Budget 2018 – What you need to know
Nov 08, 2018
Budget & Autumn Statement
The 2018 Budget was delivered by the Chancellor, Philip Hammond, on 29 October 2018. With less than six months until the UK is scheduled to leave the EU, the shadow of Brexit loomed heavily over his announcements. The Chancellor was keen to convey a positive and reassuring message, but there is every chance that if Brexit negotiations don’t go to plan then next year’s Spring Statement may well have to be upgraded to a full Budget. Despite promises of more money for the NHS and an end to austerity there were a few nasty surprises, and this Budget could be seen as the calm before the storm…
Personal allowance is increased early
The Government’s manifesto pledge back in 2015 was that the personal allowance would rise to £12,500 in 2020 and the higher rate tax threshold to £50,000. However, the Chancellor has decided to bring forward these increases by one year, and the new allowances will now take effect from 6 April 2019, taking an estimated 1 million taxpayers out of higher rate tax.
Note that up to 10% of the personal allowance (£1,250 from 6 April 2019) may be transferred from one spouse or civil partner to the other if unused and the transferee is a basic rate taxpayer. As announced last year, this transfer is now also available on behalf of deceased spouses and civil partners in the year of death.
No changes in tax rates
The basic rate of income tax and higher rate remain at 20% and 40% respectively, and the 45% additional rate continues to apply to income over £150,000.
There had been rumours that the dividend rate might be increased, but dividends continue to be taxed at 7.5%, 32.5% and then 38.1%, depending upon whether they fall into the basic rate, higher rate band or additional rate tax band. Remember though that only the first £2,000 of dividend income is now tax free.
The annual ISA investment limit increased to £20,000 from 6 April 2017, and it will remain at that level for 2019/20. Dividends on shares held within an ISA continue to be tax free.
Happily the much rumoured further restriction in pension tax relief failed to materialise.
IR35 ‘off-payroll’ rules to be extended to private sector
In 2017 changes were made to IR35 legislation making public service companies in the public sector responsible for collecting tax and NICs from individual workers. Following consultations this summer, the Chancellor announced in his Budget that they are now extending the same rules to the private sector. From April 2020, all medium and large sized businesses will have to ensure that any individuals who effectively work for them as employees are taxed as employees, even if they choose to structure their work through a personal service company.
There will be further consultation on how these rules will work in detail, but the smallest 1.5 million businesses are set to be excluded. This is a controversial plan, as it’s going to put a big administrative burden on businesses that will have to decide whether the new rules apply to individual workers, and then deduct tax and NICs accordingly.
Annual Investment Allowance temporarily increased
The Annual Investment Allowance (AIA) provides businesses with a 100% write-off against profits when they acquire plant and machinery. It is being temporarily increased from £200,000 to £1 million for two years from 1 January 2019, in a bid to boost capital investment. This will mean that the timing of any capital expenditure you make will be critical. In certain circumstances it may be a good idea to delay expenditure until after 1 January 2019 to get the full benefit.
However, the current enhanced capital allowance for energy efficient plant will be abolished from April 2020. A further change is that the writing down allowance for special rate pool equipment, broadly long-life assets and fixtures in buildings, is being reduced from 8% to 6% from April 2019.
VAT registration limit continues to be frozen
The VAT registration limit normally increases in line with inflation each year, but there was speculation recently that in the future it may be reduced. However, following last year’s announcement that the limit would be frozen at £85,000 until 1 April 2020, it has now been extended by a further two years and will remain at this level until 2022. The de-registration limit will remain at £83,000. This is a welcome announcement in light of the introduction of new rules next April for Making Tax Digital for VAT.
Entrepreneurs’ Relief – it’s now harder to qualify
In order to ensure that only genuine businesses can benefit from Entrepreneurs’ Relief, the Chancellor has announced that the minimum qualifying period will be increased from the current 12 month ownership to 24 months, for disposals on or after 6 April 2019.
There are further changes affecting shareholdings in personal companies. As well as holding at least 5% of the ordinary share capital, individuals must now also be entitled to 5% or more of the company’s distributable profits and assets in a winding up. As now, the individual must also be an officer or employee of the company concerned, and the company must be a trading company or the holding company of a trading group.
Private Residence Lettings Relief – shared occupancy clause
In August 2018 we posted an article about a new ‘shared occupancy’ clause being introduced to rent a room relief rules from April 2019. This proposal is no longer going to apply to rent a room relief, but instead of being dropped entirely it is being replaced by new measures to change the qualifying conditions for Private Residence Lettings relief instead. Lettings relief will now include a ‘shared occupancy’ requirement, meaning that you will only receive the relief if you live in the property along with your tenant. If you let out your unoccupied home there will be no Lettings relief for that period. The changes are being postponed by a year, and will come into effect from 6 April 2020.
New capital allowance for commercial buildings
A new 2% straight line tax deduction is being introduced for the cost of construction or renovation of commercial buildings and structures. This is a particularly interesting development, carrying as it does echoes of the former Industrial Buildings Allowance system that was swept away a decade ago.
This tax break will apply to eligible construction costs incurred on or after Budget Day, and will be available to commercial property landlords as well as trading businesses. The cost of the land is specifically excluded.
R&D tax credit restricted
The amount of repayable R&D tax credit for Small and Medium Sized Enterprises (SMEs) will again be restricted by the amount of the claimant company’s PAYE and NIC liability from April 2020.
The new limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period.
More rates relief for small businesses
There has been much lobbying from the small business sector to reduce business rates to enable traditional retailers in particular to compete with internet traders.
The Chancellor has announced a one third reduction in business rates for small businesses with premises with a rateable value up to £51,000.
Now we have to wait and see what the fall-out from Brexit may be, and whether we end up having a Spring Statement or a fully-blown Emergency Budget in early 2019. Leaving the EU is certainly likely to have a significant impact on future budget decisions and spending projections so watch this space!