Summer Budget 2015 – ‘A Budget for Working People
Summer Budget 2015 – ‘A Budget for Working People’
Less than four month’s on from his March Budget you might have been forgiven for assuming that this 2nd Budget from the Chancellor might be briefer in terms of any significant changes being announced. However, in the first Budget from a Chancellor of a majority Conservative government in almost 19 years, George Osborne sets out a whole range of measures which he says are designed to move us towards a UK in which wages and the tax take are increased and the country’s welfare bill is reduced, in what he calls a ‘Budget for working people.’
Income Tax Thresholds & Allowances
The Personal Allowance will increase from the current £10,600 to £11,000 in April 2016 (up from £10,800 as announced in the March Budget).
The Government has an ambition to increase the Personal Allowance to £12,500 by 2020, and a law is to be introduced so that, once it reaches this level, people working 30 hours a week on the National Minimum Wage won’t pay Income Tax at all.
The threshold at which most people start to pay higher rate Income Tax will increase from the current £42,385 to £43,000 in 2016/17 (up from £42,700 as announced in the March Budget).
Income Tax on Dividends
The Chancellor has announced a major overhaul of how dividends are taxed, replacing the current dividend tax credit with a “tax-free allowance” of £5,000 for all taxpayers receiving dividend income.
Effective from April 2016, dividends received above £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending upon the level of a person’s income and into which tax band those dividends fall.
Dividends received by pension schemes or individual savings accounts (ISAs) are to remain tax-free.
The amount that those with an income of more than £150,000 can pay tax-free into a pension will be reduced. Those with income in excess of £150,000 will have their tax-free contributions allowance tapered away from its current £40,000 per year to a minimum of £10,000 once income reaches £210,000.
Taxable death benefits paid by a pension scheme where the scheme member is 75 or over will from April 2016 be subject to the recipient’s marginal rate of Income Tax under Pay As Your Earn (PAYE) rather than at the previous flat rate of 45%.
A Green Paper is to be published on proposals for "a radical change" to the pension savings system consulting on a new ISA-style pension where savers pay tax on the income they put in, but not when they take it out.
Non-domiciled individuals – Income Tax
A person who lives in the UK but considers their ‘natural home’ to be elsewhere, is classed by the UK tax system as a non-domiciled individual.
Unlike individuals who are domiciled in the UK, non-domiciled individuals can elect not to pay UK tax on income and gains arising outside of the UK, unless they bring that money into the UK (subject to payment of varying levels of charge where such income exceeds £2k and they have been resident in the UK for at least 7 out of the previous 9 years).
The definition of a non-UK domiciled individual will be changed from April 2017 to exclude anyone who has been resident in the UK for 15 or more out of the last 20 years, meaning more people will be classed as UK domiciled.
These changes mean that the new £90,000 charge for using the ‘remittance basis’ of taxation introduced in the March Budget will become redundant.
Individuals who were born in the UK to parents who are domiciled in the UK will no longer be able to claim non-domicile status whilst they are resident in the UK, regardless of the time limits mentioned above (this may happen where a person leaves the UK, becoming domiciled elsewhere, but later returns to the UK).
Individuals classed as UK domiciled under these new rules will be taxed in the UK upon their worldwide income.
Non-domiciled individuals – Inheritance Tax
From April 2017, Inheritance Tax will be payable on all UK residential property owned by non-UK domiciled individuals regardless of their residency status.
This includes property held within an offshore structure.
Relief from Income Tax on rents received in respect of mortgage interest paid by landlords is to be capped at the basic rate of tax (currently 20%) with the Government saying that it should level the playing field for homebuyers and investors.
This change will be introduced over a four-year period from April 2017.
Currently, investors can claim tax relief on their monthly interest repayments at the top level of tax they pay, meaning they can benefit from relief of up to 45%. The relief is estimated to cost the Exchequer £6.3bn a year, and critics have said it puts landlords at an advantage to first-time buyers in the property market.
Changes to the current 10% wear and tear allowance that can be claimed in respect of the estimated costs of replacing furnishings in furnished lets are also to be introduced from April 2016.
Rent A Room Scheme
An increase was announced in the amount of money homeowners can earn in rent from lodgers before they face a tax bill. The maximum amount covered by the rent-a-room scheme has been set at £4,250 for the past 18 years, but will rise to £7,500 from April 2016.
Currently, Inheritance Tax (IHT) is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another, resulting in a potential combined IHT threshold of £650,000.
