Home Insights Budget comment – A very dry Budget in more ways than one

Budget comment – A very dry Budget in more ways than one

By Ensors Team
8th Mar 2017

I didn’t see Philip Hammond taking so much as a small swig of whisky or water throughout his entire Budget speech, but there must have been something in the air to make him feel relaxed – he is famed for being rather dry, but he even made a couple of jokes, and I didn’t get the impression that they had been pre-scripted.

In fact, there was little to either enjoy or despair at in the Budget this time.  We already knew that in spite of what appears on paper to be strong economic growth there is little room for manoeuvre, and, as the Chancellor said, he needs to provide a “strong, stable platform” for Brexit negotiations.  So apart from some small tweaks, there were no major changes.

During his speech, Hammond also mentioned that a strong economy needs a “fair, stable and competitive tax system”, but the system for taxing income for individuals is very far from stable at the moment.  George Osborne introduced some fairly fundamental changes to the taxation of investment income, and Hammond is introducing a major adjustment to one of these innovations already.

For many years, there was a direct link between the tax paid by a company on its profits, and the tax ‘allowance’ given to individuals who receive dividends paid out of those profits.  This link has been steadily chipped away at under successive Chancellors, and Osborne severed it completely from April 2016, so that dividends are now fully taxed the same as any other untaxed income, albeit at reduced rates of tax.  But, importantly, this tax charge did not apply to the first £5,000 of dividends.

At the same time, there has for many years been an opportunity for owners of limited companies to perfectly legally reduce their tax bill by drawing dividends out of the profits of their companies and taking advantage of the lower taxes on dividends.  Hammond therefore has decided that the £5,000 allowance is too generous and reduced it to £2,000, from April 2018.  Due to the way that this allowance works, the maximum additional tax liability will be just over £1,100 per year, and for most owner-directors it will be £225.

However, on International Women’s Day, it is perhaps noteworthy that the Government estimates that significantly more men than women will be affected by this measure. 

Together with the increase in national insurance for the self-employed, this was not a Budget to please either the self-employed or those with small businesses.  Nor does it feel particularly stable.