George Osborne presented the final Budget of this Parliament on Wednesday 18 March 2015.
It is possible that some of the proposals outlined in the Budget will not come to fruition unless the Conservative Party is in power after the election, although Ed Balls has indicated that there was nothing in the “pretty empty” Budget that Labour would reverse if it won power.
Our blog focuses on the main issues likely to affect you, your family and your business. If you have any questions please do not hesitate to contact us for advice. For our full Budget summary, visit our website here.
Main Budget tax proposals
- Increased personal allowances
- The introduction of a new Personal Savings Allowance
- Changes to ISAs including the introduction of a new type of ISA for First Time Buyers
- Changes to pensions
- Entrepreneur’s Relief – changes to qualifying conditions
The personal allowance for 2015/16
For those born after 5 April 1938 the personal allowance will be increased to £10,600. For those born before 6 April 1938 the personal allowance remains at £10,660. The reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 that was brought in a few years ago will continue. This is only a small increase in the personal allowance from the current levels. We weren’t expecting much of a change, as the personal allowance increased so much early on in the Coalition’s Parliamentary term.
Starting rate of tax for savings income
From 6 April 2015, the maximum amount of an eligible individual’s savings income that can qualify for the starting rate of tax for savings will be increased from £2,880 to £5,000, and this starting rate will be reduced from 10% to 0%. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit, so mainly affects the older generations with modest pension income. It is also a useful tax break for director-shareholders who extract their share of profits from a company by taking a low salary and the balance in dividends. This is because dividends are taxed after savings income and thus are not included in the individual’s ‘taxable non-savings income’.
Personal Savings Allowance
The Chancellor announced that legislation will be introduced in a future Finance Bill to apply a Personal Savings Allowance to income such as bank and building society interest from 6 April 2016. The Personal Savings Allowance will apply for up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year, but will not be available for additional rate taxpayers. The Personal Savings Allowance will provide basic and higher rate tax payers with a tax saving of up to £200 each year and will be in addition to the tax advantages currently available to savers from Individual Savings Accounts (ISAs). In reality, this means that most people will pay no tax at all on their interest come.
The end of tax deduction at source on interest
As a result of the above Personal Savings Allowance proposals, and wider changes to the tax return system, from April 2016 the automatic deduction of 20% income tax by banks and building societies on non-ISA savings will cease. It is as yet unclear how this will work in practice, such as how the tax will be collected if not at source by the bank, if it is in fact due. We eagerly await further information from the Government/HMRC.
Transferable Tax Allowance
From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance whereby a fixed amount of the personal allowance (up to 10%, being £1,060) is transferred from one spouse to another. Unfortunately, the option to transfer will only be available to couples where neither pays tax at the higher or additional rate. For those couples where one person does not use all of their personal allowance the benefit will be up to £212 (20% of £1,060). Eligible couples can now register their interest for marriage allowance at GOV.UK/marriageallowance.
Help to Buy ISA
The government has announced the introduction of a new type of ISA, the Help to Buy ISA, which will provide a tax free savings account for first time buyers wishing to save for a home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings. Though, as an ISA, this will benefit from tax-free status, the likelihood is that individuals who will benefit from this scheme will have savings income of less than £1,000 and it would therefore be covered by the Personal Savings Allowance anyway. Help to Buy ISAs will be subject to eligibility rules and limits, which are included in detail on our full Budget summary.
There is an overall limit, known as the lifetime allowance, on the total amount of tax relieved pension savings that an individual can have over their lifetime. The Chancellor has now announced that for tax year 2016/17 onwards the standard lifetime allowance will be reduced from £1.25 million to £1 million. Fixed and individual protection regimes will be introduced alongside the reduction in the lifetime allowance to protect savers who think they may be affected by this change. The lifetime allowance will be indexed annually in line with CPI from 6 April 2018.
Pensions – changes to access to pension funds
The Taxation of Pensions Act has recently been enacted. It provides that individuals aged 55 or over can access their money purchase pension savings as they choose from 6 April 2015. The legislation gives the flexibility to either purchase an annuity or draw down periodically on the pension fund. The fundamental tax planning point arising from the changes is that a person can decide when to access funds depending upon their other income in each tax year.
