Finance Act 2016

This article looks at the changes made by the Finance Act 2016 (which is the legislation as it relates to the tax year 2016–17) and should be read by those of you who are taking F6 (UK) in an exam in the year 1 April 2017 to 31 March 2018. The aim of the article is to summarise the changes made by the Finance Act 2016 and to look at the more important changes in greater detail.

The article also includes details of legislation which was enacted prior to 31 July 2016, but has only come into effect from 6 April 2016. With the exception of the accrued income scheme, the article does not refer to any amendments to the F6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the F6 (UK) Syllabus and Study Guide for the year 1 April 2017 to 31 March 2018 for details of such amendments.

Please note that if you are sitting F6 (UK) in the period 1 September 2016 to 31 March 2017, you will be examined on the Finance Act 2015 and the Finance (No 2) Act 2015, which is the legislation as it relates to the tax year 2015–16. Therefore, this article is not relevant to you, and you should instead refer to the Finance Act 2015 article published on the ACCA website (see 'Related links').

INCOME TAX

Rates of income tax

The rates of income tax for the tax year 2016–17 are as follows:

Personal allowance

The personal allowance for the tax year 2016–17 is £11,000.

This is gradually reduced to nil where a person’s adjusted net income exceeds £100,000. Adjusted net income is net income (total income less deductions for gross pension contributions to an employer’s occupational pension scheme, loss relief and interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £122,000 or more is not entitled to any personal allowance ((122,000 – 100,000)/2 = £11,000). Where a person has an adjusted net income of between £100,000 and £122,000, then the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a result of the withdrawal of the personal allowance. In this situation, it may be beneficial to make additional personal pension contributions or gift aid donations.

EXAMPLE 1
For the tax year 2016–17, June has a trading profit of £184,000. Her income tax liability is:

No personal allowance is available because June’s adjusted net income of £184,000 exceeds £122,000.

EXAMPLE 2
For the tax year 2016–17, May has a trading profit of £159,000. During the year, May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is:

• The gross personal pension contributions are £40,000 (32,000 x 100/80) and the gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £11,000 is reduced to £7,500 (11,000 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are extended to £84,000 (32,000 + 40,000 + 12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively.

Savings income

There has been a major reform to the tax treatment of savings income.

Interest received from bank and building societies is now paid gross without any tax being suffered at source.

Certain types of savings income are still paid net of basic rate tax, but these are not examinable. Therefore, as far as F6 (UK) is concerned, all savings income will be treated as paid gross.

Savings income now benefits from a 0% rate. For basic rate taxpayers, the savings income nil rate band for the tax year 2016–17 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band.

The savings income nil rate band is also known as the savings allowance or personal savings allowance, but these terms are confusing because there is no allowance as such.

Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the higher rate threshold of £32,000, at the higher rate of 40% if it falls between the higher rate threshold of £32,000 and the additional rate threshold of £150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of £150,000.

EXAMPLE 3
For the tax year 2016–17, Ingrid has a salary of £45,600 and savings income of £1,800. Her income tax liability is:

Ingrid is a higher rate taxpayer, so her savings income nil rate band is £500.

The savings income nil rate band counts towards the basic rate and higher rate thresholds.

EXAMPLE 4
For the tax year 2016–17, Henri has a salary of £40,000 and savings income of £10,000. During the year, he made gross personal pension contributions of £4,000. His income tax liability is:

Henri is a higher rate taxpayer, so his savings income nil rate band is £500.

The savings income nil rate band of £500 counts towards the basic rate threshold of £36,000 (32,000 + 4,000).

Savings income can also benefit from the starting rate of 0%. However, the starting rate only applies where savings income falls within the first £5,000 of taxable income. If non-savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.

EXAMPLE 5
For the tax year 2016–17, Ali has pension income of £12,700 and savings income of £6,000. His income tax liability is:

• Non-savings income is £1,700 (12,700 – 11,000), so £3,300 (5,000 – 1,700) of the savings income benefits from the starting rate of 0%.
• Ali is a basic rate taxpayer, so his savings income nil rate band is £1,000.

When it comes to tax planning for a married couple, or a couple in a civil partnership, the availability of the savings income nil rate band means that transferring income from the partner paying tax at a higher rate to the partner paying tax at a lower rate is no longer necessarily the most beneficial option.

EXAMPLE 6
Samuel and Samantha are a married couple. For the tax year 2016–17, Samuel will have a salary of £90,000. Samantha will have a salary of £30,000 and savings income of £1,500.

Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500 of her savings income will be taxable at the rate of 20%. Samuel is a higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient savings to Samuel so that he receives £500 of the savings income will therefore save income tax of £100 (500 at 20%) for 2016–17.

For the savings income nil rate band of £1,000 to be available, a taxpayer must not have any income subject to higher rate tax. Likewise, if the savings income nil rate band of £500 is instead to be available, then there must be no income subject to additional rate tax. The detailed rules for establishing whether higher or additional rate tax is applicable are quite complicated, and therefore are not examinable. For any question involving the savings income nil rate band it will be quite clear as to which tax rate is applicable.

The savings income nil rate bands will be given in the tax rates and allowances section of the exam.
 

Dividends

There has been a major reform to the tax treatment of dividends.

Dividends are now treated as being paid gross. The 10% tax credit has been abolished.

The first £5,000 of dividend income for the tax year 2016–17 benefits from a 0% rate. This £5,000 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate. However, the dividend nil rate band counts towards the basic rate and higher rate thresholds.

Dividend income in excess of the £5,000 nil rate band is taxed at 7.5% if it falls below the higher rate threshold of £32,000, at 32.5% if it falls between the higher rate threshold of £32,000 and the additional rate threshold of £150,000, and at 38.1% if it exceeds the additional rate threshold of £150,000. These rates all represent an effective 7.5% increase to the rates which previously applied to dividend income.

EXAMPLE 7
For the tax year 2016–17, Ezra has a salary of £56,000 and dividend income of £6,800. Her income tax liability is:

EXAMPLE 8
For the tax year 2016–17, Erica has a salary of £34,400 and dividend income of £11,200. Her income tax liability is:

The £5,000 dividend nil rate band counts towards the basic rate threshold of £32,000.

The introduction of the dividend nil rate band does not alter the order in which tax rates are applied to taxable income. This is firstly non-savings income, then savings income and finally dividend income. Deductible interest, trade losses and the personal allowance should initially be set against non-savings income and then savings income. There are some situations where this order of set off will not be the most beneficial (with set off against dividend income preferable to set off against savings income), but such a scenario will not be examined.

EXAMPLE 9
For the tax year 2016–17, Joe has a salary of £40,000, savings income of £2,000 and dividend income of £9,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted £5,800 in PAYE from his earnings. The income tax payable by Joe is:

• Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
• The dividend nil rate band uses up the remaining basic rate threshold of £1,300 (32,000 – 28,700 – 500 – 1,500).
• With savings income and dividend income now paid gross, tax repayments will not normally arise.

The savings income and dividend nil rate bands will mean that many taxpayers no longer have any tax liability in respect of savings and dividend income.

EXAMPLE 10
For the tax year 2016–17, Ming has property income of £22,300, savings income of £700 and dividend income of £1,200. Her income tax liability is:

Ming is a basic rate taxpayer, so her savings income nil rate band is £1,000. This is restricted to the actual savings income of £700.

The availability of the dividend nil rate band (together with the savings income nil rate band) complicates tax planning for married couples and couples in civil partnerships.

EXAMPLE 11
Nigel and Nook are a married couple. For the tax year 2016–17, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £8,000.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2016–17.

Nook has fully utilised her dividend nil rate band of £5,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £3,000 of the dividend income will therefore save income tax of £975 (3,000 at 32.5%) for 2016–17.

The effective 7.5% increase to the tax rates which apply to dividend income means that incorporating the business of a sole trader or partnership is now less beneficial from a tax viewpoint than was previously the case. The increased rates also impact on the decision whether to extract profits from a company either as director’s remuneration or as dividends.

EXAMPLE 12
Sam is currently self-employed. If he continues to trade on a self-employed basis, his trading profit for the year ended 5 April 2017 is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NIC) for the tax year 2016–17 will be £12,631.

Sam is considering incorporating his business on 6 April 2016. The forecast taxable total profits of the new limited company for the year ended 5 April 2017 will be £50,000. After paying corporation tax of £10,000, Sam will withdraw all of the profits by paying himself dividends of £40,000 during the tax year 2016–17.

Sam’s income tax liability will be:

The total tax cost if Sam incorporates his business is £11,800 (10,000 + 1,800). This is an overall saving of just £831 (12,631 – 11,800) compared to continuing on a self-employed basis.

However, incorporation can provide other tax advantages. For example, the corporation tax rate on profits remaining undrawn within a company is just 20%. This compares to the higher and additional rates of 40% and 45% which can be payable by a sole trader or partners.

The dividend nil rate band will be given in the tax rates and allowances section of the exam.
 

