Finance (No. 2) Bill 2016 Explanatory Notes Volume 1 Clauses 1 to 81 24 March 2016 © Crown copyright 2016 You may re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit http://www.nationalarchives.gov.uk/doc/opengovernment- licence/version/3/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or e-mail: [email protected]. Any queries regarding this publication should be sent to us at: [email protected]. ISBN 978-0215092649 Explanatory notes Introduction 1. These explanatory notes relate to the Finance (No. 2) Bill 2016 as introduced into Parliament on 24 March 2016. They have been prepared jointly by the HM Revenue & Customs and HM Treasury in order to assist the reader in understanding the Bill. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So, where a section or part of a section does not seem to require any explanation or comment, none is given. FINANCE (No. 2) BILL 2016 RESOLUTION 2 CLAUSE Clause 1: Income tax charge and rates for 2016-17 Summary 1. This clause provides for income tax and sets the main rates for 2016-17. Details of the clause 2. Subsection (1) provides for income tax for 2016-17. 3. Subsection (2) sets the basic, additional and higher rates of income tax for 2016-17. Background note 4. Income tax is an annual tax. It is for Parliament to impose income tax for a year. 5. This section imposes a charge to income tax for the tax year 2016-17. It also provides the main rates of income tax for 2016-17: the 20% basic rate, the 40% higher rate and the 45% additional rate. FINANCE (No. 2) BILL 2016 CLAUSE 2 Clause 2: Basic rate limit for 2017-18 Summary 1. This clause sets the income tax basic rate limit for the 2017-18 tax year. Details of the clause 2. Subsection (1) sets the amount of the basic rate limit for 2017-18 at £33,500. Background note 3. Income tax is an annual tax. It is for Parliament to impose income tax for a year. 4. An individual’s taxable income is charged to tax at the basic rate of tax up to the basic rate limit. 5. Finance Act 2016 sets the basic rate limit at £33,500 for 2017-18. FINANCE (No. 2) BILL 2016 CLAUSE 3 Clause 3: Personal allowance for 2017-18 Summary 1. This clause sets the income tax personal allowance for the 2017-18 tax year. Details of the clause 2. Subsection (1) sets the amount of the personal allowance for 2017-18 at £11,500. Background note 3. An individual is entitled to a personal allowance for income tax. The government has an objective to raise the personal allowance to £12,500 by the end of this parliament. 4. This measure will increase the personal allowance for 2017-18 to £11,500. FINANCE (No. 2) BILL 2016 RESOLUTION 22 CLAUSE 4 Clause 4: Savings allowance, and savings nil rate etc Summary 1. This clause introduces a new nil rate of tax for savings income (such as interest) within an individual's savings allowance. Each individual will have an annual savings allowance of £1,000, unless they have any higher-rate income for the year (in which case their allowance will be £500) or any additional-rate income (in which case their allowance will be nil). The clause will have effect for savings income paid or credited on and after 6 April 2016. Details of the clause 2. Subsection (1) provides for amendments to Income Tax Act 2007 (ITA). 3. Subsection (2) adds the new savings nil rate to the rates of income tax listed in section 6 of ITA. 4. Subsection (3) amends section 7 of ITA to set the new savings nil rate. 5. Subsection (4) inserts new Section 12A into section 10 of ITA. 6. Subsection (5) introduces new Section 12A and new Section 12B of ITA. Section 12A Savings income charged at the savings nil rate 7. New Section 12A provides the basis for calculating how much of an individual's savings income is eligible for the new savings nil rate, with reference to their savings allowance. The effect of subsection (1) of this new section is that the savings nil rate applies to an individual's savings income that is not covered by other allowances (such as the tax-free personal allowance) or the 0% starting rate for savings. Section 12B Individual's entitlement to a savings allowance 8. New Section 12B determines an individual's savings allowance for a tax year - which may be £1,000, £500 or nil - with reference to whether they have any higher-rate or additional- rate income in the year. Subsection (8) of this new section defines higher-rate and additional-rate income for these purposes. This new section also enables HM Treasury to make regulations that change the amount of savings allowance, and includes provisions in relation to such regulations. 9. Subsection (6) of the clause provides that the income ordering rules at section 16 of ITA will apply for the purposes of determining the extent to which an individual's income is savings income, and therefore potentially eligible for the savings nil rate. 10. Subsection (7) amends section 17 of ITA (concerning repayment claims) to allow such claims to be made where tax has been paid on income that is chargeable at the savings nil FINANCE (No. 2) BILL 2016 RESOLUTION 22 CLAUSE 4 rate. 11. Subsection (8) amends sections 55B and 55C of ITA (concerning the transferable tax allowance for married couples and civil partners) to take account of the savings nil rate within the eligibility conditions for a tax reduction, where the other party to a marriage or civil partnership has elected to reduce their personal allowance. 12. Subsection (9) updates section 745 of ITA to clarify the exemption from income tax for income treated as arising to an individual as a result of certain transactions relating to the transfer of assets abroad. This amendment is consequential to the reduction of the starting rate of savings to 0% from April 2014. 13. Subsections 10 to 16 provide consequential amendments to ITA and other legislation to take into account the savings nil rate and savings allowance. Subsection (13) amends section 669 of the Income Tax (Trading and Other Income) Act 2005 to clarify the method for calculating a reduction in the residuary income of an estate, by removing an unnecessary reference to the starting rate for savings. 14. Subsections 17 to 21 provide for the commencement of the provisions within this clause and also set out powers for HM Treasury to amend, repeal or revoke other tax legislation in consequence of this clause. Background note 15. At Budget 2015, the government announced the introduction of a new Personal Savings Allowance (PSA). This change enables most individuals to receive up to £1,000 of savings income (such as interest on a bank or building society account) tax-free each year. However, where an individual has any higher-rate income in the year, their PSA will be £500, and individuals with additional-rate income in the year will have a PSA of nil. The PSA provides a new nil rate for savings income in addition to the 0% starting rate for savings which has applied since 6 April 2014, and the tax-advantages that apply for ISA savings. 16. Alongside the PSA, banks, building societies and National Savings and Investments (NS&I) will cease to deduct income tax from the interest they pay on savings accounts. 17. Savings income is defined at section 18 of ITA and includes a number of different types of payments, such as interest; certain purchased life annuity payments; profits from deeply discounted securities; gains from certain contracts for life insurance and certain accrued income profits. FINANCE (No. 2) BILL 2016 RESOLUTION 3 CLAUSE 5 SCHEDULE 1 Clause 5 and schedule 1: Rates of tax on dividend income, and abolition of dividend tax credits etc Summary 1. This clause introduces a new dividend allowance, which will apply to the first £5,000 of an individual's dividend income. The allowance will operate as a 0% tax rate inserted into the Income Tax Act 2007 (ITA 2007). The measure also introduces new rates for dividends received above the £5,000 allowance, and abolishes the dividend tax credit (along with consequential amendments). The new rules will apply from 6 April 2016. Details of the clause 2. Subsection (1) provides for the amendments of ITA 2007. 3. Subsection (2) adds "the dividend nil rate" to the list of rates at which tax is charged. 4. Subsection (3) introduces a new 0% rate for dividend income, called "the dividend nil rate", and changes the dividend ordinary rate to 7.5% and the dividend higher rate to 38.1%. 5. Subsection (4) changes the dividend trust rate to 38.1%. 6. Subsection (5) introduces new section 13A into ITA 2007, which provides the rules for the new 0% rate. New section 13A: Income charged at the dividend nil rate 7. New Section 13A(1) explains when the dividend nil rate will apply. 8. New Section 13A(2) identifies the dividend income to be charged at the dividend nil rate.