Summer Budget: An overview
Budget: Radical, but no big giveaways
The budget announcements were eagerly awaited, the first full Conservative budget in almost 20 years, and pundits were predicting ‘more pain before more gain’. So how did the man on the street fare? As always, there are winners and losers.
The key aspect of the statement was reward for work, underpinned by the announcement of a new National Living Wage for workers aged 25 and above.
Income taxes will reduce, with the personal allowance increasing from £10,600 to £11,000 from 6 April 2016. The higher rate threshold, which triggers the 40% rate of income tax, increases from £42,385 to £43,000 from 6 April 2016. Therefore all taxpayers entitled to the full personal allowance will be £80 better off, and higher rate and additional rate taxpayers will be a total of £123 better off in income tax terms.
However, the news is not so good for individuals receiving dividend income from an investment portfolio or as a return on their shareholding in the family business. The notional dividend 10% tax credit will be replaced by a new dividend tax free allowance of £5,000 and the setting of new dividend tax rates. For individuals with dividend income in excess of £5,000 basic rate taxpayers will pay tax of 7.5%, higher rate taxpayers 32.5% and additional rate taxpayers 38.1% on dividend income.
Additional rate taxpayers (those earning in excess of £150,000) will feel further pain through the reduction to the pensions annual allowance. Currently they can obtain tax relief of 45% on gross annual contributions up to £40,000. For every £2 of income over £150,000 the annual allowance going forward will be reduced by £1 to a minimum annual allowance of £10,000, up to which they can contribute to a pension without incurring a clawback of tax relief.
The private rental sector received a surprise in the announcement that individuals who receive rental income on residential property and incur finance costs (i.e. mortgage interest) will see tax relief restricted for the interest (higher and additional rate taxpayers only) which up until now has been fully tax deductible against the rental profits.
The new rules will be phased in from 2017/18 tax year and by 2020-21 landlords will only receive tax relief at the basic rate on their finance costs (versus 40%/45% previously). So for example a higher rate taxpayer currently getting tax relief of £800 on £2,000 of mortgage interest will see this reduce to only £400. On the flip side of the coin for homeowners willing to rent a room to lodgers the tax free annual amount you can earn from this will increase from £4,250 to £7,500 per year.
There was a significant change to inheritance tax which sees the nil-rate band now remain static until 2020-21. An additional nil-rate band will be introduced from 2017-18 when a residence is passed on death to a direct descendant, and will increase gradually from £100,000 in 2017-18 to £175,000 in 2020-21, thereafter increasing in line with the Consumer Prices Index.
The intention of this policy is to take families out of inheritance tax where the tax mainly results in the increase in value of the family home. Even if the family home is passed on and a smaller property acquired this additional nil-rate band will still be available. Estates in excess of £2 million will though be excluded from the additional nil rate band.
As expected, today’s budget unveiled radical reforms, yet there were no big tax giveaways other than those following through on promises previously made, such as the inheritance tax threshold.
More pain has undoubtedly been felt both by lower income families through the cuts to the welfare state and the higher earners, through changes to dividend income, reduction in tax relief on finance costs on rental property and reductions to tax relief on pension contributions.
Whilst a raft of changes were introduced for non-domiciled individuals, they are likely to impact only a small percentage of individuals.
The chancellor has promised he is moving the UK towards a lower tax, lower welfare state from what is currently a high tax, high welfare country. Only time will tell.
Alexandra Docherty is Tax Director in the Edinburgh office of Johnston Carmichael