Summer Budget 2015
Chancellor George Osborne presented his first Budget Statement of the new Parliament on Wednesday. As well as being the first of the new Parliament, it was also the first budget speech to a Conservative majority since November 1996.
With the deficit anticipated to be somewhat lower than predicted following the delivery of the March budget, the Chancellor is using the resulting ‘wriggle room’ to slow the pace of the £12bn welfare savings cuts he announced in March, with these now to take place over three years rather than two. Having received criticism in March for providing insufficient detail on these cuts, Mr Osborne has now outlined his proposals in full with the emphasis on reforms to the tax credit system.
The long awaited changes to Inheritance Tax relating to the passing on of the family home have now been detailed, along with some other less anticipated changes which will affect our clients. We have prepared our usual Budget Summary outlining the changes announced by the Chancellor and hope that you find this to be of interest. Should you have any questions or require more detailed information in relation to any specific aspect of the Budget Statement, please do not hesitate to contact us.
• Personal Allowance – increasing to £11,000 from April 2016 and £12,500 by 2020
• Restriction on mortgage interest relief for wealthier landlords
• Dividend tax credit to be replaced by tax-free dividend allowance of £5,000 from April 2016
• Annual Allowance – reduced from April 2016 for top rate tax payers
• NI Employment Allowance no longer available where director is sole employee
Corporate and Banking
• Corporation tax rate reduced to 19% from 2017 then to 18% in 2020
Tax Evasion and Avoidance
• Permanent non-domicile status to be abolished from 2017 with new deemed domicile rules
Mr Osborne detailed further increases to personal allowances and thresholds already announced in his March budget. The Chancellor has also introduced his changes to Inheritance Tax on the family property and has provided detail on the previously announced cuts to the welfare system.
Personal Allowance – the amount that a person can earn before paying any income tax will now rise to £11,000 from April 2016, an increase from the £10,800 previously announced. The Marriage Allowance will also rise in line with the personal allowance.
Higher Rate Threshold – the level at which taxpayers will start to pay tax at the higher rate will rise to £43,000 for 2016/17.
National Living Wage (NLW) – A new National Living Wage of £7.20 per hour will be introduced from April 2016 for all workers over 25. This will rise to in excess of £9 per hour by 2020.
Welfare – Significant changes will be made to the welfare system with a view to reducing the total amount of benefits paid to working-age claimants by £12bn by 2019/20. Tax credits are bearing the brunt of the cuts with working age benefits (not including statutory payments) being frozen for the next 4 years, affecting Working Tax Credit recipients in particular. Child Tax Credit has also been targeted and payment will be limited to 2 children for births occurring from April 2017. In addition, the overall benefit cap will be reduced to £20,000 (£23,000 in London) per household.
Mr Osborne has introduced changes to the taxation of property income which will have an effect, in particular, on residential property landlords who expand their portfolio through borrowing.
Mortgage Interest Relief – Tax relief on mortgage interest will be restricted to the basic rate (20%) for landlords who pay tax at the higher or additional rates. The restriction is to be phased in over a period of four years starting from April 2017.
Wear and Tear Allowance – In addition, from April 2016, the 10% wear and tear allowance will be withdrawn for all landlords. Tax relief will only be available when furnishings are actually replaced.
Rent-a-Room Relief – As a reflection of the fact that this relief has not been increased since 1997, the sum allowed as a deduction under the rent-a-room scheme will rise to £7,500. This means that individuals who have lodgers staying in their home will only pay tax on any rental income exceeding this amount.
The Chancellor has detailed a major change to the way in which dividend income is taxed. The dividend tax credit, which has existed in its current format since 1999, is to be removed completely. This change is likely to result in increased tax bills for investors with large portfolios and will affect directors of owner managed businesses who regularly use dividends as part of their remuneration planning.
Dividend Income – The taxation of dividend income will be substantially reformed with the 10% tax credit that currently accompanies such payments being abolished. Instead, from April 2016, a £5,000 tax-free allowance on dividend income will be introduced. Dividend income exceeding this amount will be taxed at new basic, higher and additional tax rates for dividends of 7.5%, 32.5% and 38.1% respectively.
There was a further modest change to the rules on pension savings, affecting only top-rate tax payers. However, the proposed Green Paper may bring about further changes in the future.
