The Budget Summer 2015
I think it is fair to say that modest relief is the best way of summing up the 2015 summer budget, the first wholly Conservative budget for nearly two decades. On the face of it, it wasn’t all that painful.
As the BBC commented, George Osborne seems to have dispensed with the tradition of good news prior to an election and bad news immediately afterwards and tipped this on its head. The outlook for cuts in March was bleak and many commentators were expecting major increases in tax and cuts in spending to be announced when Mr Osborne took to his feet on 8th July. However, what we witnessed may, in time, be heralded as a ‘good’ budget.
As with any budget there will undoubtedly be winners and losers but many of the announcements made this time seemed to be focussed on building the economy. The Chancellor has moved his own goal posts on debt reduction and delivery of a surplus and when one drills down on the changes put forward, you might be led to believe that it is his expectation that the economy will grow sufficiently in the next 2-3 years that the delayed cuts, pencilled in for the latter part of this Parliament, may not need to happen.
Corporation Tax, minimum wage and employment allowance
Aimed at increasing profits, but with a view to encouraging companies to reinvest the additional money in growing their workforce, there were several announcements relating to company profits and employment taxes.
Corporation Tax, which has been pegged at a single rate of 20%, will reduce to 19% from April 2017 and drop to 18% by 2020, probably in the final budget of this parliament. Some of these gains will be offset by the introduction of a new Living Wage, a revamped version of the Labour party’s national minimum wage introduced in the late 90’s. The living wage will increase the minimum hourly rate payable to staff from the current £6.50 to £7.20 in April 2016. The chancellor pledged to see this rate at £9.00 by the end of the Parliament in 2020. With increases in personal allowance, previously announced in the March 2015 budget, the new living wage is designed to ensure that anyone working 30 hours a week on the basic rate of pay, pays no tax on their income.
To further encourage employers to take on more staff, the Chancellor also increased the employment allowance from £2,500 to £3,000 which is the equivalent to paying no NIC on 4 full-time employees on the new living wage.
One other notable policy on staffing and training was the introduction of a training levy, paid by larger companies to help fund more apprenticeships for smaller companies.
Inheritance tax (IHT), pensions and personal allowances
The headlines were designed to say no IHT payable on £1m houses but the reality is this will not actually be the case until 2020, as the changes announced will be phased in from April 2017. The Chancellor has introduced a family home allowance, which on top of the existing nil rate band, for a married couple or civil partners will eventually stand at £500,000 each, so £1million combined. But the new allowance will start at £100,000 in 2017 and gradually rise to £175,000 over 3 years. This, added to the nil rate band of £325,000, which he confirmed will be frozen, makes your £1million headline within 5 years, but even then, a tapering means that houses over £2million don’t enjoy all of the benefit.
The eternally complicated subject of pensions did not get through another budget without further amendment as the Chancellor confirmed that the tax relief on pension contributions is to be restricted. From April 2016 the £40,000 annual exemption is to be reduced by £1 for every £2 by which your income exceeds £150,000 until (at income of £210,000 or above) the exemption has been restricted to £10,000, However, he also announced that a consultation would take place on the future on pension contributions with one idea being that contributions be made from post-tax income which would then mean any extraction could be taken without paying further tax. The consultation on this formed one of the many supporting documents in the main budget statement and will be a subject for further discussion in due course.
The personal allowance, the amount earned before tax becomes payable, will be £11,000 from April 2016, rising to £11,200 from April 2017. Mr Osborne is targeting £12,500 by the end of the parliament which as previously noted, would mean those people on the new Living Wage and working 30 hours a week pay no tax on their income. The higher rate threshold, the point at which you begin to pay an accelerated rate of tax will also increase to £43,000.
No tax credit for dividends
One surprising move by the Chancellor was the removal of tax credit on dividends, with the introduction of a new £5,000 annual allowance. Dividends in excess of that amount will be taxed at 7.5%, 32.5% or 38.1% depending on whether you are a basic, higher or additional rate taxpayer.
This will hit many small business owners which seek to extract income from their company in a tax efficient manner and on a ‘when the business can afford it basis’. Initial calculations suggest that basic salary, using the increased personal allowance, with dividends on top, will still be economically beneficial but as ever, it will come down to personal circumstances.
Landlords and renting rooms
From 6 April 2016 rent a room relief will increase to £7,500 per annum from the current level of £4,250.00. This is the amount that a home owner can receive, tax free, from the letting of individual rooms in their home. The increase will also apply where an individual rents out rooms in a guest house, B&B or similar providing it is their main home.
However, there will now be restrictions on mortgage interest relief for landlords. Mortgage interest was previously used to offset taxable income but from April 2017, this will gradually be restricted so that landlords will only receive tax relief at the basic rate of tax (20%). The full impact of this new restriction will not be felt until 2020/21.
There are many other headline grabbers emerging from the summer budget, not least of all the similarities between many of the announcements made and the Labour party 2015 manifesto… but attention will undoubtedly focus on the cuts to welfare and the Living Wage as the two most significant elements of what is still a budget delivered in austere times.