Self-assessment payments on account

Since savings income and dividend income are now paid gross, when it comes to calculating self-assessment payments on account (or establishing whether payments on account are actually required) the only tax which is deducted at source is tax deducted under PAYE.

Although payments on account for the tax year 2016–17 are based on tax year 2015–16 figures, a question will not be set involving tax deducted at source from savings income or dividend income in that year.
 

Transferable amount of personal allowance

The transferable amount of personal allowance (also known as the marriage allowance or marriage tax allowance) is £1,100 for the tax year 2016–17. This is 10% of the actual personal allowance.

The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax, so the tax reduction is therefore £220 (1,100 at 20%). If the recipient’s tax liability is less than £220, then the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

EXAMPLE 13
Paul and Rai are a married couple. For the tax year 2016–17, Rai has a salary of £35,000 and Paul has a trading profit of £8,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £9,900 (11,000 – 1,100), and because this is higher than his trading profit of £8,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income

£8,500 threshold
The distinction between lower-paid employees (those earning less than £8,500 a year) and P11D employees has been removed. The taxable benefits regime which applies to P11D employees therefore now applies regardless of the level of an employee’s earnings.

Company car benefit
For the tax year 2016–17, the base level of CO₂ emissions used to calculate company car benefits is unchanged at 95 grams per kilometre. However, the base percentage has been increased from 14% to 16%. There are lower rates for company motor cars with low CO₂ emissions:

• For a motor car with a CO₂ emission rate of 50 grams per kilometre or less, the percentage is 7%.
• For a motor car with a CO₂ emission rate of between 51 and 75 grams per kilometre, the percentage is 11%.
• For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre, the percentage is 15%.

The percentage rates (including the lower rates of 7%, 11% and 15%) are increased by 3% for diesel cars, but not beyond the maximum percentage rate of 37%.

The company car benefit information which will be given in the tax rates and allowances section of the exam for exams in the period 1 April 2017 to 31 March 2018 is:

Car benefit percentage
The relevant base level of CO₂ emissions is 95 grams per kilometre.

The percentage rates applying to petrol cars with CO₂ emissions up to this level are:

EXAMPLE 14
During the tax year 2016–17, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2016–17. The motor car has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometre.

Betty was provided with a new petrol powered company car throughout the tax year 2016–17. The motor car has a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometre.

Charles was provided with a new diesel powered company car on 6 August 2016. The motor car has a list price of £13,500 and an official CO₂ emission rate of 137 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2016–17. The motor car has a list price of £84,600 and an official CO₂ emission rate of 218 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2016–17 for the use of the motor car.

Amanda
The CO₂ emissions are between 76 and 94 grams per kilometre, so the relevant percentage is 15%. The motor car was available throughout 2016–17, so the benefit is £1,830 (12,200 x 15%).

Betty
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The CO₂ emissions figure of 109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 16% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 18% (16% +  2% ((105 – 95)/5)). The motor car was available throughout 2016–17, so the benefit is £2,952 (16,400 x 18%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 27% (16% + 8% ((135 – 95)/5) + 3% (charge for a diesel car)). The motor car was only available for eight months of 2016–17, so the benefit is £2,430 (13,500 x 27% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 40% (16% + 24% ((215 – 95)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2016–17, so the benefit is £30,102 (31,302 (84,600 x 37%) – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit.

Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided with a company van has been increased from £3,150 to £3,170.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year 2016–17, the base figure has been increased from £22,100 to £22,200.

The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

EXAMPLE 15
Continuing with example 14.

Amanda was provided with fuel for private use between 6 April 2016 and 5 April 2017.

Betty was provided with fuel for private use between 6 April 2016 and 31 December 2016.

Charles was provided with fuel for private use between 6 August 2016 and 5 April 2017.

Diana was provided with fuel for private use between 6 April 2016 and 5 April 2017. She paid Fashionable plc £600 during the tax year 2016–17 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2016–17, so the benefit is £3,330 (22,200 x 15%).

Betty
Fuel was only available for nine months of 2016–17, so the fuel benefit is £2,997 (22,200 x 18% x 9/12).

Charles
The motor car was only available for eight months of 2016–17, so the fuel benefit is £3,996 (22,200 x 27% x 8/12).

Diana
The motor car was available throughout 2016–17, so the benefit is £8,214 (22,200 x 37%). There is no reduction for the contribution made by Diana since the cost of private fuel was not fully reimbursed.

Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased from £594 to £598.

Trivial benefits
An exemption has been introduced for trivial benefits which do not cost more than £50 per employee provided these benefits are not cash or a cash voucher.

