Spring Budget 2017—Income tax and NICs

This analysis is part of the Lexis®PSL Tax team’s summary of the Spring Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.

Class 4 NICs

The government will legislate to increase the main rate of Class 4 NICs from April 2018. Currently, the self-employed pay Class 4 NICs at 9% on profits between £8,060 and £43,000 (with a 2% rate applying to profits over £43,000). From 6 April 2018, the 9% main rate will increase to 10%, with a further increase to 11% from 6 April 2019.

This increase will address the exacerbated differential between the rates of NICs paid by employees and those paid by the self-employed when Class 2 NICs are abolished from April 2018 (as announced at Budget 2016), and also reflects the post-April 2016 pension entitlement changes.

See: Spring Budget 2017 (para 3.5), OOTLAR (para 2.7) and National Insurance and the self-employed: fact sheet.

Dividend allowance reduction

The government announced that it will reduce the dividend allowance from £5,000 to £2,000. This measure, which will apply from April 2018, is part of the Chancellor’s drive to reduce the difference between those working through a company and those who are employed or self-employed. Taken together with increases to the ISA and personal allowances, the government believes that 80% of general investors will continue to pay no dividend tax. The legislation will be included in FB 2017.

See: Spring Budget 2017 (para 3.6), OOTLAR (para 1.2) and TIIN: Income Tax: dividend allowance reduction.

Personal allowance and higher rate threshold

As announced in AS 2016, the Chancellor confirmed in Spring Budget 2017 that these rates will be increased through legislation in FB 2017 in accordance with the table below:

By the end of this parliament in 2020, the personal allowance is set to increase to £12,500 and the higher rate threshold to £50,000. In order for personal allowance increases not to be eroded by inflation going forward, once the personal allowance reaches £12,500, it will then rise in line with the Consumer Price Index (CPI).

However, following legislation introduced in FA 2016, s 6, the government will separate the ‘main rates’ of income tax into three distinct groups for the first time, to be set in FB 2017:

‘main rates’ will apply to non-savings, non-dividend income of taxpayers in England, Wales and Northern Ireland
‘savings rates’ will apply to savings income of all UK taxpayers, and
‘default rates’ will apply to a very limited category of income taxpayers that do not fall within the two groups above, such as trustees and non-residents

From April 2017, the income tax rates and thresholds for non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament and the basic rate limit for Scottish taxpayers will be different.

See: Spring Budget 2017 (para 3.4) and OOTLAR 2017 (para 1.1).