Annual Allowance – it was announced that the annual allowance for pension contributions that benefit from tax relief for taxpayers with adjusted income in excess of £150,000 is to be reduced. This allowance will be tapered at a rate of £1 for every £2 of adjusted income, from the current allowance of £40,000 down to a minimum of £10,000. This reduction will take effect from April 2016.
Pension Savings – the Chancellor announced that the government will be consulting on whether there is a case for reforming pension tax relief, with a view to strengthening incentives to save whilst allowing greater simplicity and transparency.
The Chancellor has introduced changes to a couple of existing reliefs for employers and businesses. The change to the already proposed reduction in AIA will be welcomed, especially as it will give some stability to this relief which has been subject to a number of temporary changes since its original introduction in 2008.
National Insurance Contributions (NICs) – The NIC Employment Allowance which was introduced by Mr Osborne in the 2013 budget is to be increased from £2,000 to £3,000 with effect from April 2016. However, where the sole employee of the company is a director, the allowance will no longer be available.
Annual Investment Allowance (AIA) – AIA will be reduced to a permanent level of £200,000 for investment in qualifying plant and machinery made on or after 1 January 2016. This change replaces the previously planned reduction of the allowance to £25,000 in January 2016.
|Corporate and Banking
An unexpected further reduction to the rate of Corporation Tax may encourage unincorporated businesses to review their structure. However, the changes to taxation of dividend income and the loss of Employment Allowance for directors could serve to counter any advantage to the lower rates, and careful planning will be required.
Corporation Tax – The main rate of corporation tax will reduce again to 19% from April 2017 with a further cut to 18% being introduced in April 2020. Payment dates for Corporation Tax payments for companies with profits greater than £20 million will be brought forward.
Banking Sector – Substantial changes are to be made to the way banks are taxed. The existing Bank Levy charged on banks’ balance sheets will be gradually lowered from the current 0.21% to 0.1% between 2016 and 2021. Replacing this will be a new tax on the profits of banks, which will be introduced from January 2016 and will, initially, be set at 8%.
Insurance Premium Tax – The standard rate of Insurance Premium Tax will be increased to 9.5% from November 2015.
Vehicle Excise Duty (VED) – A new Vehicle Excise Duty (VED) banding system will be introduced for cars registered from April 2017. This will reflect the technological improvements that have been made and the resulting decrease in carbon dioxide emissions. A new Roads Fund will be created and, from 2020/21, all of the receipts generated from VED in England will be used to support the fund, which will reinvest the money by way of improvements to the road network.
Tax Evasion and Avoidance
The Chancellor continues to tackle tax evasion and avoidance through the extension of several existing measures along with some new rules relating to domicile and ownership of UK residential property.
Non-Domicile Status – new rules to be introduced from April 2017 will apply deemed domicile status to individuals who have been resident in the UK for 15 of the previous 20 tax years. In addition, an individual born in the UK to parents who are UK domiciled will no longer be able to claim non-domicile status if they leave but then return and resume UK residence. The changes will remove the permanent non-domicile status.
IHT on UK residential property – from April 2017 new rules will be introduced to ensure that anyone who owns UK residential property, and would otherwise be subject to IHT on that property, cannot avoid the charge by way of holding the property in an offshore structure.
Tax Avoidance – the government is to publish a consultation and subsequently introduce legislation in the 2016 Finance Bill to target serial offenders making persistent use of tax avoidance schemes which fail. This will introduce special reporting requirements, a surcharge specific to those whose latest return is inaccurate due to the use of another failed avoidance scheme, restriction of access to reliefs and development of the scope to name persistent avoiders.
General Anti-Abuse Rule (GAAR) – the government is to produce a consultation document considering the possibility of introducing a specific GAAR penalty together with further measures to strengthen the GAAR further.
Other Points of Interest
• From 2016/17 student maintenance grants will be abolished and replaced with student loans, which will become repayable once the individual is earning over £21,000 per year.
• The Climate Change Levy exemption currently available for renewable electricity will end.
• The annuity payable to recipients of the Victoria Cross and George Cross will be increased from £2,129 to £10,000.
• Apprenticeship levy to be introduced for all large employers.
• New ‘youth earn or learn scheme’ to be introduced.