2015 Summer Budget
Victoria Bishop and Brett Bennett, robinson+co’s Tax Partner and Tax Manager respectively, give their unique resumé of the 2015 Summer Budget.
“Gosh, that was a humdinger,” says Victoria as she takes a deep breath after the first Tory Budget since the 1990s. The Chancellor came up with a lot that was expected, but also a few surprises, not least the change to the taxation of dividends.
“This is likely to upset the long standing practice of small and micro limited companies remunerating their shareholders and directors by a low salary and topping up with dividends. Over the next few days, the robinson+co team will be putting a lot of figures to the test to ensure that our clients are affected as little as possible,” continues Victoria.
Another surprise was the lack of news about national insurance contributions – it was widely expected that there would be changes to national insurance contributions paid by the self employed but apart from increasing the Employment Allowance (available to employers) to £3,000 from April 2016 this area was not mentioned – and nor was VAT.
However, even the expected announcements aren’t straightforward – such as the precise rules for the new Inheritance Tax regime, and how the new rules for tax relief on interest payments will work in practice.
If you have any queries about any of the issues around the Summer Budget please get in touch with your normal contact at robinson+co, or Victoria or Brett on firstname.lastname@example.org and email@example.com.
As expected the Personal Allowance will increase to £11,000 from 6 April 2016 with the higher rate threshold edging up to £43,000 at the same time. The government’s plan is for the two amounts to be £12,500 and £50,000 respectively by 2020. From April 2017 the Personal Allowance will be £11,200, suggesting a £200 increase per year until the end of the government, and the higher rate tax threshold £43,600.
A major consequence of the increase in the Personal Allowance is that it causes “age allowances” to disappear. No matter our age, we will now all get the same personal allowance; in turn this means that many people aged over 75 will no longer have to complete an annual tax return. The Tax Team will be ensuring that our clients are removed from the tax return system as appropriate.
Major reform to the taxation of dividends
With the current system of taxing dividends being described as “arcane”, the Chancellor has done what many before have indicated they would do, but never delivered; made a major reform to the taxation treatment of dividends.
Under the old regime, dividends, along with basic salary (up to the personal allowance), could be remitted to individuals with no additional tax charge personally, if together they totalled less than the basic rate limit (currently £42,385). This made it very attractive for small businesses to incorporate, and remunerate their shareholders via dividends.
However, with effect from April 2016, the Chancellor will introduce a new allowance which will treat the first £5,000 of dividend income as tax free, and introduce a tax rate chargeable on the balance of the dividends exceeding £5,000.
The tax rate charged will vary depending on the level of income received by the individual, but basically the rates charged will be:
Basic Rate – 7.5%
Higher Rate – 32.5%
Additional Rate – 38.1%
By the Chancellor’s own admission, this will reduce the incentive to incorporate and remunerate through dividends, rather than salary, to reduce tax.
These rules appear to be quite complex and further guidance is still to follow, but preliminary calculations indicate that this could mean that most owner managed businesses who remit remuneration up to the basic rate, will see an additional tax charge of approximately £2,000 per year per individual, and potentially an introduction into the Payments on Account regime for personal tax.
The Chancellor announced in his budget speech that he had successfully reduced the main corporation tax rate from 28% down to 20% over the last term of Government, and made a point that it couldn’t go any further. However, he then went on to announce that the main company tax rate will be reduced again from April 2017 to 19%, with a further reduction from April 2020 to 18%.
However, it appears that the small profits rate – which has traditionally been less than the main rate – will remain at 20%.
The majority of limited companies in the UK pay corporation at the small profits rate and so the impact of the change will be limited to the 1.1 million larger companies; this seems to be aimed at attracting multi nationals (back) to the UK.
Goodwill on Incorporation and Intangible Assets
Back in the March Budget, the Chancellor introduced some “Anti Avoidance” rules around the tax relief on Goodwill. He has now taken those rules one step further, whereby – with immediate effect - companies will no longer get a tax benefit from the reduction in value of “acquired goodwill” and intangible assets. This is in fact a return to the original treatment from prior to 2002.
The published guidance does indicate that these reforms will only apply to new goodwill (and intangible assets) acquired after 8 July 2015, but we will wait to see if the measures go further than they appear at first glance.
If you have any queries about this please contact David Plaskett our Senior Partner on 01900 603623.
Annual Investment Allowance
As previously mentioned in our earlier budget summaries, the Annual Investment Allowance is reducing from £500,000 on 1 January 2016. Some sources had tipped a reduction to £50,000, or potentially £100,000 so as to ensure that tax relief for capital investment still continued for businesses. However, the Chancellor exceeded everyone’s expectations by only decreasing the allowance (with effect from 1 January 2016) to £200,000.