Pension freedoms to be extended to people with annuities
The Chancellor announced just before the Budget a new flexibility for people who have already purchased an annuity. This aims to give those who have already purchased an annuity the flexibility that comes from the new rules. From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity for a capital sum. Individuals will then have the freedom to take that capital as a lump sum, or place it into drawdown to use the proceeds more gradually, in the same way as those under the new rules.
Corporation tax rates
As announced a number of years ago, from 1 April 2015 the main rate of corporation tax, currently 21%, will be reduced to 20%. As the small profits rate is already 20%, the need for this separate code of taxation disappears. The small profits rate will therefore be unified with the main rate.
Annual Investment Allowance (AIA)
The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. The maximum annual amount of the AIA was increased to £500,000 April 2014 until 31 December 2015, however it was due to return to £25,000 after this date. £25,000 has been considered by us to be a very low figure and many small businesses have capital expenditure in excess of this annually. Thankfully, the Chancellor announced that following conversations with business groups, this would be addressed in the Autumn Statement and would be set at a much more generous rate.
Research and Development (R&D) tax credits
As previously announced, the government will increase the rate of the ‘above the line’ credit from 10% to 11% and will increase the rate of the SME scheme from 225% to 230% from 1 April 2015. We work closely with an R&D specialist to decide whether your business is eligible to claim the credits, and to ensure that any claim is maximised. If you think that the activities you undertake could qualify, please get in touch and we will be able to advise further.
Construction Industry Scheme (CIS) improvements
At Autumn Statement the government announced it would make a number of changes to the CIS. The aim of the changes is to reduce the administrative burden and related cost burden on construction businesses, which of course we welcome! From 6 April 2015 the requirement for a contractor to make a return to HMRC even if the contractor has not made any payments in a tax month is removed. No nil returns will need to be filed – great news. From 6 April 2016 mandatory online filing of CIS returns will be introduced. We can’t see this making a major difference as most CIS returns that we come across with clients are already filed online, through third party software such as Sage, or on the HMRC website.
Class 2 National Insurance contributions (NIC)
From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year as part of the tax return, based on the number of weeks self-employed. Those with profits below a threshold will no longer have to apply in advance for an exception from paying Class 2 NIC. Instead they will have the option to pay Class 2 NIC voluntarily at the end of the year so that they may protect their benefit rights.
Corporation tax relief for goodwill on incorporation
An anti-avoidance measure was announced at Autumn Statement, and is effective from 3 December 2014, to restrict corporation tax relief where a company acquires internally-generated goodwill and certain other intangible assets used in a business from ‘related persons’. In addition, individuals will be prevented from claiming Entrepreneurs’ Relief (ER) on disposals of goodwill when they transfer the business to a related company. Capital gains tax will be payable on the gain at the normal rates of 18% or 28% rather than 10%. This had previously been a lucrative tax planning point for small businesses, so it is a shame to see it taken away, however the government considered that it was unfair to a business that had always operated as a company. The annual exemption on capital gains will still be available, so approximately £11,000 of goodwill sold to a company will remain tax-free, as long as there are no other capital gains in the year.
Digital tax accounts
The government has announced some initiatives to ‘transform the tax system over the next Parliament’ by introducing digital tax accounts and removing the need for annual tax returns. A digital tax account will supposedly enable individuals and small businesses to see and manage their tax affairs online. This is probably the most surprising and controversial announcement for us. As something that’s never been even hinted at before, it’s a complete curveball! It is worth noting that this is only a suggestion currently – there has been no consultation as yet about how this would work for self-employed individuals or those with more complex tax affairs, rather than those simply with PAYE income and bank interest. There is a lot of work to be done on the Government’s part to get a digital tax account in place even for those who aren’t currently in self-assessment, let alone those that complete a tax return. We will just have to wait and see what develops with this one!
Chartered Certified Accountant