The amount individuals can earn before paying tax is being increased to £11,000 from April 2016.
Corporation Tax and Dividends
The rate of corporation tax is being cut to 19% from April 2017 and 18% from April 2020. Tax on dividend income is being introduced. Basic rate taxpayers will pay 7.5% tax on dividends received a £5,000 tax-free allowance, with a higher rate and additional rate taxpayers paying 32.5% and 38.1% respectively.
Goodwill on incorporation
Limited companies acquiring businesses set up after 2002 were able to obtain tax relief on any goodwill purchased. This allowed sole-traders and partnerships to enjoy tax relief on goodwill when they incorporated their own businesses. Restrictions have now been introduced only to allow tax relief when the goodwill is disposed of or sold.
Annual Investment Allowance (AIA)
The Annual Investment Allowance refers to the amount businesses can spend on capital equipment (such as plant and machinery) and receive 100% tax relief. While this had been set to drop to £25,000 from January 2016, hints from the Chancellor indicating the AIA would not reduce this much proved true. The AIA is now set at a permanent £200,000 from January 2016. The AIA limit has yo-yoed significantly since its introduction several years ago, and this stabilisation of the rate will help businesses plan tax effective capital expenditure with greater ease.
Many landlords pay little tax on their rental income due to mortgage interest. The tax relief is available on interest (whether a mortgage or otherwise) is gradually being restricted to 20% tax relief. This will only affect landlords who are higher rate tax payers. From the 2016/17 tax year, 25% of finance costs will be restricted to a 20% tax relief. This restriction will be increased by 25% each year till the 2020/21 tax year when 100% of finance costs will give rise to a maximum 20% tax saving.
The 10% wear and tear allowance is also being scrapped. From April 2016, landlords will no longer be able to claim 10% of their furnished property rental income as expenses. Actual expenditure should be claimed instead.
Homeowners renting out bedrooms in their own dwellings currently enjoy a £4,250 tax-free allowance on the rental income. This is being increased to £7,500 from April 2016.
Individuals earning more than an “adjusted income” of £150,000 and making pension contributions will not benefit from as much tax relief as those earning less. The “adjusted income” takes into account pension contributions made by employers via salary sacrifice. Taxpayers can currently obtain tax relief on up to £40,000 of pension contributions each year, however after April 2016, this allowance will be reduced by £1 for every £2 a person earns above £150,000. The restriction is subject to a maximum of £30,000, meaning a minimum tax relief allowance of £10,000 will apply.