News

Budget 2016 tax changes: new moves

This year's Budget contained many measures which could affect your long term financial planning.

Budgets have become a regular feature of the financial landscape. The March 2016 Budget is the third in twelve months and it revealed some important tax changes:

Income tax

For 2017/18 the personal allowance will rise by £500 to £11,500 and the higher rate tax starting point will increase by £2,000 to £45,000. This means the higher rate threshold will finally rise above its 2009/10 peak of £43,875. The Chancellor confirmed his goal of a personal allowance of £12,500 by the end of the Parliament (2020/21), but he made no comment about an earlier pledge to raise the higher rate threshold to £50,000 by the same time.

Capital gains tax

One unexpected change was an 8% cut in the rates of capital gains tax, starting in the current year 2016/17. Gains that fall within your basic rate tax band are now generally taxable at 10%, while gains in higher and additional income tax bands suffer 20% tax. However, gains made on residential property (e.g. buy-to- let and second homes) do not benefit from this reduction, and continue to be taxed at the old 18%/28% rates.

ISAs

The ISA contribution limit for 2016/17 is unchanged at £15,240 due to the fact that inflation was negative last September, but the Chancellor announced the limit would jump to £20,000 for 2017/18. He also promised the launch of a new Lifetime ISA (LISA) from 2017/18, which is designed to encourage saving by the under-40s. The LISA offers the equivalent of 20% tax relief on up to £4,000 of savings each year until the age of 50.

Corporation tax

Mr Osborne had already earmarked a cut in corporation tax to 18% in 2020, but in the Budget he shaved another 1% off the rate, taking it down to 17%. However, he also proposed a number of technical changes to corporation tax which will increase the Exchequer's tax take from some larger companies.

Other tax changes which were announced in earlier Budgets are being legislated for in the Finance Bill currently going through Parliament. Some of these need to be considered alongside the March 2016 measures. For example:

  • Dividend taxation The £5,000 dividend allowance, which was introduced from 6 April 2016, adds to the appeal of investing in shares and share-based funds. Not only will some investors escape tax on their dividends altogether, but the most tax any individual will pay on capital gains is now 20%.

    The dividend allowance and future changes to corporation tax are also relevant to the way in which any business should be structured, and whether or not taking dividends is the best way to extract profits going forward.
  • Pension protection A 20% cut to the lifetime allowance (to £1m) was announced in the March 2015 Budget, along with two new transitional protections that can be claimed by those affected. These took effect from 6 April 2016.  

If you think any of these changes could affect you, now is the time to talk to us about what actions you should take, if any.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.