2015 Summer Budget
As you probably expected, there were a lot of changes in the Summer Budget, many of which will affect some or all of your clients.
Check the details below, but some of the highlights are:
- an increase in the minimum wage employers must pay
- significant changes in the taxation of dividends
- reduction in the pension Annual Allowance for high earners
- a brand new Nil Rate Band linked to the value of the home
- further staged reductions in Corporation Tax
- an increase in the Employment Allowance
There are also, again as expected, several measures to reduce tax avoidance. I will not refer to some of the more intricate schemes that have been attacked, but some which may be of interest to your clients are:
- preventing a one man band from benefiting from the Employment Allowance
- reducing the tax benefit of incorporating, by disallowing goodwill from the sole tradership to be factored into the incorporation as a tax deductible cost
- a possible attack on putting the home into trust on death
- favourable tax status for non-doms will be removed once they are regarded as permanently resident
- possible future attacks on the favourable Income Tax and National Insurance position of salary sacrifice, travel and subsistence expenses, and termination payments
National Minimum Wage will continue for workers up to age 25, but from April 2016 a more generous National Living Wage will be introduced for those over 25. This is National Minimum Wage in all but name.
As previously announced, the National Minimum Wage will increase from £6.50 to £6.70 in October 2015, but will be replaced in April 2016 by the National Living Wage of £7.20.
The government’s aim is for National Living Wage to reach 60% of median earnings by 2020, which is forecast to be over £9. The estimated cost of this to employers, according to the OBR, is just over 1% of profit.
One of the ways the Low Pay Commission expects companies to recoup this is through increasing prices. This might be a good time for your clients to consider increasing their prices, even if they do not have staff on minimum wages and therefore are not impacted by this, especially if other businesses start doing so.
Income Tax & National Insurance
The Personal Allowance will increase to £11,000 in April 2016 and £11,200 in April 2017. The government’s stated aim is to increase it to £12,500 by the end of this parliament and then to maintain it at the equivalent of at least 30 hours per week on National Living Wage.
The Higher Rate Band will start at £32,000 in April 2016, increasing to £32,400 in April 2017 and £37,500 by the end of this parliament.
From April 2016 there will be a new Dividend Tax Allowance of £5,000, which means any dividends received up to this amount will be tax free. The previously announced £5,000 Starting Rate for savings income will still apply where total income over allowances does not exceed £5,000.
It seems from the wording that it would be possible for your clients to have both £5,000 dividends and £6,000 savings interest (covered by the Starting Rate and the £1,000 Personal Savings Allowance) as well as £11,000 earnings (covered by the Personal Allowance) tax free. This is a total of £22,000. I am making this assumption because the rules for the Starting Rate refer to income in excess of “allowances” and the new Dividend Tax Allowance should therefore come within this exemption. However, I have not yet seen the small print and have been unable to obtain confirmation of this. In the Budget Report a total potential tax free figure of £17,000 is quoted, which means the Treasury has not taken account of the Starting Rate in the calculation, and I would have expected them to provide the most favourable figure if it were possible.
Check out my blog article showing how a couple could have up to £56,200 a year completely tax free. This article takes account of the Summer Budget figures, but I have been very conservative and assumed in the article that a taxpayer will not be able to take advantage of both the Dividend Tax Allowance and the Starting Rate. The actual figure could therefore even be £66,200! Have a read of the article which I believe would interest many clients.
I will continue researching this point and will send out an advisory e-mail when I get a definitive answer. Make sure you do not miss this e-mail if you do not already subscribe – you can request to receive it here.
If dividends exceed the £5,000 Dividend Tax Allowance the excess will be taxed at 7.5% for Basic Rate taxpayers. Higher Rate taxpayers will pay 32.5%. Additional Rate taxpayers will pay 38.1%. These changes mean clients who are shareholding directors should re-visit the calculations to see whether they should extract profit from the company through bonuses or dividends. Tax is not the only factor in such a decision, but as the tax has changed, so might the decision.
Rent-a-Room relief will increase from £4,250 to £7,500. Many clients would not wish to take in a lodger in order to gain tax free income, but probably most of your clients are unaware there are other ways of using this relief. As I have outlined in a previous blog, there is nothing in the legislation stopping you from renting out part of your house (perhaps most of it) to someone as a holiday let while you too are on holiday somewhere else. Now that the relief has increased this may be something worth discussing with some of your clients, especially if their house is in a very desirable location or might be of particular interest to holidaymakers for other reasons.
Consultations on Personal Tax
There will be a consultation with businesses to try to make IR35 tougher. Any of your consultant clients who have so far managed to avoid the IR35 provisions should be alerted to the possibility this may soon change.
The government will consult on simplifying the tax and NI treatment of termination payments and travel and subsistence payments. I am cynical enough to believe that “simplifying tax” probably means “increasing tax”.
The government will look at salary sacrifice schemes and may restrict them further. Watch this space!
The Annual Allowance for pensions, currently at £40,000 if your clients have not yet used flexible access with their pensions, will be tapered down to £10,000 depending on their taxable income. The taper will start at £150,000 and will be £1 for every £2. The definition of income for this purpose is a little convoluted. If their income is £110,000 or below their Annual Allowance will not change. But if it is over £110,000 they must then also add pension contributions, whether made personally or by their company, to determine whether they are over the £150,000 threshold in which case the taper applies.
