George Osborne has presented his first Budget without regard for coalition partners. The measures he has introduced recognise the need to incentivise individuals and businesses, with the promise to balance the nation’s books and reduce debt. We have summarised below some of the more impactful changes.
Some of the measures are surprising: the introduction of a new National Living Wage for the over 25s of £7.20 per hour from April 2016; reductions in Corporation Tax to compensate employers for possible higher wage bills; and far reaching reductions in many state benefits – including Child Tax Credits.
Our summary of these and other tax changes and fiscal incentives follows:
The Tax Lock
The Government are to legislate to set a ceiling for increases to various taxes. This will ensure that they cannot rise above their 2015-16 levels for the duration of the current parliament. The taxes affected are:
- The main rates of Income Tax.
- The standard and reduced rates of VAT.
- Employer and employee Class 1 National Insurance Contribution (NIC) rates.
The NICs Upper Earnings Limit cannot rise above the Income Tax higher rate threshold and it will not be possible to remove any items from the zero or reduced rate of VAT.
Personal Tax allowance
The personal allowance will be increased to £11,000 from April 2016, with the promise of further yearly increases to meet the Government’s target of £12,500 by the end of the current parliament. The rates for the current and next two tax years are:
- £10,600 for 2015-16
- £11,000 for 2016-17
- £11,200 for 2017-18
Income Tax rate bands
There was significant press commentary prior to the Budget predicting an increase in the threshold at which tax payers are liable to the 40% Income Tax rate. During the term of the current parliament it was promised this would rise to £50,000. As a first step the higher rate threshold will be increased to £43,000 from April 2016. For the current and following two tax years the thresholds are:
- £42,385 in 2015-16
- £43,000 in 2016-17
- £43,600 in 2017-18
If your income before personal allowances exceeds this amount you will be paying 40% Income Tax on the excess (this assumes that you are only entitled to the basic personal allowance).
The threshold at which the 45% rate starts is unchanged at £150,000.
There were no changes to the basic Income Tax rate (20%), the higher rate (40%) and the additional rate (45%).
Dividend tax credit to be abolished
From April 2016 Income Tax payers will no longer be able to claim a deduction for tax credits associated with the receipt of dividends.
In its place, a new Dividend Tax Allowance of £5,000 is to be introduced. If your dividend income is below this allowance you will pay no Income Tax. Dividends received in excess of £5,000 will be taxed as follows:
- 7.5% if you are a standard rate (20%) tax payer
- 32.5% if you are a higher rate (40%) tax payer
- 38.1% if you are an additional rate (45%) tax payer
Abolition of non-domicile status
The Government is to legislate such that, from April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years will be deemed to be domiciled in the UK for tax purposes.
Additionally, from April 2017, individuals who are born in the UK, to UK domiciled parents, will no longer be able to claim non-domiciled status whilst they are resident in the UK.
IHT – Main Residence Nil-rate Band (MRNB)
A new nil-rate band for IHT purposes is to be introduced. It will be available when a residence is left on death to direct descendants. The amount of the MRNB will be:
- £100,000 in 2017-18
- £125,000 in 2018-19
- £150,000 in 2019-20
- £175,000 in 2020-21
Any unused MRNB can be transferred to a surviving spouse or civil partner. The allowance will still be available if the tax payer downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent amount, up to the amount of the available MRNB, are passed on death to a direct descendant.
From April 2017, estates with a net value of more than £2m will be subject to a reduction of £1 in the available MRNB for every £2 the net estate exceeds £2m.
The basic nil-rate band of £325,000 will remain frozen at this level until April 2021.
As expected, George Osborne has made a few cuts to Tax Credits as part of his plan to reduce public expenditure. The following are the main changes:
- From April 2016, the income threshold that applies to Tax Credits will be reduced from £6,420 to £3,850.
- From April 2016, once a claimant earns above the income threshold, their Tax Credits award will be reduced by 48p for every additional £1 they earn. Presently, the taper rate is 41p for each additional £1 of income.