Tax free childcare
In early 2017, a new tax free childcare scheme for working families will be introduced, with this scheme eventually replacing childcare vouchers. The new tax free childcare scheme is not examinable.

Childcare vouchers will continue to be available until April 2018, so they remain examinable in the year 1 April 2017 to 31 March 2018.

The existing rules for employer-supported childcare are not affected and continue to be examinable.

Dispensations
Previously, an employer could agree a dispensation with HM Revenue and Customs to avoid the need to report routine business expenses which are reimbursed to employees.

Dispensations have now been replaced by an automatic exemption which applies provided the expense is an allowable deduction for the employee.

Payrolling of benefits
It is now possible for an employer to choose to include most taxable benefits within their normal payroll, with the employee’s income tax liability being collected under PAYE. Payrolled benefits do not then have to be reported on form P11D.

If taxable benefits are not payrolled, then they continue to be reported on form P11D. Income tax will then normally be collected by an adjustment to the employee’s PAYE tax code.

Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of £75,000.

For exams in the year 1 April 2017 to 31 March 2018 the actual official rate of interest of 3% for the tax year 2016–17 will be used.
 

Capital allowances

From 1 January 2016, the annual investment allowance (AIA) limit is £200,000. For exams in the year 1 April 2017 to 31 March 2018, only this current limit of £200,000 is examinable.

The AIA provides an allowance of 100% for the first £200,000 of expenditure on plant and machinery in a 12 month period. Any expenditure in excess of the £200,000 limit qualifies for writing down allowances as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The £200,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, for the three-month period ended 31 March 2017, the AIA limit would be £50,000 (200,000 x 3/12).

The capital allowances information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

Rates of allowance

Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 8% are included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use adjustment can be calculated.

EXAMPLE 16
Ming prepares accounts to 31 December. On 1 January 2016, the tax written down value of plant and machinery in her main pool was £16,700.

The following transactions took place during the year ended 31 December 2016:

Motor car (1) purchased on 8 January 2016 has CO₂ emissions of 120 grams per kilometre. This motor car is used by Ming and 20% of the mileage is for private journeys. Motor car (2) purchased on 14 April 2016 and sold on 12 December 2016 has CO₂ emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2016 has CO₂ emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2016 has CO₂ emissions of 70 grams per kilometre.

Ming’s capital allowance claim for the year ended 31 December 2016 is:

• Motor car (1) is kept separately because there is private use by Ming. This motor car has CO₂ emissions between 76 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) had CO₂ emissions over 130 grams per kilometre and therefore qualifies for writing down allowances at the rate of 8%. Even though it is the only asset in the special rate pool, there is no balancing allowance on the disposal of this motor car because the expenditure is included in a pool.
• Motor car (3) has CO₂ emissions between 76 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18% in the main pool.
• Motor car (4) has CO₂ emissions of less than 75 grams per kilometre and therefore qualifies for the 100% first year allowance.

Property income

Replacement furniture relief
The 10% wear and tear allowance for furnished properties has been abolished, being replaced by replacement furniture relief.

Individuals and companies can now deduct the actual cost of replacing furniture and furnishings when calculating the property income from renting out a residential property. The property does not need to be fully furnished for relief to be available. Furnishings include items such as beds, televisions, fridges and freezers, carpets and floor coverings, curtains, and crockery and cutlery.

There is no relief for the initial cost of furniture and furnishings. There is only relief when assets are replaced.

The amount of relief is reduced by any proceeds from selling the old asset which has been replaced. Also, relief is not given for any cost which represents an improvement. For example, if a washing machine is replaced with a washer-dryer, only the cost of an equivalent washing machine qualifies for relief.

Replacement furniture relief does not apply to furnished holiday lettings because the cost of furniture and furnishings in such properties qualifies for capital allowances.

EXAMPLE 17
On 6 April 2016, Fang purchased a freehold house. The property was then let throughout the tax year 2016–17 at a monthly rent of £800.

During April 2016, Fang furnished the property with a cooker costing £440, a washing machine costing £330, and floor coverings costing £2,200. The cooker was sold during December 2016 for £110, and replaced with a similar model costing £460. The washing machine was scrapped, with nil proceeds, during March 2017. It was replaced by a washer-dryer costing £670, although the cost of a similar washing machine would have been £360.

The other expenditure on the property for the tax year 2016–17 amounted to £1,310, and this is all allowable.

Fang’s property income is:

• No relief is available for the initial cost of the cooker, washing machine and floor coverings.
• Relief for the replacement cooker is reduced by the proceeds of £110 from the sale of the original cooker.
• No relief is given for that part of the cost of the washer-dryer which represents an improvement over the original washing machine. Relief is therefore restricted to the cost of a similar washing machine.