If they have a very high income this means the Annual Allowance change to £10,000 will no longer be a disincentive for flexible pension access. You may therefore wish to review any advice you have given high earner clients on this matter.
The government will consult on the high charges made by some providers when pensions are switched. They may look at imposing a charge cap where the pension holder is over 55. This could be good news for advisers who do a lot of pension switch business. You should note that if you are in this market, or would like to move into it, Adviser Breakthrough Software can provide you with a very powerful tool which will help you determine whether or not a pension switch is best advice for your client, as well as providing all the documentation you need to present your advice compliantly to the client.
There will also be a consultation on radical reforms to pensions, including the possibility of making them work more like ISAs. Clients should be encouraged to invest what they can now in their pensions in case the tax relief is removed.
The £325,000 Nil Rate Band will stay unchanged until at least April 2020.
However, there is now an additional Nil Rate Band called the Residence Nil Rate Band. This applies to the value of your client’s home, as long as that value is passed on to their direct descendants. Note it is the value of the home that has to be passed on, not the home itself (although the latter would also count). The very wealthy will not receive the Residence Nil Rate Band, as there will be a tapered withdrawal once the estate value including the home exceeds £2,000,000.
To make this more liberal (but rather more complicated) it doesn’t even have to be the value of the last home they lived in. They can sell their home and either downgrade or live elsewhere (for example rental accommodation or a nursing home), and the higher value of the “original” home will count for this purpose. There are no details yet on how exactly this will work (how many years or house sales you can go back, for example).
This may be bad news for those of us advising clients on putting their home into trust, depending on how the provisions are worded. It could mean they would lose this new Nil Rate Band completely! This is not entirely clear yet. I will send out an advisory e-mail when I get a definitive answer. Make sure you do not miss this e-mail if you do not already subscribe – you can request to receive it here.
The Residence Nil Rate Band is being introduced in stages – £100,000 in April 2017, £125,000 in April 2018, £150,000 in April 2019 and £175,000 in April 2020. This means the total Nil Rate Band available to a couple in 2020 will be up to £1,000,000, depending on the value of their home. That was the headline from the Budget, but for an individual it will be £500,000 in 2020, and next year just £425,000. Perhaps we should be advising all our clients to get married and not to die before 2020!
Corporation Tax will drop to 19% in 2017 and 18% in 2020.
The Annual Investment Allowance, which allows businesses to claim 100% of their expenditure on qualifying investments in plant and machinery, will be increased or reduced, depending on how you look at it. Currently it is £500,000 and will remain at this figure until December 2015. The budget announcement is that it will then “increase” to £200,000. The reason this is an increase is that the original plan was to reduce it back to £25,000.
The Employment Allowance will increase from £2,000 to £3,000 in April 2016. This allowance reduces the amount of Employer’s National Insurance you have to pay. For many employers the higher figure will mean they pay no Employer’s National Insurance at all. This allowance will no longer be available where the owner of a company is also its only employee.
From 8th July there will be a restriction on Corporation Tax relief for the purchase of goodwill. Many sole traders and partnerships benefit by selling the goodwill in their business to the new company they set up when they incorporate. Whilst the new measure should not stop this, and it is still a tax benefit for the individual, the company will no longer benefit from a tax break on top of this.
Buy to Let Businesses
From April 2017 mortgage interest relief for landlords of residential properties will be restricted to basic rate tax. The restriction will be phased in over 4 years. There is no change to commercial property mortgage tax relief.
From April 2016 the Wear and Tear Allowance will be withdrawn. Landlords will still be able to deduct the actual costs but will not be able to deduct 10% regardless of those costs.
Insurance premium tax will increase by over 50% (6% to 9.5%) from 1st November 2015.
The annual Vehicle Excise Duty on all cars registered after 1st April 2017 will be £140 (but zero if there are no CO2 emissions). The first year duty will be on a sliding scale from zero to £2,000 depending on emissions. This duty will be hypothecated to strategic road investment from 2020. The new rates of duty will change the calculations of whether it is more efficient to buy or hire a car personally or through the company so you may wish to re-visit this calculation with your clients.
Taxpayers will no longer be treated as “non-doms” if they have resided in the UK for at least 15 of the last 20 years. Non-doms will also no longer be able to envelope UK property in an offshore structure and avoid Inheritance Tax on this property.
Claims Management Companies regulation is going to be reviewed in early 2016. The likelihood is that this regulation will be tighter, which may ease some of the problems financial advisers have sometimes had to face from the operations of these companies.
There will be changes to tax advantaged venture capital schemes restricting further the companies that can benefit from them and prohibiting the use of VCT or EIS in conjunction with management buyout schemes. The government will also look carefully at renewable energy VCTs with a view to stopping tax relief on the more abusive schemes.
From April 2016. maintenance grants for students will be replaced with loans, and from April 2017 some universities will be allowed to increase their fees in line with inflation. Clients with young children may need to consider increasing the investments they are making to allow for university education.
The rule allowing withdrawal and replacement of cash in an ISA without this counting towards the annual subscription limit will be extended to stocks and shares ISAs from April 2016.
Finally, unfunded EFRBS (employer financed retirement benefit schemes) may be coming under attack.