While the second Budget of 2015 produced few surprises as far as personal taxes are concerned, there are some notable changes for businesses.
Below is a summary of key items of interest announced by George Osborne in his Budget speech on 8 July 2015.
Personal Tax Announcements
- The amount people with an income of more than £150,000 can pay tax-free into a pension will be reduced.
Most people can contribute up to £40,000 a year to their pension tax-free. From 6th April 2016, this amount will be reduced for individuals with incomes of over £150,000, including pension contributions. The Annual Allowance will be tapered away to a maximum of £10,000.
- Income tax threshold increases; rates remain the same.
The 40% rate threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
- The tax-free Personal Allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016.
- Reforming dividend tax.
The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Tax rates on dividend income will be increased.
This system will mean that only those with significant dividend income will pay more tax. Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe.
- The standard rate of Insurance Premium Tax will increase to 9.5%.
From November 2015 the standard rate of Insurance Premium Tax will be increased from 6% to 9.5%. Households’ insurance prices are falling and the standard rate remains lower than that of many other EU countries.
Inheritance Tax Announcements
- Taking the family home out of Inheritance Tax.
Currently, Inheritance Tax is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another.
From April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18.
The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21.
The allowance will be gradually withdrawn for estates worth more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
The nil rate bad remains frozen at £325,000 until 2021.
- Trusts and IHT.
Individuals will no longer have the advantage of multiple nil rate bands by creating multiple trusts but they will be able to settle property up to the value of the nil rate band into trust every seven years.
- Restricting tax relief for wealthier landlords.
Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.
Non-Dom Status Changes
A detailed consultation document will be published later this year and will form part of the 2016 Finance Bill.
- Ending permanent non-dom status.
Permanent non-dom status will be abolished from April 2017. From that date, anyone who’s been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for all tax purposes.
In addition, those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country.
These reforms mean that the £90,000 remittance basis charge payable by those who have been resident for 17 out of 20 years will be redundant as such persons will be taxable on an arising basis after 15 years. The £30,000 and £60,000 remittance basis charges remain unchanged. The government will consult on the need to retain a de minimis exemption beyond 15 years where total unremitted foreign income and gains are less than £2,000 pa.
- Inheritance Tax will be charged on UK properties held in off-shore companies from April 2017.
Business Tax Announcements
- National Living Wage and National Insurance.
From April 2016, the government will introduce a new National Living Wage (NLW) of £7.20 per hour for workers aged 25 and over (the current National Minimum Wage (NMW) is £6.50). It is planned that the NLW will rise annually over the next five years until it reaches a target of 60% of median earnings, or £9, by 2020. Workers aged under 25 will continue to be subject to the NMW.
To offset the higher costs this will mean for some employers, from April 2016 the National Insurance contributions Employment Allowance will rise from £2,000 to £3,000 a year. Simplification of National Insurance contributions is to be considered.
- Corporation tax.
The rate of corporation tax will be cut from the current 20% to 19% in 2017 and 18% in 2018.
There are two other changes to the corporation tax regime. With immediate effect, the acquisition costs of assets related to the reputation and relationships of the business will no longer be deductible from a company's taxable profits. And from April 2017, companies with annual profits exceeding £20 million will have to pay their corporation tax every three months, rather than waiting until the seventh month of their accounting year.
The Annual Investment Allowance, for qualifying investment in plant and machinery, will be raised from £25,000 to £200,000 from 1 January 2016.
- Bank taxation.
There are various changes to the way in which banks are taxed: a new tax on bank profits at 8%, from 1 January 2016; a reduction in the bank levy rate from 0.21% to 0.18% from 1 January 2016, with further staged reductions to 0.10% from January 2021; and a change in the scope of the levy so that, from January 2021, it will apply to banks’ UK balance sheet liabilities. Payments made to the Eurozone Resolution Fund will attract relief from the bank levy from 1 January 2016. Compensation payments made by banks will no longer be deductible from the profits subject to corporation tax.
- Improving tax recovery.
Various anti-tax-avoidance measures are to be introduced. Rules will be changed so that, with effect from 8 July 2015, companies will not be able to offset losses against tax payable under the Controlled Foreign Companies (CFC) regime.
With immediate effect, carried interest on investment funds will be subject to capital gains tax at 28%. A consultation will examine to what extent fund managers' performance-related returns should be subject to CGT.
A further consultation will aim to increase the effectiveness of the IR35 regime in ensuring that individuals working through their own limited company pay appropriate tax and National Insurance contributions.
From April 2016, companies whose director is the sole employee will no longer be eligible for Employment Allowance in respect of National Insurance contributions.
- Other business tax changes.
There will be a consultation on the rules for company distributions. Changes to the taxation of corporate debt loan relationships and derivative contracts will be introduced.
Disposals of trading stock and intangible assets other than in the normal course of business will be taxable at full open-market value.
The changes to the Enterprise Investment Schemes and Venture Capital Trusts announced in the spring budget but not included in the spring Finance Act will be included in the summer Finance Bill.
The Office of Tax Simplification will be put on a statutory basis; among its future tasks will be a review of the way in which small businesses are taxed.
A roadmap of the government’s plans for business taxes over the remainder of the Parliament will be published by April 2016.
Investment, Infrastructure and the Regions
- Investment in transport.
The various rates of vehicle excise duty (VED) will be simplified and, from 2020–21, all monies raised from VED in England will be spent on road improvements, by way of a new Roads Fund. A second Road Investment Strategy will be published by the end of the Parliament.
There are changes to the way in which the railways are financed, with more power devolved to Network Rail’s route managers, funds to be provided through the train operating companies, and a greater focus on realising value from station redevelopment. A longer-term review of Network Rail’s financing will report by next year’s budget. Up to £20 million will be made available in a further round of the New Stations Fund.
- Other investment.
A consultation on the business energy efficiency tax regime will be held in the autumn of 2015. The North Sea investment and cluster area allowances will be expanded, and the Climate Change Levy exemption for renewable electricity removed.
A levy on large employers will fund an increase in the number of apprenticeships to 3 million during the Parliament.
£23 million will be invested in six Next Generation Digital Economy Centres.
- Investment in the regions.
Further devolution deals are being negotiated for the City Regions of Sheffield and Liverpool and for Leeds and West Yorkshire, and bids are invited for a new round of Enterprise Zones.
The Northern Powerhouse will be developed by putting Transport for the North on a statutory footing, with devolved powers and funding to introduce oyster-style smart ticketing across the region and improve trans-Pennine connections.
Extensions to the Midland Metro are planned, and it is hoped to extend the Birmingham Enterprise Zone. Projects supported by the New Stations Fund will include bids for stations at Edwinstowe and Ollerton, which would be served by a new branch of the Mansfield–Worksop line.
In the East of England, support will be given to reducing journey times on the London–Norwich line and to dualling the A120 between Braintree and Marks Tey.
In the South West, planned improvements include developing business cases for the North Devon Link Road and the A391, and proposals for a new station between Taunton and Castle Cary. £10 million will be provided for broadband improvements. It is hoped to reform EU law to enable greater support for small cider makers.
In London, £4 million is to be invested in a UK Regions Digital Research Facility. In the South East, improvements to rail services to Ramsgate, Rye and Hastings are planned, along with an expansion of the Lewes–Uckfield route study to examine connections between London and the south coast more generally.