From April 2017, each individual will be offered an additional family home allowance in order to help them to pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017/18 with an allowance of £100,000, increasing to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.
The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, meaning the total tax-free allowance for a surviving spouse or civil partner could be up to £1 million in 2020/21.
The allowance is to be gradually withdrawn for estates worth more than £2 million and the existing nil-rate band of £325,000 is to remain at £325,000 until the end of 2020/21.
Main Rate of Corporation Tax
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20% in 2015, in order to boost the UK’s competitiveness. It will now fall further, from 20% to 19% in 2017, and then to 18% in 2020, benefiting over a million businesses.
Small firms' NI contributions will fall, with a one third increase in the employment allowance from £2,000 to £3,000 from April 2016. So a small firm could hire four staff on the National Living Wage and pay no National Insurance at all.
Annual Investment Allowance (AIA)
The annual investment allowance, which has previously been increased temporarily, will be set permanently at £200,000 from January 2016. The allowance means businesses can deduct the full value of certain items, including equipment and machinery, up to a total value of £200,000 from their profits before tax. This helps them with cash flow because it means that full tax relief is given in the year items are purchased, rather than over several years.
This permanent increase will help businesses plan their spending on longer-term capital investments.
Amortisation of Goodwill and other Intangible Assets
From 8 July 2015 relief will not be available from Corporation Tax for amortisation in respect of goodwill or other intangible assets acquired on or after that date.
The government continues to clamp down on tax avoidance, what they consider to be aggressive planning and evasion, as well as increasing resources for HM Revenue and Customs (HMRC) to pursue collection of taxes.
Extra investment is to be made between now and 2020 for HMRC’s work on evasion and non-compliance.
The government will triple the number of criminal investigations HMRC can undertake into complex tax crime, concentrating on wealthy individuals and companies.
HMRC will be allowed access to more data to identify businesses that aren’t declaring or paying tax.
A loophole is to be closed allowing investment fund managers to reduce the amount of Capital Gains Tax that would otherwise be payable on their profits from the fund.
International companies will be required to pay tax on profits diverted from the UK.
A ‘general anti-abuse rule’ penalty will be introduced along with tough new measures for serial avoiders, including publishing the names of people who repeatedly use failed tax avoidance schemes.
Legislation is being introduced to prevent the set off of UK losses and certain surplus expenses against the profits of controlled foreign companies (CFCs).
Further consultation is to be had around avoidance through ‘disguised employment’ via the use of personal service companies.
Rules are being introduced aimed at preventing companies from artificially inflating the value of stock for tax purposes.
Legislation is also being introduced to avoid exploitation of the employment allowance where the sole employee of a company is its director.
WELFARE & BENEFITS
From April 2016, a National Living Wage of £7.20 an hour will be implemented for those aged 25 and over. This is set to rise to £9 an hour by 2020.
Working-age benefits such as tax credits and Local Housing Allowance will be frozen for 4 years from the 2016-17 tax year. Maternity Allowance, maternity pay, paternity pay and sick pay will not be included in this freeze.
The household benefit cap will be reduced from £26,000 to £23,000 in London and £20,000 elsewhere in the UK.
For children born from April 2017, Child Tax Credit claims will be limited to 2 children.
Working families with 3 and 4 year olds will receive 30 hours of free childcare from September 2017.
From the 2016-17 academic year, university student grants will be replaced by a new maintenance loan support. The cash amount available to new students will be £8,200 per year and will only be required to be paid back when graduates earn above £21,000 per annum.
3 million new apprenticeships will be created by 2020 which will be funded by a levy on large employers. Firms committed to training and improving will have the potential to get back more than they put in.
Road Tax (Vehicle Excise Duty – VED)
The road tax system will be revised to make it fairer and sustainable. From 2017, there will be a flat rate of £140 for most cars, except in the first year when tax will remain linked to the CO2 emissions that cars produce.
Electric cars won’t pay any road tax at all and the most expensive cars will pay more. Existing cars won’t be affected – no one will pay more for a car that they already own. The money brought in from road tax in England will be spent on England’s roads from 2020.
The government will extend the deadline for the first MOT of new cars and motorcycles from 3 years to 4 years.
Fuel duty has been frozen for another year.
Insurance Premium Tax (IPT) will rise from 6% to 9.5% from November 2015.
If you would like more information or would like to discuss your tax affairs in general please contact our Tax Partners, Steve Crompton or Chris Barrington on the details below:
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394
direct dial: 01942 292505
mobile: 07730 436070