The positive side of this announcement is that most businesses will still be able to fully utilise their capital investment budgets, without concern for falling foul of potential timing issues as previously announced on robinson+co’s news feed.
For what feels like the 10th budget in a row, the Chancellor has announced that he will engage with key stakeholders on how to improve the effectiveness of existing “intermediaries” legislation. In addition, the consultation process will also incorporate a review of the rules that allow tax relief on travel expenses of personal service companies.
This has the original feeling of “not again” when it was announced, but together with the reform to the taxation of dividends, it could be an interesting time ahead.
As mentioned above the Employment Allowance is being increased to £3,000 for 2016/17. This means that employers get a reduction in their employer’s national insurance contributions due. Where robinson+co deal with your payroll, this allowance will be claimed automatically but if you have any queries please contact Christine Smith, Deirdre Chestney or Helen Atkinson for further information.
However, from April 2016 businesses will not be able to claim this allowance where the only employee is also the director. We will need to read the legislation carefully to see if this applies to situations where there are more than one director-employee.
National Minimum Wage (“NMW”)
"A rose by any other name would smell as sweet" says Juliet in Romeo and Juliet, but it remains to be seen whether this principle will apply to what is effectively the renaming of the NMW to “National Living Wage.” From April 2016 employers will have to pay people aged 25 and over a premium on the NMW – based on the October 2015 rates this will be 50p per hour above the NMW. This increases the NMW to £7.20 an hour and the NLW should be £9 per hour by 2020.
In addition the government aims that people working 30 hours at the NMW will not have to pay tax – this will be achieved by increasing the Personal Allowance as above.
In the opinion of the Office for Budget Responsibility this increase to wage rates will have only a “fractional” effect on the availability of jobs.
Again, an advantage of using robinson+co to deal with your Payroll is that we ensure you comply with rules such as these, but please contact Helen, Deirdre or Christine as appropriate.
There were a few changes to the taxation of rental income which will affect a lot of people – although to be more accurate it’s the tax consequence of certain expenditure that is changing:
- Interest on loans taken out to purchase a let property has always been an allowable expense for tax purposes. Whilst this rule is not changing, the relief will be given at 20% only so higher rate taxpayers will have a higher tax liability. This change is to be brought in over 4 years starting from April 2017
- There will be changes to the “Wear & Tear Allowance” whereby the landlords of furnished accommodation receive a tax allowance for furnishings every year even if they do not make any purchases. From April 2016 actual costs only will be deductible.
Please note that there is no change to the rules regarding furnished holiday lettings, where such expenditure is relieved through the Capital Allowances regime.
However there is a welcome change to the “Rent-a-Room” scheme: from April 2016 home owners can earn up to £7,500 per year from lodgers in their main home.
Please contact Victoria on 01900603623 if you have any queries about the taxation of rental income.
The Chancellor took great delight in fulfilling one manifesto promise on inheritance tax: he is introducing an extra inheritance tax allowance for a residence passed on to children or grandchildren on death.
The allowance will be phased in as follows:
To increase in line with CPI
The flip side of this is that the nil rate band is to remain at £325,000 until April 2021, although by taking account the residence relief, at this point an estate including a residence passed to descendents will pay no inheritance tax until it is worth more than £500,000 (£1million for a married [or civil partner] couple – the magic figure so beloved by the Tories).
Both the nil rate band and residence relief can be transferred to a surviving spouse if not utilised in full.
In addition it should be noted that if an estate is worth more than £2million in total, then the residence relief will be withdrawn at the rate of £1 for every £2 above £2million.
There continues to be lots of changes in this area.
Firstly a consultation was announced which will look at various changes to pension plans and savings.
Secondly, as previously announced the Lifetime Allowance will decrease to £1million on 6 April 2016 and after that it will increase annually in line with CPI.
Thirdly, tax relief available on pension premiums made will be restricted for those earning over £150,000 per year. The relief will be restricted by reducing the Annual Allowance to £10,000 only as your income rises. The Annual Allowance for others remains at £40,000 per year.
For years there have been restrictions on the amounts that can be invested into your personal pension but these restrictions have been based on “rolling” input periods. With input periods showing no resemblance to the actual tax year, it has made it difficult for individuals to know when, and how much they can deposit.
These periods have always been known as a “PIP” – a pension input period and we cannot ignore the opportunity to say how this area does indeed give you the pip!
With immediate effect, the Chancellor has announced that rules will be in place to deem that all pension funds open as at 8 July 2015, will have a closure to the their pension input period (i.e. period that you can fully utilise your pension contribution allowance). A new input period will start on 9 July 2015 and run to 5 April 2016, where it will also cease, and then all future periods will run from 6 April, to the following 5 April.
