«BRIEFING PAPER Number 7535, 26 April 2016 Direct taxes: rates and By Antony Seely allowances 2016/17 Inside: 1. Rates and thresholds 2. Income tax ...»
Number 7535, 26 April 2016
Direct taxes: rates and By Antony Seely
1. Rates and thresholds
2. Income tax allowances
3. Income tax – other
allowances & reliefs
4. Other direct taxes
5. Budget 2016 announcements
6. Main personal income tax
rates & allowances since 1990/91 www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | firstname.lastname@example.org | @commonslibrary Number 7535, 26 April 2016 2 Contents Summary 3
1. Rates and thresholds 5
1.1 Income tax 5
1.2 National Insurance contributions 6
1.3 The ‘tax lock’ 7
2. Income tax allowances 8
2.1 Indexation 8
2.2 Personal allowance 9
2.3 Transferable allowance for married couples & civil partners 9
2.4 Blind person’s allowance 10
2.5 Age-related allowances 10
2.6 Transitional allowances for older people 10
3. Income tax – other allowances & reliefs 12
3.1 Company cars & free fuel
Cover page image copyright: Attribution: No copyright required 3 Direct taxes: rates and allowances 2016/17 Summary This paper sets out the main changes to direct tax rates and allowances announced in the Budget on 16 March 2016. It lists the principal personal allowances which will be available against income tax in the tax year 2016/17, and it outlines the conditions necessary for eligibility for these allowances. The paper provides a summary of the general tax position in straightforward cases only. It should be noted that it deals just with tax allowances. No reference is made to cash benefits provided under the social security system, or to child tax credit and working tax credit.
Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate. For 2016/17 these three rates are 20%, 40% and 45% respectively. Tax is charged on taxable income at the basic rate up to the basic rate limit, set at £32,000. ‘Taxable income’ excludes personal allowances, which represent the amount of money someone may receive free of tax. Tax is charged at the higher rate on taxable income between the basic rate limit and the higher rate limit, set at £150,000. The additional rate is charged on taxable income over £150,000. All three tax rates are unchanged from 2015/16.
The personal allowance is increased by £400 to £11,000 for 2016/17. The basic rate limit is increased by £215, so that the higher rate threshold – the point at which individuals become liable to pay tax at the higher rate – is £43,000.
In the 2012 Budget the Coalition Government announced it would phase out the two age-related personal allowances, claimed by individuals aged 65-74, and those aged 75 and over. From April 2013 these allowances would be frozen – at £10,500 and £10,660 respectively – until they became aligned with the personal allowance. In addition, only existing recipients would be entitled to claim either allowance. Both allowances have now been overtaken by the personal allowance and withdrawn.
In the 2015 Budget the Coalition Government confirmed the introduction of a new marriage allowance. From April 2015 individuals whose income is insufficient to make full use of their personal allowance have been entitled to transfer this unused fraction to their spouse or civil partner, up to a set amount. Individuals cannot make use of this allowance if their spouse or partner pays more than the basic rate of tax. For 2016/17 the maximum that can be transferred is £1,100.
All married couples used to be entitled to claim the married couple’s allowance, which was withdrawn from April 2000 for all couples under 65 at that time. Taxpayers may still make a claim, if one or both partners were born on or before 5 April 1935. For 2016/17 this allowance is set at £8,355. The allowance is ‘restricted’ to 10 per cent; in effect, taxpayers receive a credit worth 10% of the married couple’s allowance to set against their final tax bill.
The rates of National Insurance contributions (NICs) for both employees and employers are unchanged for 2016/17. For employees, the rate of NICs is set at 12% on all earnings between the primary threshold and the upper earnings limit, and at 2% on earnings above the upper earnings limit. For employers, the rate of NICs is set at 13.8% on earnings above the secondary threshold. Both the primary and secondary thresholds are unchanged, set at £155 & £156 per week, respectively. The upper earnings limit is increased to £827 per week for 2016/17, so that it remains aligned with the higher rate threshold.
Number 7535, 26 April 2016 4 This paper deals only with tax allowances and ‘wasteable’ tax credits: those which are limited to the amount of the tax liability and therefore cannot give rise to a payment by the authorities to the taxpayer. Details of ‘non-wasteable’ tax credits – such as the child tax credit and the working tax credit – along with other tax rates and allowances for the 2016/17 year are set out in Annex B to HM Treasury, Overview of Tax Legislation and Rates, March 2016, which was published alongside the 2016 Budget report.
5 Direct taxes: rates and allowances 2016/17
1. Rates and thresholds
1.1 Income tax Earned income For 2016/17 income tax on earned income is charged at three rates: the basic rate of 20%, the higher rate of 40% and the additional rate of 45%. All three rates are unchanged from 2015/16.
The 20% basic rate applies to taxable income up to a threshold of £32,000. Taxable income excludes personal allowances, which represent the amount of money someone may receive free of tax. (Personal allowances are discussed in more detail in section 2 of this paper.) Taxable income in excess of the threshold is charged at the higher rate of 40%, up to £150,000. Income earned above this threshold is charged tax at 45%.
This rate structure covers all non-savings income: earnings, pensions, taxable social security benefits, trading profits and income from property. A 10% starting rate of tax used to apply on non-savings income, but was withdrawn in April 2008.
Savings and dividend income For 2016/17 savings income is charged at 0% for income up to £5,000.
Above this limit savings income is charged tax at the basic rate of 20%, up to the basic rate limit of £32,000. Savings income above this limit is charged at the 40% higher rate, up to the higher rate limit of £150,000. Savings income above this limit is charged at the 45% additional rate.