- The child element in Tax Credits and Universal Credits claims will be restricted to the first two children. There will no longer be awards for third or subsequent children born after 6 April 2017. There will be exceptions for multiple births, disabled children and other exceptional circumstances.
- The in-year income disregard (the amount by which a claimants income can increase in one year as compared to the previous year without affecting eligibility) is to be reduced from April 2016, from £5,000 to £2,500.
Insurance Premium Tax (IPT) hike
From 1 November 2015 IPT is to be increased from 6% to 9.5%
Corporation Tax rate
The main rate of Corporation Tax is to be reduced from the current 20% to:
- 19% from 1 April 2017, and
- 18% from 1 April 2020.
These reductions are intended to maintain the UK’s competitive tax position and to compensate employers for the possible increases in their wages costs when the new National Living Wage for the over 25s is introduced from April 2016.
The National Living Wage arrives
It has fallen to a Conservative Government to make the important shift towards the implementation of a National Living Wage (NLW).
The long term goal is to set a rate of £9 per hour by 2020. As a first step, from April 2016, the NLW rate for over 25s will be £7.20.
Corporation Tax payment dates change for larger companies
For accounting periods ending on or after 1 April 2017, companies with taxable profits over £20m will be required to pay Corporation Tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting periods.
National Insurance Employment Allowance (EA)
The Government is to increase the EA from April 2016. The allowance is as follows:
- £2,000 for 2015-16
- £3,000 for 2016-17
This means that most employers will not pay the first £3,000 of employers NIC from April 2016.
Annual Investment Allowance (AIA)
The current AIA limit is £500,000. This allows businesses to write off up to this amount in qualifying asset purchases (commercial vehicles, plant and machinery and computers etc.) against their taxable profits.
This is a temporary increase and from 1 January 2016 the maximum was set to revert to the previous permanent level of £25,000. It is now intended to increase this permanent limit to £200,000 from 1 January 2016.
This is a welcome announcement as businesses contemplating investment in qualifying plant and machinery of up to £200,000 will now have more time to make a buying decision, past the end of this year, and not lose a tax advantage.
Tax relief on acquisition of goodwill to be restricted
Acquisitions of goodwill after 8 July 2015 will be subject to restrictions for Corporation Tax relief purposes.
Bank Corporation Tax Surcharge
An 8% supplementary tax is to be levied on banking sector profits from 1 January 2016. The tax will apply before deductions for carried forward losses.
The tax will not apply to the first £25m of profit within a group.
Nuisance calls clampdown
In a welcome announcement, the amount that can be claimed by claims management companies is to be capped. It is hoped that change will discourage cold calling to promote PPI and other similar claims.
Three million new apprenticeships
The Government intends that three million new apprenticeships will be created by 2020. The scheme will be funded by a levy on large employers and firms that commit to training will be able to get back more than they invest.
Savers and investors (including property investors)
Wear and Tear Allowance (WTA)
The WTA presently compensates residential landlords by allowing them to deduct 10% of their gross rents received (adjusted for some direct charges) before tax due is computed. The allowance is intended to cover replacements of furnishing made from time to time.
From April 2016, this WTA will no longer be available. In its place the actual replacement cost will be deductible.
Capital allowances will continue to apply for owners of furnished holiday let properties.
HMRC will be issuing technical guidance on this change.
Basic rate restriction for landlord finance costs
Landlords of residential properties will have tax relief on finance charges, such as mortgage interest, restricted to the present 20% basic rate of tax. This will be phased in over four years from April 2017.
Rent-a-room relief increase
From April 2016 the present rent-a-room relief of £4,250 is to be increased to £7,500.
Pensions Lifetime Allowance to be reduced
This allowance is to be reduced from £1.25m to £1m from 6 April 2016.
Transitional arrangements will be in place to protect funds in excess of £1m, ensuring that the change will not be retrospective.
From 6 April 2018 the Lifetime Allowance will be indexed annually in line with the Consumer Price Index.
Pension’s annual allowance reduced for high income earners
The present £40,000 Annual Allowance for pension contributions is to be reduced for high income earners from April 2016.
Those with income in excess of £150,000 will see their allowance tapered down to a minimum of £10,000.