As ever robinson+co’s financial services team is here to guide you through these changes, and ensuring that you don’t inadvertently exceed the annual allowance with these changes. Pension advice is a highly regulated and complicated area and it is imperative that you get advice from our highly qualified and highly experienced Chartered Financial Planner, Jenny Armstrong. Please contact her on firstname.lastname@example.org.
Welfare Payments & Tax Credits
robinson+co does not give advice on social security benefits but this Budget is so intricately linked to the £12billion of welfare savings that has been trumpeted by the media that it would not be possible to ignore this area.
In particular the changes from April 2016 to Tax Credits – based on your taxable income and administered by H M Revenue & Customs – are worth noting:
- The taper rate will be increased from 41% to 48%. This is the rate at which the tax credits decrease once your income exceeds the income threshold
- The income threshold itself is decreasing from £6,420 to £3,850
- The income disregard is decreasing from £5,000 to £2,500. This is the amount of income increase that can be ignored before deciding if any Tax Credits should be repaid
- From April 2017 a third or subsequent child will not lead to an increase in Tax Credits. There is an exception here for children born as a result of “rape, or other exceptional circumstances” but the mind boggles somewhat as to how this will work
- There will be no increase to the rate of Tax Credits until at least 2020/21.
If you have any queries about Tax Credits please contact Helena Clarkson on 019467 25808.
As ever, there were measures to target ”tax avoidance, planning and evasion” (direct quote of news release at https://www.gov.uk/government/news/summer-budget-2015-key-announcements), including £750million allocated H M Revenue & Customs for this work – the aim is that this investment will bring in £7.2billion in extra tax.
Non domiciled individuals
Again it felt like the Chancellor has had the shackles of a coalition government released, with the announcement of significant changes to the taxation of Non Domiciled individuals, for both income tax and Inheritance Tax. (Although, interestingly the Guardian called this announcement Ed Miliband’s legacy!) The overwhelming intention is that if someone lives in the UK for an extended period of time, then they should pay UK tax.
This has been achieved by altering the rules on the determination of how someone is deemed to be domiciled in the UK. That is, individuals that have resided in the UK for 15 out of the last 20 years will be deemed to be domiciled in the UK and will therefore be taxed on all foreign income and capital gains, and Inheritance Tax charged on all worldwide assets, regardless of whether the income is remitted to the UK. These new rules will apply from April 2017. (There has always been a rule about Inheritance Tax and non domiciled individuals but 17 years out of 20 was been the trigger factor.)
These reforms mean that the £90,000 remittance basis charge will now become redundant, although the £30,000 charge (for under 7 years residence in the UK) and £60,000 charge (for 7 – 15 years residence) remain in place.
Added to the rules are changes to the ability for individuals to elect for non-domiciled status when they leave, with a period of 5 years needing to pass before they can adopt the status, regardless of whether they can demonstrate a severing of all ties to the UK at the point of departure.
As ever the Budget encompassed a myriad of other measures, not necessarily accountancy or tax issues and these include:
- 30 hours free childcare for 3 and 4 year olds from September 2017
- Changes to the VED system, changing it back into a “Road Fund Tax,” and levelling the playing field when it comes to the rates charged for new and older vehicles
- As expected, the BBC will have to fund the free TV Licences for the over 75s
- There will be funding for “Transport in the North” – but as the North seems to be limited to Manchester, who knows if Cumbria, let alone West Cumbria, will benefit
- Changes to student funding
- Increase of Insurance Premium Tax to 9.5% from November 2015
As ever, please do not hesitate to contact Victoria Bishop or Brett Bennett on 01900 603623 or email@example.com / firstname.lastname@example.org for further information on any matter arising from the Summer Budget.
So, do we have a Budget for a “lower welfare, lower tax, high wage” Britain? It certainly appears that the National Living Wage has taken the sting out of the welfare cuts which is making it difficult for the government’s opponents to criticise – although some are pointing out that statistics show that the living wage in London is already £9.25. Equally, while the Daily Mail is applauding a new “Georgian Age,” it is also querying how the 3 children rule will work with an example of someone who has no children with her partner – but he has three children from a previous relationship.
From the tax point of view the Budget is going to lead to some interesting calculations: will incorporation become less popular with the new dividend rules or will the non tax advantages trump the new tax disadvantages.
The answer will depend on each individual business and the circumstances of its owners and we at robinson+co look forward to working with you to ensuring you and your family get the best deal possible.
- These notes are not a full resume of the Budget Report issued on 8 July 2015
- All care has been taken in preparing this material. However no responsibility can be accepted for any losses arising to any person acting or refraining from acting as a result of this material
- Any comments are those of Victoria Bishop and Brett Bennett and do not necessarily reflect the views of robinson+co.