiming ER.
Business taxes (self-employed, limited liability partnership, partnerships and companies)
Effective from April 1 (for companies) and April 6 (for unincorporated businesses):
- The annual investment allowance remains at £200,000.
- The 'wear and tear allowance' has been reformed, meaning that landlords will be able to deduct the actual costs of replacing furnishing.
- The current 100% first-year allowance on business purchasing of low emission cars* will be extended to April 2020.
*A low emission car is one where the CO2 emissions do not exceed 75gm/km. This threshold will fall to 50gm/km from April 2018. In addition, the CO2 emission threshold for the main rate of capital allowances for business cars will reduce from 130gm/km to 110gm/km from April 2018.
Tax relief on the finance costs incurred on a residential property will be gradually restricted to basic rate tax relief.
The government will introduce the apprenticeship levy in April, which will be set at a rate of 0.5% of an employer’s pay bill and will be payable through PAYE. It will apply to all employers across all sectors.
However, each employer will receive an allowance of £15,000 to offset against their levy payment, with the result that only employers with total gross employee earnings in excess of £3 million will actually pay the charge. Read C+D's analysis here.
Meanwhile, the national insurance contributions (NIC) employment allowance remains at £3,000 a year. The allowance has been withdrawn from single person companies, such as a personal service company.
From April 2018, termination payments in excess of the £30,000 exemption will also be subject to employer’s NICs. A consultation will also be held on reducing the scope of the £30,000 exemption. Termination payments apply when, for example, a business is taken over or merged, and directors’ or senior employees’ posts are terminated.
From April 2017, tax relief available for pension advice arranged by the employer will increase from £150 to £500.
The VAT compulsory registration taxable turnover threshold limit (the limit above which you are required to register for VAT), will increase on April 6 from £83,000 to £85,000.
The compulsory deregistration taxable turnover threshold limit has changed to £83,000, meaning you should de-register the business for tax purposes. If your turnover is below this level, you can continue registration on a voluntary basis, although this may not be worthwhile, because of the administrative burden.
National insurance contributions
Class 1, class 1A and class 1B NIC rates are unchanged.
From April 6, the class 2 weekly rate will rise 5p to £2.85. The exemption limit is also rising from £5,965 to £6,025 a year. Class 2 NICs will be included in taxpayers’ final self-assessment liability, together with income tax and class 4 NICs.
The class 3 voluntary weekly contributions rate will rise from £14.10 to £14.25.
The small earnings class 4 NICs exemption has increased from £8,060 to £8,164. Class 4 contributions are set at:
- 9% rate on annual profits of between £8,164 and £45,000
- 2% on annual profits over £45,000.
From April 2018, NICs for the self-employed will be changing. Class 2 NICs will be abolished and class 4 NICs reformed. However, since the government’s swift U-turn on increasing class 4 NICs for the self-employed, one week after the budget was announced, the exact nature of these reforms has yet to be confirmed.
From April 1, corporation tax will reduce to 19% for all companies, irrespective of the level of their profits. This will be reduced further to 17% from April 1, 2020.
Umesh Modi is a chartered accountant and tax advisor, and a partner at Silver Levene LLP.
This article is based on current legislation and practice and is for guidance only. Professional advice should be taken before acting on matters mentioned here.