Frequently referred to as the ‘Emergency Budget’ – a term I think is probably more appropriate for the goings-on in the European Parliament this week – the officially-named Summer Budget was presented by George Osborne on Wednesday. It was the first budget of the ‘lower tax, lower welfare, higher wage’ economy that the Chancellor and Prime Minister have been talking of since before the election. So let’s look at these separately.
- The personal allowance will be increased from the current £10,600 to £11,000 in April 2016 aiming for a £12,500 allowance by 2020 – BUT permanent non-dom status will be abolished from April 2017 and anyone resident in the UK for 15 of the past 20 years will be considered UK domiciled for tax purposes.
- The higher rate threshold will be increased to £43,000 in 2016/17 ultimately targeting a £50,000 threshold by 2020 – BUT, those earning over £150,000 will have the tax relief on pension contributions gradually limited to £10,000 (from the current £40,000) from April 2016.
- Dividend tax will be reformed from April 2016 removing the 10% tax credit and introducing a £5,000 tax-free dividend allowance. This is welcome news for savers with dividend producing investments – BUT, this will actually result in more tax being paid by those receiving high levels of dividend income.
- The introduction of the £175,000 family home allowance to be phased in from 2017/18 will mean married couples and civil partners will be able to pass on £1 million free of Inheritance Tax by 2020/21 – BUT, the allowance will be gradually withdrawn for estates worth more than £2 million.
- Corporation Tax will be cut to 19% in 2017 and 18% in 2020 – BUT…..
- ……employers will be required to pay a compulsory Living Wage of £7.25 an hour from April 2016 rising to £9 an hour by 2020.
- 3 million new apprenticeships will be created by 2020 funded by a levy on large employers. Firms that are committed to training will be able to get back more than they put in.
- Employer National Insurance bills will be cut by £1,000 as the Employment Allowance rises from £2,000 to £3,000. From next year businesses will be able to employ 4 people full time on the National Living Wage and pay no National Insurance.
- And whilst delivering higher wages, the increase in Public Sector Pay of just 1% a year for 4 years may not feel like it to those on the government payroll after taking into account inflation.
- Working-age benefits, including tax credits and Local Housing Allowance, will be frozen for 4 years from 2016/17.
- The household benefit cap will be reduced to £20,000 (£23,000 in London).
- Support through Child Tax Credit will be limited to 2 children for children born after April 2017 (will this be called the ‘bedroom activity tax’?).
- Those aged 18 to 21 who are on Universal Credit will have to apply for training or go on a work placement scheme – the so-called ‘earn or learn’ incentive.
- Rents for social housing will be reduced by 1% a year for 4 years, and tenants on higher incomes (over £40,000 in London and over £30,000 outside London) will be required to pay market rate, or near market rate, rents.
Some other welcome (or not, depending on your point of view) measures include:
- The defence budget will rise by 0.5% above inflation each year to 2020 which means the Government will be able to meet the NATO pledge to spend 2% of GDP on defence.
- Insurance Premium Tax will increase to 9.5% from 6% in November 2015, so expect higher insurance premiums.
- The amount that can be charged by claims management companies (such as those that encourage claims for PPI or personal injury insurance) will be capped, which is expected to reduce the incidence of nuisance calls to potential customers.
- Tax relief for landlords will be restricted. Landlords can deduct costs (including mortgage interest) from their profits before tax. For wealthier landlords, tax relief at 40% and 45% can currently be claimed but this will be restricted to 20% for all individuals by April 2020.
- Road tax will be reformed. From April 2017 there will be a flat rate of £140 for most cars, except in the first year when tax will remain linked to CO2 emissions, and existing cars won’t be affected – no one will pay more for a car that they already own. The first MOT will not be needed now until a car is 4 years old.
This is something of a radical budget, certainly in comparison with the Chancellor’s previous, albeit Coalition-ised, budgets and is a whole world away from the ‘omnishambolic’ 2010 effort. There are certainly some significant measures, many of which will impact on future financial planning scenarios, such as the pension contribution restrictions for higher earners, the complete overhaul of dividend tax and of course the much-vaunted £1 million IHT threshold.
As always, we will carefully consider all these measures– and those yet to be discovered in the Red Book (123 pages this time, only one page less than March!) – and will review the impact on your circumstances at your next review meeting. As always, do let us know in the meantime if you have any questions or should there be specific aspects of the changes that concern you.
Philip Chandler APFS CFPCM APP
Chair of Aspinalls Technical Committee