The chancellor George Osborne gave his Summer Budget report on 8 July 2015. It was certainly not a budget for smaller businesses. The big headline was his raid on small business owners by introducing a new dividend tax.
Here is a summary of the key points. These matters need to be formally enacted to become law and most should be included in the Finance Bill 2016. Some will have immediate effect from 8 July 2015 and others from 6 April 2016.
Personal Allowance increase
The Government will increase the income tax personal allowance from £10,600 in 2015-16 to £11,000 in 2016-17. It will increase to £11,200 from 2017-18. These increases are larger than those announced in the Spring Budget and therefore move the Conservatives closer to their manifesto pledge to raise the personal allowance to £12,500.
The personal allowance is the amount of personal income (e.g. from salary, self-employment, dividends and interest) that can be earned before somebody pays income tax.
The Government is also proposing that once the personal allowance has reached £12,500, it will be uprated in line with the National Minimum Wage (NMW), ensuring that anyone on the NMW working 30 hours per week or less will not pay income tax. Prior to the personal allowance reaching £12,500, the Chancellor will have a legal duty to consider the level of the NMW in setting the personal allowance.
High Rate Threshold increase
The Government will increase the higher rate threshold from £42,385 in 2015-16 to £43,000 in 2016-17 and to £43,600 in 2017-18. The National Insurance Contribution (NIC) Upper Earnings Limit will also increase to remain aligned with the higher rate threshold. The Conservatives pledged in their manifesto to raise the higher rate threshold to £50,000 by 2020.
Tax on Dividends
The Government will abolish the dividend tax credit from April 2016 and introduce a new Dividend Allowance of £5,000 pa. The new dividend tax on dividend income above £5,000 will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The changes appear to be aimed at small limited companies that pay a small salary designed to preserve entitlement to the State Pension, together with a much larger dividend payment in order to reduce National Insurance costs. We have produced a special publication on the dividend tax.
Corporation Tax rates
The Government will reduce the corporation tax rate from 20% to 19% with effect from 1 April 2017 and 18% with effect from 1 April 2020.
Capital Allowances – Annual Investment Allowance
The present temporary rate of the capital allowances annual investment allowance is £500,000 per annum, though, this was due to revert to its permanent rate of £25,000 with effect from 1 January 2016. The permanent level will now be raised to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
Self-employed National Insurance contributions (NICs)
The Government will consult in Autumn 2015 on abolishing Class 2 NICs and reforming Class 4 NICs for the self-employed.
The Government will increase the annual Employment Allowance from £2,000 to £3,000. This will come into effect from April 2016. From 6 April 2016, the Employment Allowance will no longer be available for companies where the sole director is the only employee.
Employers pay National Insurance at 13.8% on salaries above around £8,000 pa. Most employers can currently reclaim the first £2,000 of this National Insurance. It does not apply to the National Insurance paid by employees.
Currently, a sole director-shareholder could pay themselves £22,553 and reclaim the entire employer’s National Insurance of £2,000 i.e. (£22,553 - £8,060) x 13.8%. This will be stopped from 6 April 2016.
Rent a Room Relief
The Government will increase the level of Rent-a-Room relief from £4,250 to £7,500 from April 2016.
This means that from 6 April 2016, a person will be able to receive up to £7,500 of income tax-free from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord’s main residence. Receipts include amounts received for meals and cleaning services paid for in relation to the use of the room.
As announced in the March Budget 2015, the Government will introduce an allowance from 6 April 2016 to remove tax on up to £1,000 of savings income for basic rate taxpayers and up to £500 for higher rate taxpayers. Additional rate taxpayers will not receive an allowance. Automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease from the same date.
The Government is to publish a public consultation in the near future on whether changes are required to the deduction arrangements in place for other savings income. This may allow an owner-managed limited company to pay up to £1,000 of interest to the owner tax free every year, e.g. on a large balance on a director's current account, and receive full Corporation Tax deductibility on the £1,000 loan paid.
Wear and Tear Allowance
Landlords of furnished properties can currently deduct 10% of gross rent from their profit to account for wear and tear, irrespective of their expenditure. This means landlords can reduce their tax liability even when they have not improved the property.
From April 2016, the Government will replace the Wear and Tear Allowance with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets.
