Budget 2016 – Income Tax

Personal Allowances

The Government’s long term plan has been to extend the tax free personal allowance to £12,500 and the point at which individuals pay higher rate tax to £50,000.  Today they went one step closer to both of these figures.

Previously announced, from 6 April 2016 the personal allowance will be £11,000 and the higher rate tax threshold will be £43,000.

Today it was announced that from 6 April 2017, the personal allowance will increase to £11,500 and the higher rate tax threshold will be £45,000.

For taxpayers who have income over £100,000 in a tax year, the personal allowance will continue to be withdrawn.  £1 of the personal allowance is lost for every £2 of income over the £100,000 threshold, so in 2016/17 people with income over £122,000 will not receive any personal allowance.  The £100,000 threshold will remain unchanged in 2017/18.

 

Income Tax Rates

The basic rate of income tax remains at 20% and in 2016/17 will be applied to the next £32,000 of income after the personal allowance.

The higher arte of tax applies to income in excess of £43,000 in the 2016/17 tax year.

The additional rate of 45% will continue to apply to income of over £150,000 in 2016/17.  This threshold should also apply to the 2017/18 tax year.

 

The end of the road for the Renewals Allowance

The renewals allowance will be abolished with effect for expenditure incurred on or after 6 April 2016 for income tax purposes and from 1 April 2016 for Corporation Tax purposes.

The renewals allowance predates the capital allowances regime and was originally intended to cover expenditure on the replacement and alteration of tools. The government consider it to be no longer necessary. Businesses with a trade or a commercial property letting business can claim capital allowances instead.

The new relief for residential landlords which starts in April 2016 can be used for costs incurred in replacing domestic items such as furnishings and appliances, which should ensure that tax relief on these items is not lost.  The main losers would appear to be businesses which have been using the Renewals Allowance to claim tax relief on large pieces of equipment once the Annual Investment Allowance, currently £200,000, is exhausted. This is something for which the Renewals Allowance was never intended. Eligible expenditure can still attract writing down allowances.

 

£1,000 “Trading” and “Property” allowances

Another welcome break for what the Government referred to as “micro-entrepreneurs”, was the announcement of a £1,000 allowance for both trading income and property income.

Individuals with trading and/or property income less than £1,000 will no longer need to declare or pay tax on this income.  Those with relevant income above this limit can choose to deduct the £1,000 rather than claim actual expenses if they wish.

For the avoidance of doubt, these are two separate £1,000 allowances so it could potentially allow £2,000 of income to be exempt from tax and NIC.

 

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Nov 25

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