2016 Budget review

Many of the changes in yesterday’s Budget had already been revealed in the Autumn statement, such as the change to the taxation of dividends that I’ll come to in a minute. However there were also some genuinely unexpected announcements as well, such as the reduction in the capital gains and corporation tax rates. The reaction from most commentators was that it was a good Budget for small businesses.

However this is certainly not the case if you own your own company and take money from the company as a mixture of salary and mostly dividends. if you are then you are going to see a significant increase in your personal tax bill from the 16/17 tax year, with the actual tax payments due 31 Jan 18. Dividend payments were previously tax free if you weren’t a higher rate tax payer but from 5th April they will be taxed at 7.5% after the first £5,000. This means that if you are currently taking a salary of £10,000 and dividends of £25,000 you will go from having no personal tax to pay to £1,500. For more on this point have a look at my earlier blog.

I’ve summarised below the key changes that are likely to have an impact on small business owners and landlords.

Rates and allowances

2016/17 2015/16
£ £
Income tax rates – (non-dividend income)
10% lower rate tax – savings rate only Up to 5,000 Up to 5,000
20% basic rate tax Up to 32,000 Up to 31,785
40% higher rate tax 32,000 – 150,000 31,786 – 150,000
45% additional rate tax Above 150,000 Above 150,000
Personal allowance
Personal allowance those born after 5 April 1948 11,000 10,600

Corporation tax
The main rate of corporation tax is 20% and from April 2017 to 19%.

Tax is payable on dividends over £5, 000 at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band

Personal Savings Allowance
A basic rate taxpayer will be able to receive up to £1,000 of interest per year tax free on their savings.
A higher rate taxpayer will be able to receive up to £500 of interest per year tax free on their savings.
An additional rate tax payer will not have a Personal Savings Allowance.
Any amount received above these limits will be charged at the marginal rate.

Capital gain tax reduction
Legislation will be introduced in Finance Bill 2016 to reduce the 18% and 28% rates in those provisions to 10% and 20% respectively, subject to exclusions for chargeable gains on disposals of residential property.

Restriction on mortgage interest deduction
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their rental profits. The relief in respect of finance costs will be restricted as follows:

2017/18 75% allowed 25% ba sic rate
2018/19 50% allowed 50% basic rate
2019/20 25% allowed 75% basic rate
2020/21 Nil 100% basic rate

The end of wear and tear allowance
From 5 April 2016 wear and tear allowance and the renewable allowance for property business will be replaced by a system allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year. Capital allowances for furnished holiday lets will not be affected.

The government will introduce in Finance bill 2017 legislation that will move the liability to pay the correct employment taxes from a worker’s own company to the public sector body or agency / third party paying the company.


2016/17 2015/16
£ £
Standard rate 20% 20%
Registration threshold 83,000 82,000
Deregistration threshold 81,000 80,000