Budget Comment July 2015
None of the major changes happen immediately but there is plenty to look forward to. One thing is clear – this won’t be popular with the Tax Software companies! And tucked away in the background is an announcement that the Office of Tax Simplification is to become a permanent body, mmm…
Let’s take a look:
Taxation of Dividends
In the Blythe world the biggest impact is on our Limited Company Owner Manager clients who are used to paying themselves modest salaries and large dividends. This generally adopted tactic saves significant National Insurance and wasn’t liked by the Chancellor.
The new system allows all taxpayers to receive dividends of £5,000 tax free and there is a further £1,000 nil rate band available to basic rate taxpayers (reducing to £500 for higher rate taxpayers and nil for those with earnings above £150,000). Above these levels basic rate taxpayers will pay a new 7.5% rate on dividends, higher rate taxpayers will pay 32.5% and those with earnings above £150,000 will pay 38.1%. The dividends will no longer be grossed up for the 10% tax credit which disappears.
So in the existing system an owner manager of a company with £11,000 salary plus dividends of £28,246 would pay no additional tax in Self Assessment. But from 6 April 2016 this same arrangement would create a liability of £1,668. And for dividends above this level the rate increases on 6 April 2016 from 25% to 32.5%. For comparison, if these figures were earned as profit in a Self Employment the total of tax and National Insurance would still be £2,283 higher.
Comment: Operating a business through a limited company is still valid but the significant Income Tax and National Insurance advantages will be watered down. Having said that two big tax benefits of a company remain – simpler sharing with a spouse and ability to smooth large profit years.
Corporation Tax rate down to 19% but not until 1 April 2017. Three years later it will be down to 18%.
Comment: This slightly softens the impact of the new taxation of dividend. But that’s a long way to look ahead!
Sticking with Owner Managers, the National Insurance Employment Allowance will rise from £2,000 to £3,000 from 6 April 2016 but, please note, it is no longer available if a Director is the sole employee.
Comment: Consider whether there is anyone else that should be on your payroll.
There is a significant change to IHT but only gradually over a 4 year period starting from 6 April 2017. In five years time, the main winners will Children or Grandchildren beneficiaries of estates with assets of married couples valued between £1,000,000 and £2,000,000 of which the main residence makes up at least £350,000. These estates will end up paying £140,000 less in IHT. But once the estate exceeds £2,000,000 the benefit tapers and once it exceeds £2,350,000 there is no benefit.
Comment: So the Tories achieve the £1,000,000 exempt threshold they previously mentioned – but it is only achieved by combining the Nil Rate Bands of married couples with the maximum ‘Property Nil Rate Band’:
2 x £325,000 + 2 x £175,000 = £1,000,000
A bit contrived!
From 6 April 2017 the Remittance Basis will not be available to Non-Doms who have been resident in the UK for 15 out of the last 20 years.
Comment: This will have little bearing on most Non-Dom clients as the cost of the Remittance Basis has been increasing significantly over the last few years. If anything it could help by removing what can sometimes be a tricky decision.
From 6 April 2017 the Chancellor is phasing in over 4 years a restriction on loan interest relief against rental income to just the basic rate.
From 6 April 2016 the 10% Wear & Tear Allowance available for furnished property lettings will be abolished.
From 6 April 2016 Rent a Room Relief will increase from £4,250 to £7,500.
Comment: The loan interest restriction will eventually have a significant impact but probably not enough to significantly dampen down house price inflation!
Recording expenditure on property becomes increasingly important.
Nice touch on the Rent a Room relief (available when you take in a lodger).
Look out for further restrictions for high earners.
Comment: Tax planning with pension contributions used to be big business for the super wealthy. They have gradually been more or less been legislated out of this area. On the other hand those Owner Managers who don’t like the new taxation of dividend might like to look again at their pension provision.
The comments above are brief highlights and each item is subject to change, and not all items have been mentioned. Please remember – there is always more to it than meets the eye so please contact us before taking or refraining from action.
Please see the March 2015 Budget and Rates & Allowances 2015/16 page for further information.
Rates and Allowances for 2016 and 2017
The chart of new Rates and Allowances is, as always, set out below. Probably the biggest change is the increase in Tax Free income (the Personal Allowance) from £9,440 to £10,000 in 2014-15. Did you think it was £10,500? Understandable if you did but that is next year’s Allowance (2015-16). The good thing for higher rate taxpayers is that the 40% threshold hasn’t been reduced (as it has been recently) in fact it has increased from £41,450 to £41,865. So a real benefit here for higher rate taxpayers. There’s a summary of Tax Rates below reflecting these changes.