Chancellor of the Exchequer George Osborne presented the post-election Summer Budget on July 8 – the first Conservative only ‘red briefcase’ speech since 1996.
He described it as a Budget for working people and a continuation of the Government’s aim of creating a ‘higher wage, lower tax and lower welfare’ country. It was crammed full of expected cuts and rises but also contained a good deal of surprises.
So what as your accountant and tax advisor, should we make of the Summer Budget of 2015 – basking in the sunshine or nervously awaiting a downpour?
As in all Budgets economic aspirations frame and drive the main changes.
For this Conservative government these centre around a commitment to keep debt falling as a share of GDP until a budget surplus of 0.4% is reached in 2019-20.
To help achieve that the Government has identified £12billion of annual savings from the welfare system, and the debate on whether the mix of benefit cuts combined with rises in personal allowances and changes to the “living” or should that be “enhanced minimum” wage will continue for some time to come. But more pertinently for us accountants, £5billion of increased revenue has also been identified from ‘tackling tax evasion, avoidance, planning and imbalances’ in the tax system.
That includes cracking down on tax avoidance from foreign companies in the UK, ensuring that investment fund managers pay full capital gains tax on their carried interest and ‘naming and shaming’ serial users of avoidance schemes.
On more prosaic business matters there was a crucial and largely unexpected change on corporation tax with the rate falling from the present 20% to 19% in 2017 and 18% by 2020. This should be a boon to UK firms both large and small.
However companies with profits over £20million a year may be less keen to hear that corporation tax payments dates will be brought forward “so tax is paid closer to the point at which profits are earned”.
Large firms may also shudder at the prospect of an apprenticeship levy to encourage more youngsters into the workforce and to plug the nation’s skills gaps.
Banks will be pleased by a gradual reduction on their bank levy rate but will also have to deal with a new 8% surcharge on bank profits from January 1, 2016.
But it is perhaps small businesses who have to be particularly wary of some of the Budget changes.
Small and medium-sized firms will be cheered by news that the Annual Investment Allowance will not fall to £25,000 but be set at £200,000 “both this year and every year”.
This will surely spur investment.
National Insurance contributions will also fall with the Government’s new Employment Allowance increasing by 50% to £3,000 from next year.
But owner-managed businesses who take a dividend as their company salary may be hit by the chopping of the Dividend Tax Credit from next April. It is being replaced by a new Dividend Tax Allowance of £5,000 a year with the rates on dividend income above that level set at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.
Dividends paid within pensions and ISAs remain tax-free.
Businesses will also face extra costs with the introduction of a National Living Wage for workers over 25 of £7.20 by April next year and over £9 by 2020. This could hit SMEs more than their larger rivals.
The ICAEW said the Budget would “inevitably mean more regulation and tax law that everyone, including me as your Accountant and tax advisor, will need to cope with. This is from a Government that wants to simplify the tax system and reduce the regulatory burden”.
There is sense in that argument but to be fair to the Government it also announced an intention to publish a business tax roadmap by next April outlining plans for business taxes over the rest of the Parliament and that is welcome guidance.
The establishment of the Office of Tax Simplification (OTS) on a permanent basis is another positive. It will advise the Government on how to deliver a simpler tax system.
The government will also consult in autumn 2015 on abolishing Class 2 NICs and reforming Class 4 NICs.
When it comes to individual taxation the Chancellor is committed to ensuring that people keep more of their hard-earned cash in their pockets.
As tipped he outlined plans to legislate a tax lock which would set a ceiling for the main rates of income tax, VAT and NIC. In short they will not exceed 2015/16 levels in the life of this Parliament.
Further good news for workers came with a planned rise in the tax-free personal allowance from £10,600 to £11,000 next year. This is part of a longer term aim to increase it to £12,500 by 2020 so it is likely that another climb may come next year.
The higher rate tax threshold, 40%, also climbs from £42,385 to £43,000 from next year. Again the longer term aim is to have a £50,000 threshold.
‘Non-doms’ however were in the Government’s cross-hairs, with those resident in the UK for over 15 of the last 20 years becoming obliged to pay full UK taxes on worldwide income and gains from April 2017.
Property also saw significant tax changes. The Government will retain mortgage interest relief for landlords on residential property but this will now be restricted to the basic rate of income tax.
However home owners renting out their attics or spare room to a ‘Roger the Lodger’ will be able to earn £7,500 tax-free from them each year.
Perhaps more striking were the changes to Inheritance Tax. From 2017 there will be an extra £175,000 inheritance tax allowance for those who leave their homes to their children or grandchildren, on top of the £325,000 standard inheritance tax allowance currently.
The threshold and new allowance are both twice as high for married couples and civil partners, meaning they will now be able to inherit up to £1million tax-free from each other.
Changes to pension taxation were also significant. Those earning over £150,000 will have their tax-free contributions allowance tapered away from its current £40,000 per year to a minimum of £10,000. The Government is also consulting on a novel ISA-style pension where savers would pay tax on the income they put in but not when they take it out.
This was a more complex and varied Budget than expected. Businesses and individuals, circumstances permitting, will welcome many of the changes but certainly for SMEs and owner-managers it may be worth spending more time than usual poring over the details to get a true grasp of the tax and regulatory changes.
Well… what else are summer evenings for?!