Rent-a-room relief
The annual threshold for rent-a-room relief has been increased from £4,250 to £7,500.

Rent-a-room relief means that an individual, who rents a furnished room or rooms in their main residence, is exempt from income tax on the property income if gross rents do not exceed £7,500 a year. If gross rents exceed £7,500 a year, then the individual can elect to be taxed on the gross rents less £7,500 (the ‘alternative basis’), rather than the normal basis of assessment (gross rents less actual expenses).

EXAMPLE 18
During the tax year 2016–17, Edmond rented out a furnished room in his main residence. He received rent of £8,540 and incurred allowable expenditure of £2,140 in respect of this room.

If Edward claims rent-a-room relief, then his property income is £1,040 (8,540 – 7,500). Using the normal basis of assessment, his property income would be £6,400 (8,540 – 2,140). Therefore, it is beneficial for Edward to elect for the alternative basis under the rent-a-room scheme.
 

Individual savings accounts

The individual savings account (ISA) investment limit for the tax year 2016–17 is unchanged at £15,240. The £15,240 limit is completely flexible, so a person can invest £15,240 in a cash ISA, or they can invest £15,240 in a stocks and shares ISA, or in any combination of the two – such as £10,000 in a cash ISA and £5,240 in a stocks and shares ISA.

A person can now withdraw money from a cash ISA and replace it in the same tax year without this replacement counting towards their ISA investment limit.

EXAMPLE 19
On 10 May 2016, Vincent invested £12,000 into a cash ISA, and then withdrew £4,000 from this account on 15 February 2017. He does not have a stocks and shares ISA.

Vincent can make a further investment of up to £7,240 (15,240 – 12,000 + 4,000) into his cash ISA for 2016–17 (between 16 February and 5 April 2017).

The introduction of the savings income nil rate band for basic and higher rate taxpayers has removed the tax benefit of investing in cash ISAs for many individuals. However, cash ISAs are still advantageous for additional rate taxpayers and for other individuals where their savings income nil rate band is already utilised.

The introduction of the dividend nil rate band has removed the tax advantage of receiving dividend income within a stocks and shares ISA for many individuals. However, chargeable gains made within a stocks and shares are exempt from capital gains tax. Stocks and shares ISAs are therefore still advantageous where chargeable gains are made in excess of the annual exempt amount.

A new innovative finance ISA has been introduced in order to bring peer-to-peer lending (a form of online financing where lenders are matched with borrowers) into the ISA net. The innovative finance ISA is not examinable.
 

Accrued income scheme

Although not a Finance Act change, the accrued income scheme has been added to the syllabus and is therefore examinable for exams in the year 1 April 2017 to 31 March 2018 onwards.

UK Government securities (gilts) are exempt from capital gains tax, so without the accrued income scheme it would be quite a simple matter to avoid tax on interest from gilts.

EXAMPLE 20
On 1 July 2016, Peter purchased £100,000 (nominal value) of gilts which pay interest at the rate of 3% for £120,000. Interest is paid half-yearly on 30 June and 31 December based on the nominal value. Peter sold the gilts on 30 November 2016 to Petra for £121,250 (including accrued interest).

The accrued interest included in the sale proceeds figure is £1,250 (100,000 at 3% x 5/12).

Peter will include the accrued interest as savings income for 2016–17, even though he has not received any actual interest.

Petra will receive interest of £1,500 (100,000 at 3% x 6/12) on 31 December 2016, but will only include £250 (1,500 – 1,250) as savings income for 2016–17.

EXAMPLE 21
On 1 May 2016, Ying purchased £300,000 (nominal value) of gilts paying interest at the rate of 1% for £180,000. Interest is paid half-yearly on 31 March and 30 September based on the nominal value. Ying sold the gilts on 31 January 2017 for £181,000 (including accrued interest), having received interest of £1,500 on 30 September 2016.

Accrued interest for the period 1 May 2016 to 31 January 2017 is £2,250 (300,000 at 1% x 9/12), and this is the amount that Ying will include in her savings income for 2016–17.

The accrued income scheme only applies where an individual holds gilts with a total nominal value in excess of £5,000.

The scheme also applies to other securities, such as corporate bonds, but any question on the accrued income scheme will be confined to gilts.

National insurance contributions (NIC)

Class 1 and class 1A NIC
For the tax year 2016–17, the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £8,061 per year and £43,000 per year, and the rate of 2% is paid on all earnings over £43,000 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings over £8,112 per year.

An exemption from employer’s class 1 NIC has been introduced for apprentices aged under 25. This exemption is not examinable.

