Submitted by Sestini
| on Thu, 07/09/2015 - 16:58 | In Uncategorized
After much speculation in the media as well as social and professional circles, I did not think George Osborne could surprise me with his announcements in the Summer Budget. However, the policies that had been trailed were peppered with surprises and some policies reaching further than anticipated.
The message from Mr Osborne was loud and clear, the Conservative Party aims to keep the UK competitive and build a secure economy whilst being a high wage, low tax, low welfare economy. The ultimate goal: to bring the UK into a surplus by the end of this Parliament. This would largely be achieved by controlling Government spending and reforming the welfare system.
Whilst committing his support to the NHS and Defence spending, “locking” the rates of Income Tax, National Insurance Contributions and VAT, George Osborne’s Budget is a mixed bag for individuals and businesses.
Pensions and Savings
- Pensions tax relief – The Government will issue a Green Paper in relation to a broad reform of pension tax relief. This was the biggest surprise to us here in the Sestini & Co. office and leaves us questioning how this will interact with auto-enrolment, the tax treatment of employer contributions to any new scheme and how it will physically be operated. We also worry this may discourage additional pension saving by those who would really benefit in later life.
- Reduced Lifetime Allowance for pension contributions and Annual Allowance for high earners – less surprising is the reduction in the Lifetime Allowance for pension contributions from £1.25mn to £1mn (from April 2016); and the restriction of tax relief for pension contributions for Additional Rate Taxpayers from April 2016 by tapering the Annual Allowance to a minimum of £10,000.
- Taxation of Dividend Income – From April 2016, individuals will have a Dividend Tax Allowance of £5,000 per year. Beyond this, basic rate taxpayers will be subject to tax at 7.5%, higher rate taxpayers 32.5%, and additional rate taxpayers 32.5%. This will have an impact on the profit extraction of owners of small businesses who receive dividend income and may prompt those nearing retirement to consider an exit strategy.
- Ability of long term residents to claim non-Domicile status – From April 2017, individuals who have been resident in the UK for more than 15 of the past 20 years will not be able to benefit from non-domicile status. This may mean a significant increase in the global tax liability and reporting requirement for individuals who have chosen to visit the UK for a longer period, possibly for the purpose of employment or educating their children. Tax treaties will play their part in avoiding double taxation but at best this measure adds complexity and cost to an already unwieldy tax system for those coming into the UK.
- Restriction of finance cost relief for landlords – Historically landlords have received tax relief at their marginal rate in relation to the finance cost of buy-to-let properties: as with other types of business, to date expenses have been fully deductible against revenue in calculating net profits before the appropriate tax rate was applied. From April 2017, through a phased introduction, the relief available on these expenses will be restricted to the basic rate of tax. This seems somewhat contrary to the long-held principle that business expenses should be allowable provided they were legitimately incurred for the purpose of producing (taxable) income.
- Personal allowance increase – the personal allowance for Income Tax will increase from £10,600 (2015/16), to £11,000 (2016/17) to £11,200 (2017/18).
- Higher rate threshold increase – the threshold at which income is taxed at 20% will increase from £42,385 (2015/16) to £43,000 (2016/17) to £43,600 (2017/18). The NIC Upper Earnings Limit will remain aligned with this threshold.
Corporation & Business Tax
- Corporation Tax rate and payment – another big surprise was the announcement that the Corporation Tax rate would be reduced to 19% (2017) and then 18% (2020). Companies with annual taxable profits of £20mn or more will be required to settle their tax liability earlier.
- The employer’s national insurance allowance will be increased to £3,000 from the current £2,000 but will cease to be available to owner/managed businesses with only one director/employee. This was a real surprise as it works against start-ups in their initial phases, the very businesses which George Osborne has made much of as a sign of this country’s recovery.
- Annual Investment Allowance to remain at £200,000 – a move which the Government hopes will encourage larger companies to continue to invest in plant and machinery.
- Business Tax Roadmap – By April 2016, the Government will publish a Business Tax Roadmap setting out its plans for business taxes for the rest of this Parliament – this will hopefully provide some certainty to business which will help with their planning and forecasts.
- Inheritance Tax on UK Residential Property of non-domiciles – From April 2017, IHT will be payable on all UK residential property owned by non-domiciles regardless of their tax residence status and whether or not the property is owned in a trust or similar structure.
- Ability of long term residents to claim non-Domicile status – From April 2017, individuals who have been resident in the UK for more than 15 of the past 20 years will no longer be treated as non-Domiciled for the purposes of IHT. This appears to work in a similar way to the current “17 out of 20” test but with a slightly shorter qualification period and a longer soujourn overseas to reset the clock.
- The extension of the nil-rate band for a couple’s main residence – a highly contentious issue but the Conservatives are sticking to their plan to introduce an additional nil-rate band when a residence is passed on death to children or grand-children where an estate is worth up to £1mn (relief is tapered for estates in excess of £2mn).
More generally, the announcement of the new National Living Wage was well received although some argue that it is merely a higher National Minimum Wage that has not been set high enough and is lacking in only applying to those aged over 25 years of age.
The investment in apprenticeships will be welcomed by many businesses who are still faced with a skills-shortage though we will have to wait to see how the apprenticeship levy will be applied.
Mr Osborne announced that devolution would facilitate the creation of the “Northern Powerhouse” with Greater Manchester leading the way and the cities of Sheffield, Leeds and Liverpool currently under review.
Over the coming days we will be looking at the detail of the Budget and seeking to explain some of the quirkier measures, if you would like to discuss how this will impact you please do not hesitate to contact us.