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Dividend reliefs cut and MTD delayed for unincorporated businesses

The Spring Budget brought announcements scrapping class 2 NIC, delaying the introduction of Making Tax Digital rules for unincorporated businesses below the VAT threshold and changes to tax reliefs on dividends and on income from rented spare rooms.

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Read more news stories and analysis of the Spring Budget from the Tax Faculty.

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In Summer Budget 2015, the chancellor announced a new personal tax allowance for dividend income. From April 2016, the first £5,000 of dividend income would be exempt from income tax and new higher rates of tax would apply to further dividends.

These rules would apply to individuals with large investment portfolios, as well as to the owners of small family companies. It seems that this will be a short lived relief and from April 2018, the Chancellor has announced that the exemption will fall to £2,000.

Speculation around the differential rates of tax paid by the employed and the self employed has been growing during the last couple of months following the announcement last autumn of Matthew Taylor’s review into employment practices.

The rate of Class 4 National Insurance will rise from 9% to 10% in April 2018 and then to 11% in April 2019. Taken together with the abolition of class 2 NIC, the Treasury says that only self-employed individuals with profits above £16,250 will have to pay more NICs. However, this is likely to be just the first change to how businesses are taxed as the Taylor review is not expected to report until June.

The Making Tax Digital (MTD) proposals will require digital record keeping and updating by businesses, the self-employed and landlords. We have been expressing concern for some time that the implementation timetable for this new system, which will be mandatory for all but the smallest businesses, is being introduced too quickly.

It was announced in the Budget that the start date for unincorporated businesses and landlords with gross income below the VAT threshold (which increases from £83,000 to £85,000 from 1 April 2017), will be deferred by one year. The implementation date for these businesses will now be their first accounting period starting on or after 6 April 2019.

There was no announcement in the Budget about the turnover limit for businesses to be exempt from MTD entirely, which remains at £10,000, nor has there been anything else published about precisely how these new rules will interact with the current self assessment system.

From 6 April 2016 the rent-a-room relief limit is increased to £7,500. This relief is intended to encourage householders to rent out their spare rooms in order to help with the shortage of rented accommodation. A consultation was announced in the Budget to consider proposals which would make this more closely targeted, the aim being to increase the supply of affordable long-term lodgings. We await these with interest.

In a possible move affecting non-UK resident companies which are currently chargeable to income tax on their UK income and to capital gains tax on certain gains, there is to be consultation on the possibility of instead bringing them within the scope of corporation tax. This would include the limitations restricting corporate interest deductibility and loss relief.

For a Budget without very much tax, it seems we can anticipate a lot of consultation later this summer.

Find out more
On Friday 10 March at 12:30, Anita will be joined by other experts from the Tax Faculty to provide further analysis of the Budget announcements. Watch the live video feed here.