The rate of class 1A NIC which employers pay on taxable benefits provided to employees is also unchanged at 13.8%.

Employment allowance
The annual employment allowance for the tax year 2016–17 has been increased from £2,000 to £3,000. This can be used by businesses to reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and Customs. For example, if a business’s total employer’s class 1 NIC for the tax year 2016–17 is £4,600, then only £1,600 (4,600 – 3,000) will be paid to HM Revenue and Customs. If total employer’s class 1 NIC is £3,000 or less, then the liability will be nil.

The employment allowance is no longer available to companies where a director is the sole employee. This restriction has been introduced because the employment allowance is targeted at businesses which support employment, rather than one-man band companies. The non-availability of the employment allowance will be particularly relevant in certain tax planning scenarios. For example, when deciding whether a sole trader (with no employees) should incorporate their business, or when making a decision whether to extract profits from a company (where the director is the sole employee) either as director’s remuneration or as dividends.

The class 1 and class 1A NIC information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

EXAMPLE 22
Simone Ltd has three employees who are each paid £50,000 per year. One of the employees was provided with the following taxable benefits during the tax year 2016–17:

The class 1 and class 1A NIC liabilities are:

Class 2 NIC
For the tax year 2016–17, the rate of class 2 NIC is unchanged at £2.80 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £5,965.

Class 4 NIC
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £8,061 and £43,000, and the rate of 2% is paid on all profits over £43,000.

The class 4 NIC information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

EXAMPLE 23
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year 2016–17 are respectively £25,000 and £50,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance
The annual allowance for the tax year 2016–17 is unchanged at £40,000.

Tapered annual allowance
For the tax year 2016–17 onwards, the normal annual allowance of £40,000 is reduced by £1 for every £2 by which a person’s adjusted income exceeds £150,000, down to a minimum tapered annual allowance of £10,000. Therefore, a person with adjusted income of £210,000 or more, will only be entitled to an annual allowance of £10,000 (40,000 – ((210,000 – 150,000)/2) = £10,000). Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves entitled to the full £40,000 annual allowance for some years, and a tapered annual allowance in other years.

The definition of adjusted income is net income plus any employee contributions to occupational pension schemes (these will have been deducted in calculating net income) plus any employer contributions to either occupational or personal pension schemes. For the self-employed, adjusted income will simply be net income.

There is a threshold level of income below which tapering does not apply, but this is not examinable.

EXAMPLE 24
For the tax year 2016–17, Juliet has a trading profit of £196,000. She has never previously been a member of a pension scheme.

Juliet’s tapered annual allowance for 2016–17 is £17,000 (40,000 – ((196,000 – 150,000)/2)).

Carry forward
If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years. The carry forward from the tax year 2013–14 is based on the annual allowance of £50,000 which was applicable to that year.

It is still possible to use carried forward unused annual allowances in the tax year 2016–17 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance for 2016–17 which is used to establish whether any carried forward is available from this year to future tax years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is lost.

EXAMPLE 25
Monica and Nicola have made the following gross personal pension contributions during the tax years 2013–14, 2014–15 and 2015–16:

Monica was not a member of a pension scheme for the tax year 2013–14. Nicola was a member of a pension scheme for all three tax years. Neither Monica nor Nicola’s adjusted income for the tax year 2016–17 exceeds £150,000.

Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2014–15 and £12,000 (40,000 – 28,000) from 2015–16, so, with the annual allowance of £40,000 for 2016–17, a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2016–17. She was not a member of a pension scheme for 2013–14, so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2014–15 and £40,000 from 2015–16, so, with the annual allowance of £40,000 for 2016–17, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2016–17. The annual allowance for 2013–14 is fully utilised, but Nicola was a member of a pension scheme for 2015–16 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2016–17 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 26
Perry has made the following gross personal pension contributions:

Perry’s adjusted income for the tax year 2016–17 does not exceed £150,000.

The pension contribution of £48,000 for 2016–17 has used all of Perry’s annual allowance of £40,000 for 2016–17 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (50,000 – 32,000) from 2013–14. Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2014–15 and £21,000 (40,000 – 19,000) from 2015–16 to carry forward to 2017–18. The remaining unused allowance from 2013–14 cannot be carried forward to 2017–18 because this is more than three years ago.

EXAMPLE 27
Chong has made the following gross personal pension contributions:

Chong’s adjusted income for the tax year 2016–17 is £250,000.

