With the last Conservative Budget delivered by Kenneth Clarke on the 26th November 1996, the ‘Emergency’, or Summer Budget without doubt was going to see the Chancellor make his mark and affirm the Government’s electoral mandate. At just over an hour long, the Chancellor’s speech certainly did that, with declared aspirations to see the UK economy as being the most prosperous economy in the developed world by 2030.
George Osborne has set out to deliver a ‘Big Budget for Big Ambitions.' His focus is on creating a country where we have high wages, low welfare and low taxes along with a budget surplus in normal times and not least by 2019/20.
What then were the highlights or headline grabbers in the Chancellor’s statement?
1. The introduction of the National Living Wage of £7.20 per hour - to be introduced from April 2016 for those over 25 years of age. This rate will increase to £9 an hour by 2020. It is estimated that some 2.5million people will now benefit from this ‘pay rise’.
2. Reform to dividend tax - as part of a drive to target tax motivated incorporations, the Chancellor announced the introduction of new rates of tax on dividends received from shares. The current dividend tax credit, which reduces the amount of tax paid on income from shares, will be replaced by a new £5,000 tax dividend allowance for all tax payers. The rate of tax on dividends received over this allowance will increase to 7.5%.
3. Changes to Inheritance Tax (IHT) with the introduction of the family home allowance - the Budget included the introduction of a family home allowance to provide increased tax relief for couples seeking to pass down the family home. For a couple this will mean that the combined threshold for IHT will now go from £650,000 to £850,000.
4. Annual Investment Allowance (AIA) not to be cut - as part of a drive to improve UK productivity the Chancellor announced that the proposed reduction of the Annual Investment Allowance from the current rate of £500,000 per annum to £25,000 per annum by the end of the year, will not now take place. Instead, he will introduce a new rate of £200,000 for 2016 and subsequent years.
5. Buy to let Landlords to be hit by changes to tax relief on mortgages - the Chancellor announced that tax relief on mortgage interest is to be restricted to basic rate tax from April 2017. Certainly, higher rate tax payers until now have benefited from tax relief at the higher rate too. Whilst many investing in Buy to Let may do so for the capital growth attained, this announcement may give rise to the need to consider the viability and associated costs of individual investments or property portfolios.
6. Pension changes are likely to affect all but certainly those with income of more than £150,000 - we still await the wider consultation being carried out in relation to pension savings. However, the Budget included the announcement that from April 2016 those earning more than £150,000 will see the amount that they can contribute into their pension in any one tax year reduced from £40,000 to £10,000. It may be the case that those affected might seek to enhance the level of their contributions in the current tax year, or look at remuneration planning to reduce their income so as not to lose the relief available.
7. Even lower rates of Corporation Tax (CT) - Incorporated businesses in the UK have for sometime benefited from some of the lowest rates of CT both in Europe and the rest of the world. The announcement to cut rates even further to 19%in 2016 and 18% in 2020 will no doubt be even more welcome. The cut will also help to make the UK even more attractive for inward investment by overseas companies. The new CT rates might also make it more attractive for those that trade as a sole trader or in a partnership, depending on their level of profits, to consider incorporating and trading as a limited company.
8. The Employment Allowance to increase by £1,000 to £3,000 - employers will benefit from an increase in the Employment Allowance from £2,000 to £3,000 in April 2016. The Employment Allowance in essence gives businesses and charities alike a cut in the employer National Insurance they pay.
9. Finally the Budget included a proposal to give freedoms through devolved powers to major towns and cities, through the election of mayors, to extend opening hours on Sundays. The Chancellor may believe that such an approach could see increases in consumer spending, given the nations’ pre-occupation with the leisure activity of retail therapy.
Will the announcements in the ‘Emergency’ Budget 2015 give the economic prosperity the government aspires to? Only time will tell. Much of it will be dependent on the UK plc achieving the new levels of productivity and a global competiveness. Whether the Budget addressed the innovation and skills gap that needs to be breached to achieve this is debatable. There is still a great reliance on re-balancing the economy, a task which will undoubtedly see further pressures on the public sector, in terms of cost efficiencies.
The timing of an ‘Emergency’ Budget like this can often, not least with Parliament about to go into summer recess, enable a Chancellor to make announcements which might be less favourable or palatable, given the electorates thoughts and focus around their own summer holiday. As ever though, the accounting and tax profession will be working hard to understand the implications of the first Tory Budget in nearly 20 years and its impact on businesses and private clients.
In addition to this summary, further information, including a detailed Budget Report, Tax Rates and Allowances for 15/16 and video commentary on the key announcements can be found by visiting our website www.streetsweb.co.uk. New tax rates and tax calculators are also available by downloading our app Streets iAccountant.
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