Up until April 2013, a non-statutory basis (ESC B47) provided the option to claim either a 10% wear and tear allowance of gross rents or the ‘renewals’ basis for furnishing and fittings e.g. for sofas, chairs, beds, white goods and other furniture. The change from April 2016 will therefore take landlords back to the former renewals basis, where a landlord could only deduct the actual costs of replacing furnishings.
Finance Cost Relief for Landlords
The Government will restrict the tax relief on finance costs that individual landlords of residential property currently receive. The restriction will be phased in over 4 years, starting from April 2017.
The Government believes that the current tax system supports landlords over and above ordinary homeowners. To counter this, the Government is to restrict the relief on finance costs (such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans) that individual landlords of residential property can get to the basic rate of tax. Furnished holiday lettings are excluded from this reform.
Landlords will be able to obtain relief as follows:
in 2017–18, the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction;
in 2018–19, 50% of finance costs as a deduction and 50% given as a basic rate tax reduction;
in 2019–20, 25% of finance costs as a deduction and 75% given as a basic rate tax reduction;
from 2020–21, all financing costs incurred by a residential landlord will be given as a basic rate tax reduction.
The Government will legislate to set a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee Class 1 NIC rates, ensuring that they cannot rise above their current levels. The tax lock will also ensure that the NIC Upper Earnings Limit cannot rise above the income tax higher rate threshold and will prevent the relevant statutory provisions being used to remove any items from the zero rate of VAT and reduced rate of VAT for the duration of this Parliament.
The Government will restrict the benefits of pension tax relief for those with incomes, including pension contributions above £150,000, by tapering away their Annual Allowance to a minimum of £10,000. This policy will come into effect from 6 April 2016. The Government will also consult on the reform of tax relief on pension contributions.
Inheritance Tax and the main residence nil rate band
The Government will introduce (for transfers on death on or after 6 April 2017) an additional nil-rate band when a residence is passed on death to direct descendants e.g. children or grandchildren.
For 2017–18, the allowance will be the lower of the net value of the interest in the property or £100,000. That limit will increase annually from £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21.
The inheritance tax nil-rate band is currently frozen at £325,000 until April 2018. The Government will continue to freeze the nil-rate band at £325,000 until April 2021 so by then an individual can have an effective £500,000 nil-rate band.
Any unused nil-rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
Taxation of employee benefits and expenses
A new statutory exemption for trivial benefits in kind costing less than £50 will be introduced with effect from April 2016.
Insurance premium tax standard rate
From 1 November 2015, the standard rate of Insurance Premium Tax (IPT) which is currently 6%, will be increased by 3.5% to 9.5%.
IPT is an indirect tax and is paid on many items that you buy where VAT is not charged. The most obvious one is insurance that you buy for your home, car or business asset protection.
It was announced in the Spring Budget 2015 that the Government would change the ISA rules in the Autumn to allow individuals to withdraw and replace money from their cash ISA in-year without this replacement counting towards their annual ISA subscription limit. This policy will also cover cash held in stocks and shares ISAs and will start from 6 April 2016.
Taxation of pensions at death
In the Autumn Statement 2014, the Government announced that it is to reduce the current 45% tax rate that applies on lump sums paid from pension when someone dies who is aged 75 and over. The change will mean that the recipient taxpayer will be taxed at their marginal rate of tax from 2016–17. So, a basic rate tax payer will pay 20% and a higher rate tax payer 40% on the pension lump sum received.
The Child Element of tax credits and Universal Credit will no longer be awarded for third and subsequent children born after 6 April 2017. This will also apply to families claiming Universal Credit for the first time after April 2017.
From April 2016, the Government will reduce the level of earnings at which a household’s tax credits and Universal Credit award starts to be withdrawn for every extra pound earned. There will also be an increase in the taper rate which applies to any excess income further reducing the tax credit award.
Tackling the hidden economy
Around £300m will be invested over five years from 2016 to tackle non-compliance by small and medium-sized businesses and affluent individuals. This measure, it is hoped, will result in additional tax revenue of over £2bn by 2020-21.
HMRC’s powers to acquire data from online intermediaries and electronic payment providers, in order to find those operating in the hidden economy, will be extended. This measure will be subject to a consultation on the detail.
There will be investment in new HMRC investigators from 2016 to exploit this data. The Government says it will also create a digital disclosure channel, which will make it simple for taxpayers to disclose unpaid tax liabilities.