Chong’s tapered annual allowance for 2016–17 is the minimum of £10,000 because his adjusted income exceeds £210,000. Chong therefore has unused allowances of £9,000 (40,000 – 31,000) from 2014–15, £21,000 (40,000 – 19,000) from 2015–16 and £2,000 (£10,000 – £8,000) from 2016–17 to carry forward to 2017–18.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 28
For the tax year 2016–17, Frank has a trading profit of £95,000 and made gross personal pension contributions of £45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:

• Frank has earnings of £95,000 for 2016–17. All of the pension contributions of £45,000 therefore qualify for tax relief.
• Frank’s adjusted income is clearly less than £150,000, so the full annual allowance of £40,000 is available for 2016–17.
• The annual allowance charge of £5,000 is the excess of the pension contributions over the annual allowance.
• Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
• Higher rate tax relief is given by extending the basic rate tax band to £77,000 (32,000 + 45,000).

The amount of annual allowance for the tax year 2015–16 was subject to some complex transitional rules which meant that it could have actually been more than £40,000. The transitional rules were not examinable, and you should assume that in any exam question involving the carry forward of unused annual allowances only an annual allowance of £40,000 was available for the tax year 2015–16.

The pension scheme information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

Pension scheme limit

The maximum contribution that can qualify for tax relief without any earnings is £3,600.

Lifetime allowance
The lifetime allowance for the tax year 2016–17 has been reduced from £1,250,000 to £1,000,000.

The lifetime allowance applies to the total funds which can be built up within a person’s pension schemes. Where the limit is exceeded, there will be an additional tax charge when that person subsequently withdraws the funds in the form of a pension.

CAPITAL GAINS TAX

Annual exempt amount

The annual exempt amount for the tax year 2016–17 is unchanged at £11,100.

Rates of capital gains tax

For the tax year 2016–17, the lower rate of capital gains tax has been reduced from 18% to 10% and the higher rate has been reduced from 28% to 20%. However, the lower and higher rates are unchanged at 18% and 28% in respect of chargeable gains arising from the disposal of residential property. These residential property rates will apply where a gain arising from the disposal of residential property is not fully covered by the principal private residence exemption.

Chargeable gains are taxed at the lower rate of 10% (or 18%) where they fall within the basic rate tax band of £32,000, and at the higher rate of 20% (or 28%) where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

EXAMPLE 29
For the tax year 2016–17, Adam has a salary of £41,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2016, Adam sold an antique table and this resulted in a chargeable gain of £17,600.

For the tax year 2016–17, Bee has a trading profit of £60,000. On 20 August 2016, she sold an antique vase and this resulted in a chargeable gain of £19,100.

For the tax year 2016–17, Chester has a salary of £37,000. On 25 October 2016, he sold a residential property and this resulted in a chargeable gain of £45,900.

Adam
Adam’s taxable income is £30,000 (41,000 less the personal allowance of 11,000). His basic rate tax band is extended to £37,500 (32,000 + 5,500 (4,400 x 100/80)), of which £7,500 (37,500 – 30,000) is unused.

Adam’s taxable gain of £6,500 (17,600 less the annual exempt amount of 11,100) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £650 (6,500 at 10%).

Bee
Bee’s taxable income is £49,000 (60,000 – 11,000), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £8,000 (19,100 – 11,100) is therefore £1,600 (8,000 at 20%).

Chester
Chester’s taxable income is £26,000 (37,000 – 11,000), so £6,000 (32,000 – 26,000) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £34,800 (45,900 – 11,100) is therefore calculated as:

In each case, the capital gains tax liability will be due on 31 January 2018.

Where a person has both residential property gains and other gains, then the annual exempt amount and any capital losses should initially be deducted from the residential property gains. This approach will save capital gains tax at either 18% or 28%, compared to either 10% or 20% if used against the other gains.

However, how any unused basic rate tax band is allocated between chargeable gains does not make any difference to the overall capital gains tax liability.

EXAMPLE 30
For the tax year 2016–17, Douglas does not have any income. On 15 June 2016, he sold an antique vase and this resulted in a chargeable gain of £13,300. On 28 August 2016, he sold a residential property and this resulted in a chargeable gain of £38,600.

Douglas’ capital gains tax liability is:

• The annual exempt amount is set against the residential property gain.
• The capital gains tax liability could alternatively be calculated as:

Entrepreneurs’ relief

Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2016–17, the lifetime qualifying limit is unchanged at £10 million.

Gains qualifying for entrepreneurs’ relief are taxed at a rate of 10% regardless of the level of a person’s taxable income.

EXAMPLE 31
On 25 January 2017, Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2010 and was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2016–17.

