Income tax rates and allowances - an update following the budget
Spring Budget 2017
There were no further changes to income tax rates and allowances beyond those previously announced. The current personal allowance of £11,000 is to rise to £11,500 from 6th April 2017 as previously announced. Furthermore, the basic rate band for 2017/18 is to be £33,500 (currently £32,000).
This, together with extensions to the basic rate band, means that the higher rate tax threshold (including the personal allowance and basic rate band) is to rise from £43,000 from April 2016 to £45,000 from April 2017. The higher rate threshold is still expected to be £50,000 by the end of this parliament. The NIC upper limit will continue to align with the higher rate threshold.
The additional rate of income tax remains at 45% for taxable income over £150,000 (barring dividends – see below).
Furthermore, the personal allowance will still begin eroding when income reaches £100,000, meaning people with incomes of £100,000-£123,000 (for 2017/18) will suffer an effective 60% tax rate within this bracket.
As previously announced, from 2015/16 married couples (and those in a civil partnership) will be able to transfer 10% of their personal allowances to each other, helping couples where one person does not fully use their own allowance. However, where one of the couple is a higher rate or additional rate taxpayer, this facility will not be available.
Please see below a few planning points for your consideration and application to your personal circumstances.
Planning point: If you are married or in a civil partnership, it remains best practice to utilise both spouses’ personal allowances and basic rate bands where possible, whether this be by paying income from your business to both spouses within legitimate boundaries, or by transferring investment assets between spouses.
Planning point: If your income is at or near the higher rate, additional rate or £100,000 limit, there may be options for mitigating the impact of these tax rates depending on your personal circumstances. Please get in touch if you would like a review carried out to ensure your tax bills are kept to a minimum.
Planning point: If you currently take a minimal salary from your own company, then the increase in personal allowance needs to be considered in conjunction with NIC limits. From April 2017, we would suggest that a salary in the region £8,200 p.a. (£685pcm) could be considered optimum for these purposes. At this rate you will pay a small amount of NIC. To avoid NIC entirely, a salary of up to £8,164 p.a. may be taken. Please see the comments on Employment Allowance above – if you do not pay over £3,000 in Employers NIC already (and do not utilise your personal allowance on other income such as rental income), then you may benefit by paying up to the £11,500 personal allowance as a salary from April 2017. Please see the comment in the National Insurance section regarding Employment Allowance if a sole director is the only employee in respect of whom Employers NIC is payable.
Planning point: If your income is regularly in the 60% effective bracket (£100-123k approx.), and you have a degree of control over it (for example if you run your own company), it may be sensible to defer income in excess of the threshold until April 2017 where practical (e.g. by delaying dividend or bonus payments), or to accelerate pension contributions to bring income below the relevant threshold (subject to contribution limits). Alternatively, you could consider bringing forward the excess income from next year into 2016/17 in order to get below the threshold next year. By doing this, you can seek to get your income under the relevant limit every other year and reduce the average tax rate on your income over the years.
If you would like to discuss this further, then please do not hesitate to contact us.