The 0% rate replaces a 10% rate which had applied for the first £2,880 of savings income in 2014/15. When the 10% starting rate of income tax was withdrawn in 2008/09, a 10% rate was retained for savings income only.
In addition a new Personal Savings Allowance (PSA) has been introduced from 6 April 2016. This applies a 0% rate for up to £1,000 of savings income for basic rate taxpayers. The allowance applies a 0% rate for up to £500 of savings income for higher rate taxpayers.
Additional rate taxpayers are not eligible for the allowance.
Number 7535, 26 April 2016 6 Historically savings income has been taxed at source by banks and building societies at 20%. Alongside the introduction of the PSA, automatic deduction of tax at source will end. 1 For 2016/17 dividend income is charged at 0% for income up to £5,000 – the Dividend Allowance. Above this limit dividend income is charged tax at a basic rate of 7.5%, up to the basic rate limit. Dividend income above this limit is charged at a higher rate of 32.5%, up to the higher rate limit. Dividend income above this limit is charged at an additional rate of 38.1%.
From April 2016 the Dividend Allowance replaces the Dividend Tax Credit, which in the past individuals have been entitled to claim on dividend income. For basic rate taxpayers payment of the credit meant that, in effect, dividends were taxed at 0%. In the Summer 2015 Budget the Government announced the credit would be scrapped, and the rates of tax on dividend income would be amended accordingly. 2 In calculating tax liability, dividend and savings income are regarded as the ‘top slice’ of income, with dividends the highest. 3
1.2 National Insurance contributions Employees pay National Insurance contributions (NICs) on their earnings if they exceed the lower earnings limit (LEL), which is set at £112 per week for 2016/17.
A zero rate of NICs is charged on earnings between the LEL and the primary threshold (PT), which is set at £155 per week. A notional primary Class 1 NIC is deemed to have been paid in respect of earnings between LEL and PT to protect benefit entitlement.
Earnings above the PT are charged NICs at a rate of 12%, subject to a cap at the upper earnings limit (UEL), which is set at £827 per week.
Earnings above the UEL are charged NICs at a rate of 2%.
Prior to 6 April 2016 employees were charged a reduced rate of NICs if they had contracted out of the state second pension (S2P). These arrangements have ended with the introduction of the ‘single-tier’ state pension, and the closure of the additional state pension, from this date. 4 Employers pay NICs on employee earnings at a rate of 13.8% on earnings above the secondary threshold (ST), set at £156 a week for 2016/17.
For more details see, HMRC, Personal Savings Allowance, February 2016 Summer Budget 2015, HC264, July 2015 para 1.185-9. For more details see, HMRC, Dividend Allowance Factsheet, August 2015.
The Low Incomes Tax Reform Group publishes guidance on the taxation of savings and dividend income on their site.
For details see, The new ‘single-tier’ State Pension, Commons Briefing paper SN6525, 1 December 2015.
7 Direct taxes: rates and allowances 2016/17
secondary threshold; and UEL - upper earnings limit. 6
1.3 The ‘tax lock’ In its 2015 General Election manifesto the Conservative Party stated that, in government, it would “not increase the rates of VAT, Income Tax or National Insurance in the next Parliament.”7 In a speech the Prime Minister David Cameron confirmed that this ‘tax lock’ also meant that there would not be any extension to the scope of VAT, or an increase in the ceiling set for the main rate of NICs by employees - the 'Upper Earnings Limit' (UEL) – above the income tax higher rate threshold. 8 Following the General Election, the Chancellor George Osborne presented the Conservative Government’s first Budget on 8 July 2015.
In his Budget speech Mr Osborne confirmed that the Government would legislate to “prohibit any increase in the main rates of income tax, national insurance and VAT for the next five years.” 9 In the case of income tax and VAT, provision to this effect was made ss1-2 of the Finance (No.2) Act 2015. Separate legislation was introduced to apply the ‘tax lock’ to the primary and secondary rates of Class 1 National Insurance contributions. The National Insurance Contributions (Rate Ceilings) Act 2015 also provides that the UEL cannot exceed the higher rate threshold - the sum of the personal allowance and the basic rate limit - as proposed by the Government in its pre-Budget proposals. It is common practice for NI thresholds to be set by secondary legislation, introduced before the start of the tax year, often before the Budget statement. By contrast, income tax thresholds for the tax year are set, definitively, in the Finance Bill, introduced after the Budget. 10 Government Actuary’s Department, Report to Parliament on the 2016 re-rating and up-rating orders, January 2016 pp22-23 These thresholds for 2016/17 were set by Order: SI 2016/343.
For more details on the way National Insurance works see, National Insurance contributions: an introduction, Commons Briefing paper SN4517, 21 December 2015 Conservative Party, 2015 General Election Manifesto, April 2015 p27 “Cameron pledges to ban tax rises until 2020”, Financial Times, 29 April 2015. Mr Cameron also publicised this commitment on Twitter.
HC Deb 8 July 2015 c336 see also, Summer Budget 2015, HC 264, March 2015 para 2.53, and, HMRC, Tax lock: Income Tax, NICs and VAT: tax information & impact note, 8 July 2015 For more details see, National Insurance Contributions (Rate Ceilings) Bill 2015-16,
2. Income tax allowances All individuals receive a personal allowance which they can set against income tax. An allowance is also given to individuals who are blind.
Prior to 2013/14, individuals were entitled to claim one of two agerelated additions to the personal allowance, if they were between 65 and 74 years of age, or were 75 or over. Both allowances have now been phased out.