Michael’s capital gains tax liability is:

Although chargeable gains which qualify for entrepreneurs’ relief are always taxed at a rate of 10%, they must be taken into account when establishing the rate which applies to other chargeable gains. Chargeable gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.

The annual exempt amount and any capital losses should initially be deducted from those chargeable gains which do not qualify for entrepreneurs’ relief (giving preference to any residential property gains). This approach could save capital gains tax at 20% (18% or 28% if residential property gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.

There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest approach is to keep chargeable gains qualifying for entrepreneurs’ relief and other chargeable gains separate.

EXAMPLE 32
On 30 September 2016, Mika sold a business which she had run as a sole trader since 1 January 2010. The sale resulted in the following chargeable gains:

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £4,000 for the tax year 2016–17. She has unused capital losses of £28,000 brought forward from the tax year 2015–16.

Mika’s capital gains tax liability is:

• The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the freehold warehouse because this does not qualify for entrepreneurs’ relief.
• £28,000 (32,000 – 4,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for entrepreneurs’ relief.

Investors’ relief

Previously, where an investment in company shares was concerned, entrepreneurs’ relief was only available where an individual had a minimum 5% shareholding and was also an officer or employee of the company.

Relief has now been extended to external investors in trading companies which are not listed (unlisted) on a stock exchange. This investors’ relief has its own separate £10 million lifetime limit, with qualifying gains being taxed at a rate of 10%. To qualify for investors’ relief, shares must be:

• Newly issued shares acquired by subscription.
• Owned for at least three years after 6 April 2016.

Given the three-year holding period, investors’ relief will not be available until the tax year 2019–20. Although you need to be aware of the tax advantages offered by investors’ relief and the qualifying conditions, it will not be examined in the context of a capital gains tax computation until such time that relief is available.

The capital gains tax information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

INHERITANCE TAX

Rates of inheritance tax

The nil rate band for the tax year 2016–17 is unchanged at £325,000.

The inheritance tax information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

Where earlier nil rate bands may be relevant, they will be given to you within the question.

From 6 April 2017, an additional nil rate band (also known as the main residence nil rate band) will be available when a residential property is inherited by direct descendants of the deceased. Although some aspects of the additional nil rate band apply from 8 July 2015 (the date when the new measure was announced), the additional nil rate band is not examinable in exams during the year 1 April 2017 to 31 March 2018.

CORPORATION TAX

Rate of corporation tax

For the financial year 2016, the rate of corporation tax is unchanged at 20%. This single rate applies regardless of the level of a company’s profits.

EXAMPLE 33
For the year ended 31 March 2017, Simplified Ltd has taxable total profits of £600,000.

Corporation tax is £120,000 (600,000 at 20%).
 

Quarterly instalment payments

Since the 10% dividend tax credit has been abolished, the concept of franked investment income no longer exists. Therefore, the definition of profits for quarterly instalment payment purposes is now taxable total profits plus dividend income from non-group companies.

Franked investment income is no longer examinable.

EXAMPLE 34
For the year ended 31 March 2017, Quarter Ltd has taxable total profits of £360,000 and dividends of £20,000 from non-group companies. Quarter Ltd has had three 51% group companies for many years. The company had the same level of profits for the year ended 31 March 2016.

Quarter Ltd’s profits for the year ended 31 March 2017 are £380,000 (360,000 + 20,000). The company will therefore be required to make quarterly instalment payments in respect of its corporation tax liability because its profits exceed the profit threshold of £375,000 (1,500,000/4).

The corporation tax information which will be given in the tax rates and allowances section of the exam for exams in the year 1 April 2017 to 31 March 2018 is:

Administration

Late payment interest and repayment interest

The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, class 4 NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April 2016. For exams in the year 1 April 2017 to 31 March 2018, the assumed rate of late payment interest will therefore be 3% and the assumed rate of repayment interest will be 0.5%. 

Value added tax (VAT)

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory has been increased from £82,000 to £83,000. The deregistration limit has been increased from £80,000 to £81,000.
 

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

EXAMPLE 35
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2017. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated materials amounted to £32,400.
• Standard rated expenses amounted to £24,800.
• On 15 February 2017, Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise, all of the above figures are exclusive of VAT.

VAT Return – Quarter ended 31 March 2017

Penalties for late filing of VAT returns and late payment of VAT

New penalties for the late filing of returns and for late payment of tax are being introduced over a number of years.

Although legislation has been introduced regarding the late filing of VAT returns and the late payment of VAT, HM Revenue and Customs have yet to introduce the changes. Therefore, for exams in the year 1 April 2017 to 31 March 2018 the changes will not be examined.

Written by a member of the F6 (UK) examining team