Unwelcome Surprises from the Chancellor's Budget

The first shock will have the wider impact, but it is not due to take effect until 6 April 2018 and might come in later. This is the reduction of the tax-free dividend allowance from £5,000 currently to £2,000. For dividend income of more than £2,000, it will mean an additional tax cost of £225 for a basic rate taxpayer, up to £975 for a higher rate taxpayer and £1,143 for an additional rate taxpayer.

The change was left out of the pre-election Finance Act, but is expected to be included in the post-election Bill, depending on the outcome of the poll. We will keep you posted.

Company owner/managers can feel particularly aggrieved because it was they who were targeted by the dividend tax changes introduced just a year ago. However, if it’s any consolation, being incorporated can still offer some tax advantages over self-employment, even though class 2 national insurance contributions (NICs) will cease from April 2018. For example, at a profit level of £50,000, an owner/manager will still pay £2,025 less in tax and NICs compared with a self-employed person (taking the changes into account, but using 2017/18 rates).

There is not much that owner/managers can do. However, if you have a large investment portfolio, the two obvious steps that you can take are to make full use of the new £20,000 ISA investment limit and to invest for capital growth rather than income.

The second surprise is already in effect. This is the 25% tax charge that now applies when transferring a pension to a QROPS – short for qualifying recognised overseas pension scheme. These are HM Revenue & Customs recognised overseas pension schemes which can accept the transfer of a UK pension. QROPS can offer a number of tax advantages to expats and individuals planning to move overseas, such as not being subject to the lifetime allowance. 

There are a number of exceptions from the tax charge, such as where the individual and the QROPS are both in the same country after the transfer, or if both individual and QROPS are situated in EEA countries. The EEA country exception could obviously have a limited shelf life given the UK’s likely exit from the EU. And don’t think you can escape the charge by initially moving to the same country as the QROPS before moving on to another country – a charge will apply if this is done within five years.