With a need to balance the books, and indeed with a target of a surplus by the end of this parliament, we analyse the Chancellor’s eighth budget speech which he described as a “budget for the next generation.”
The Chancellor stated that the UK is set to grow faster this year than any other major advanced economy in the world and is predicted to sustain this against global economic difficulties, although projected growth for 2016 has been revised downwards. Against this economic back drop, and global economic pressures, £3.5 billion of spending savings are being sought for 2019/20. The Chancellor hopes that by “acting now so that we don’t pay later” that the current deficit will be turned into a £10.4 billion surplus by 2019/20.
It is hoped to raise £12 billion through anti-avoidance measures (including action on disguised remuneration schemes and a royalty withholding tax) but as commentators have stated the amount raised by such measures is notoriously difficult to predict and could well fall short of this sum leaving a hole in the Chancellor’s figures.
The headline news in relation to income tax is the increase in the higher rate income tax threshold from £42,385 to £45,000 from 6 April 2017. This threshold is calculated taking into account the increase to the individual’s personal allowance to £11,500 per annum and will benefit middle earners in particular. A new dividend tax has already been announced, and is due to be introduced from 6 April 2016, and this increase in the higher rate threshold will offset this change to some extent in the following tax year.
To mirror this increase in the dividend tax rates, the tax charge on loans to participators will be increased from 6 April to 32.5% so that a tax advantage cannot be obtained by making loans to shareholders rather than paying dividends.
Personal service companies used by public sector workers are being targeted with the public sector having a new duty from April 2017 to make sure that those working for them using personal service companies are paying the correct amount of tax. There is to no change at present for private sector contractors, although, with HMRC developing new online tools to enable the public sector to make determinations as to contractors’ employment status, there must be a possibility that, when bedded in, this change could reach the private sector in due course.
When employment ends in redundancy, the first £30,000 of a redundancy payment is tax-free for the employee (an amount that has remained static for some considerable time) but the Chancellor announced that from 2018 such payments will be subject to employer National Insurance payments. There has to be a possibility that companies might seek to reduce any ex gratia redundancy payments they make in addition to the statutory minimum to reflect this new cost. A technical consultation is also to take place around tightening the scope of the exemption.
Capital Gains Tax
The big news here is the reduction in the capital gains tax rate which is to be reduced from 6 April 2016 from 28% to 20% for higher and additional rate taxpayers and from 18% to 10% for basic rate taxpayers. Interestingly, the old rates are to remain for gains on residential property not covered by principal private residence relief which is in line with the government’s apparent policy of making investment in buy-to-let property less attractive by introducing a range of tax changes including the additional rate of stamp duty land tax.
A less preferential capital gains tax change is the introduction of a lifetime limit of £100,000 on the capital gains tax exempt gains an individual can make on the disposal of shares acquired under Employee Shareholder Agreements entered into after 26 March 2016.
The previously announced plans to extend the inheritance tax residence nil rate band to those who downsize or dispose of their property before their death will be incorporated in the Finance Bill 2016 to be published on 24 March. Otherwise this was a quiet budget on the inheritance tax front which, after the complications introduced by the residence nil rate band and the downsizing provisions, is probably to be welcomed.
Stamp Duty Land Tax (‘SDLT’)
More changes on the SDLT front to add to the already announced higher rate on the purchase of properties additional to a main residence due to come into effect from 1 April and which, it was announced in the budget, will also apply to large property investors.
Following the changes to the way that SDLT is calculated for residential property, the same system is to be applied to commercial properties. The rates will be 0% on the price paid up to 150,000, 2% on the next £100,000, and 5% above £250,000 to take effect from 17 March 2016. This will benefit smaller companies.
In addition, a new 2% rate of SDLT is to be introduced from March 2016 on the rental element of non-residential leasehold transactions with a net present value above £5 million.
Business and enterprise
The Chancellor announced a fundamental reform of the business tax system to close loopholes, help business and to simplify small business taxation; a dramatic improvement to the service provided to small businesses by HMRC is promised which, if it materialises, will be welcomed.
The headline in relation to business is the reduction in the corporation tax rate to 17% by April 2020. The Chancellor stated that this low tax regime is intended to attract multi-national business to the UK but at the same time measures are to be taken to ensure that these companies pay their taxes on their UK profits. To this end, a road map for business tax for the future is to be published. An example of one of the new restrictions is a change to the tax deductible amount that can be borrowed in the UK to fund overseas spending which will now be restricted to 30% of taxable earnings in the UK.
Foreign companies running businesses on platforms such as Ebay are also to be targeted to tackle VAT avoidance by overseas companies and, presumably, to provide a level playing field on these platforms to UK businesses.
For small businesses, there are changes to small business rates and “micro-entrepreneur allowances” of £1000 per annum for trading and property income sources such as letting a room to holidaymakers through Airnb. Class 2 national insurance contributions (paid by the self-employed) are to be abolished from 2018.
Savings and Pensions
A Help to Save plan for lower earners was announced prior to the budget but there must be some doubt as to the efficacy of this proposal given that it depends on low earners having sufficient disposable income to be able to save.
Considerable comment and discussion had taken place before the budget about the government’s paper concerning proposed pension scheme changes and the Chancellor announced that no changes are to be made as a consensus could not be reached. At the same time he announced for those aged under 40 an alternative to pension saving: a lifetime ISA which is to be introduced from 6 April 2017. A maximum of £4,000 per annum can be saved in the lifetime ISA and for every £4 saved the government will give the saver £1. The lifetime ISA can be used either for house purchase or for pension saving, there will be no tax on withdrawals and access will be allowed at any time, although the bonus will be lost if access is for purposes other than buying a house or on retirement at sixty. There must be a probability that the lifetime ISA will take over from pension savings for younger savers who may be attracted by its flexibility.
The recently announced Help to buy ISA can be rolled into the lifetime ISA while the general ISA limit will increase to £20,000 per annum from 6 April 2017.