Initial Reaction to the Post Election Budget by Mitchell Charlesworth


Following the Conservative victory at the General Election in May, today's 'bold' Budget (8 July 2015) was used to reiterate their plans to raise money through a clampdown on tax evasion and aggressive avoidance, increase funding for the NHS, reform welfare and cut government spending.

It was badged a Budget for the working people and to introduce new measures to help bring confidence to the business community, help to reduce our national debt and be fairer to taxpayers.

The Conservatives did not have to compromise on any of their pre-election promises and was their first true Budget since 1996. 

Mitchell Charlesworth's experts have completed an initial assessment of the key measures that will affect SMEs and individual taxpayers (click the below links for further information): 

Chancellor's_Briefcase

 

Our Initial Comments:

Tim Adcock

 

"For Owner Managed businesses the announcement that the dividend tax credit is to be replaced by a £5,000 dividend allowance, coupled with the introduction of a 7.5 per cent tax rate will be a surprise and will cause many to review their remuneration policies".

Tim Adcock, Tax Partner

Gemma Gower

 

"From an indirect tax point of view, the Budget was a quiet affair but the promise to freeze fuel duty should make all voters happy. However, the sting is in the tail. The insurance premium tax increase on the average car insurance policy will reduce the effect on any fuel duty freeze".

Gemma McCaldon-Gower,VAT Manager

 

Graeme Davies

 

"The announced reduction to Corporation Tax rates from 2017 are unexpected and will be welcomed by businesses, as will the announcement to fix the Annual Investment Allowance at £200k".

Graeme Davies, Tax Manager

Contact us:

If you would like to arrange a meeting to discuss any specific issue related to the budget please contact a member of the Mitchell Charlesworth tax team.

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  • Annual Investment Allowance:

Hopefully todays announcement with regards to the Annual Investment Allowance (AIA) will put an end to the constant yo-yoing on this matter.

The AIA is the limit a business can spend on qualifying capital assets and receive 100% tax relief on the cost in that year. Over  recent years we have seen numerous different levels of AIA, currently the rate is £500,000, however this was due to reduce to £25,000 from 1 January 2016. However, this Budget announcement will result in a permanent level to the AIA of £200,000 applying from 1 January 2016.

This is an obvious improvement on the £25,000 that it could have dropped to and hopefully will allow businesses to plan their capital expenditure going forwards.  

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  • Corporation Tax Rates:

In an unexpected move the Chancellor announced that from 2017 there will be a reduction to the rate of Corporation Tax from the current 20% to 19%. Furthermore, it is proposed that this rate will reduce by a further 1% to 18% from 2020.

As unexpected as this was it will also be welcomed by many businesses who will see their retained profits increase as a result of this move.

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  • Dividend Tax:

In a move that could potentially have significant implications to many owner managed business, the taxation of dividends regime will be completely overhauled.

From April 2016 the previously available Tax Credit that was attached to dividends declared will be replaced with a new tax free Dividend Allowance of £5,000 for all taxpayers.

In addition to this new dividend tax rates will  be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Although these rate remain below the main rates of income tax, those who have significant dividend income, for example due to large shareholdings, or via being a shareholder in a close company, are likely to see increased income tax liabilities.

A remuneration planning exercise before April 2016 would be well advised.

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  • Higher rate on Pension Contributions:

In an expected but unpopular move, the Chancellor announced that from April 2016, a taper will be introduced to the ‘Annual Allowance’ - the amount of tax relievable pension contributions.  For those with adjusted annual incomes (including employees and employer’s pension contributions) exceeding £150,000, the Annual Allowance will be reduced by £1 for every £2 of income over £150,000. This will reduce to a minimum of £10,000 for those with adjusted annual income exceeding £210,000.

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  • Inheritance Tax:

In what will be a popular move amongst many high net worth individuals, todays budget will introduce an additional nil rate band when a residence is passed on death to a direct descendant. This will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. It will then increase in line with the Consumer Prices Index.

This additional nil rate band will also be available when a  person downsizes or ceases to own a home.

This main residence nil rate band will be transferable where the second spouse of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.

There will be a tapered withdrawal of this additional nil rate band for estates with a net value in excess of £2m, based on a £1 withdrawal for every £2 over this threshold.

To qualify for this relief the property must have been the residence of the deceased at some point, so for example buy to let properties will not qualify.

For many families this measure will take them out of paying Inheritance Tax altogether.  

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  • Living Wage Rate:

Today's Budget introduced a new national living wage for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020. The Chancellor said this will give an average £5,000 rise over five years to an estimated 2.5 million people.

However, this introduction will cause many businesses to have to consider their salary budgets and possibly pass this onto their customers on a gradual basis to counteract the news. The Government has however attempted to soften the extra cost by increasing the National Insurance Employment Allowance from £2,000 to £3,000 from 2016.

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  • Mortgage Interest Relief:

The Chancellor announced a number of significant changes for taxation of landlords.  Changes included the controversial reduction in tax relief that landlords can claim on finance costs.  The relief will be capped at the basic rate of tax (currently 20 per cent) which will be introduced gradually from 6 April 2017.  Landlords will no longer qualify for higher rate tax relief on costs such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.  Instead, they will receive a basic rate deduction from their income tax liability for any finance costs. 

The detailed budget document further revealed plans from April 2016, to abolish the blanket 10% relief for wear and tear allowance.  Currently, landlords are afforded tax relief on 10% of the rent, whether or not they actually replace furnishings.  From April 2016, landlords will only be able to deduct costs they actually incur, which the Government hope will encourage landlords to replace and increase the standard of furnishings in let properties.

Finally, measures were introduced to increase the popular ‘rent-a-room’ tax relief.  Current provisions allow individuals up to £4,250 of tax free income received from renting out a room or rooms in their only or main residence.  The limit will be increased to £7,500 from 6 April 2016, and for following years. 

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  • Non Domicile Status:

Non Domiciled Individuals (Non Doms) are currently able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not remitted into the UK, to use this system longer term Non Doms have to pay a remittance charge. This is in contrast to the system for UK domiciled individuals who are liable to UK tax on the worldwide income and gains.

From April 2017, those who have been resident in the UK for more than 15 out of the past 20 years will be treated as domiciled in the UK for all tax purposes. This means they will no longer be able to use the remittance basis. In addition  those who had a UK domicile at birth will be deemed to have UK domicile for tax purposes whenever they are resident in the UK, regardless of their domicile status as a matter of law.

For those individuals effected by this change as well as bringing income and gains within the UK tax net, it could also bring their assets within the UK inheritance tax regime.

All Non Dom individuals will need to review their position following this announcement.

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  • Tax Rates:

In terms of income tax rates the Chancellor announced that the personal allowance (the amount of taxable income an individual can receive before they start to pay income tax) for 2016/17 will be £11,000, and will increase to £11,200 in 2017-18. 

 Summer _Budget _Income _Tax _Tables _2015 Final

The Chancellor also announced that the higher rate threshold (the amount an individual can earn before they start paying income tax at 40%) will increase from £42,385 in 2015 -16 to £43,600 during 2017-18.

From April 2016 individuals will be able to receive up to £17,000 of income per annum tax-free, and separately invest up to £15,240 per annum through an ISA tax-free.

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 "The Chancellor said the Budget moved the country from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country we intend to create".

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