Last week’s Summer Budget 2015 promises bold reforms on tax and welfare, and introduces a National Living Wage, underpinning the government’s intention to reward work and support aspiration. But what does this mean in reality?
As promised at A4C we’ve highlighted below the key points in the budget which are most likely to impact our clients.
Backing business – the good news
- Corporation tax rate cut to 19% in 2017 and 18% in 2020.
- The level of the Annual Investment Allowance will be set at £200,000 from January 2016, its highest ever permanent level.
- Employment Allowance raised by £1,000 to £3,000 from April 2016.
- Increase in the income tax personal allowance from £10,600 in 2015-16 to £11,000 in 2016-17. It will increase to £11,200 from 2017-18.
- An increase to the higher rate threshold from £42,385 in 2015-16 to £43,000 in 2016-17 and to £43,600 in 2017-18. The NICs Upper Earnings Limit will also increase to remain aligned with the higher rate threshold.
- Simplified tax system with the introduction of a statutory exemption for trivial benefits in kind costing less than £50.
Tax Targets – the bad news
To ensure that the NICs Employment Allowance is focussed on businesses and charities that support employment, from April 2016, companies where the director is the sole employee will no longer be able to claim the Employment Allowance.
The government wants to re-visit IR35 to find a solution that protects the Exchequer and improves fairness in the system. This means that individuals choosing to work through their own limited company, where they would have been employees if they were providing their services directly, will be under greater pressure to pay the same tax and National Insurance as other employees.
From April 2016 the government will remove the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. The government will set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
Travel & Subsistence Changes
The government will review the rules underlying the tax treatment of travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. The changes will take effect from 6 April 2016.
The majority of individuals and businesses pay their fair share of tax however, there are some who fail to pay what they owe. To improve tax compliance among small businesses, the government announced in the Summer Budget 2015 that it will legislate to give HMRC the power to acquire data from online business intermediaries and electronic payment providers to help identify businesses that are trading but not declaring or paying tax. HMRC will consult on these proposals in July 2015.
End of the tax return?
Small businesses will be able to manage their tax through a digital account linked to business software. HMRC will begin discussions with businesses and software providers about how best to integrate tax reporting and payment with everyday business activity.
The government will legislate to set a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee (Class 1) NICs rates, ensuring that they cannot rise above their current (2015-16) levels. The tax lock will also ensure that the NICs Upper Earnings Limit cannot rise above the income tax higher rate threshold; and will prevent the relevant statutory provisions being used to remove any items from the zero rate of VAT and reduced rate of VAT for the duration of this Parliament.
Summer Budget 2015 – The other headlines:
- Introduction of a new National Living Wage for workers aged 25 and above with a government target for this to reach £9 per hour by 2020.
- From September 2017, free childcare entitlement will be doubled from 15 hours to 30 hours a week for working parents of 3 and 4 year olds.
- The next stage of welfare reform, delivering on the government’s commitment to save £12 billion from the working-age welfare budget by 2019-20, including freezing working-age benefits and Local Housing Allowances for 4 years, reducing rents in social housing by 1% a year for 4 years, reducing the benefit cap, and reforming tax credits and Universal Credit with support focussed on those with lower incomes.
- Taking the family home out of inheritance tax for all but the wealthiest with a new transferable nil-rate band of up to £175,000 per estate when a main residence is passed to direct descendants; this means that the effective inheritance tax threshold will be £1 million.
- Introduction of a taper to the annual allowance for pensions tax relief for those with total income over £150,000.
- Increase in the standard rate of insurance premium tax from 6% to 9.5%.
- Extension in the time before a car needs its first MOT test from 3 years to 4 years.
- Restriction in relief for mortgage interest for individual landlords to the basic rate of income tax, phased in over 4 years, limiting the advantage that these individuals currently enjoy over those purchasing their own home.
- Setting an end to the permanent non-domicile status.
- Tackling tax evasion, avoidance and tax planning, by increasing tax compliance, and addressing other imbalances in the tax system
Many of these headline changes are subject to a consultation process, which will then provide the detail supporting the new rules and changes. In the meantime if you want to read the Summer Budget 2015 for yourself then visit https://www.gov.uk/government/publications/summer-budget-2015.
Of course as further information becomes available, following this Summer Budget 2015, we will analyse the implications, however if you have any questions in the meantime feel free to get in touch with Esther or Natasha on