In what was the first wholly Conservative Budget in 19 years, the Chancellor was keen to stress that this would be a “big Budget” for working people. As well as formally announcing a number of manifesto promises, the Government emphasised promises for “higher wages, lower taxes [and] lower welfare” and the final aspect will no doubt take up much of the headlines tomorrow as the Chancellor detailed proposals to restructure the welfare system.
There were announcements to increase the thresholds over which we start paying tax and then higher-rate tax, but overall personal tax remained as per the coalition’s March Budget. Over the course of this parliament, however, there will be cuts to pension tax relief for higher earners and the infamous non-doms will be subject to a new tax regime. The taxation of dividends is also set to be shaken up and the promised £1 million ‘IHT threshold’ will be introduced for married couples and civil partners.
Free of the shackles of coalition, the Government is pushing through a number of high profile measures, but as always the devil is in the detail. We explain the key changes below, so please read on to find out more.
The Conservative party, in its manifesto, announced that it would, if elected, curtail pension contribution tax relief for anyone earning in excess of £150,000 per annum. In government, it appears to have gone further than its original announcement.
“From April 2016, the Government will introduce a taper to the annual allowance for those with adjusted annual incomes, including their own and employer’s pension contributions, over £150,000″. This suggests that employer pension contributions (and potentially even personal contributions) could be counted as ‘income’ for the purposes of calculating an individual’s annual allowance, e.g. a salary of £140,000 plus an employer’s pension contribution of £20,000 could mean an adjusted annual income of £160,000.
It was confirmed that for every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.
In a surprise announcement the Chancellor also declared that more radical pension reforms could be on the horizon, stating that “pensions could be taxed like ISAs – you pay in from taxed income – and it’s tax free when you take it out. In between it receives a top-up from the government”. A Green Paper consultation will be published for debate but we expect that such a radical change would not be introduced quickly.
The Government also confirmed details of the manifesto pledge to take the “family home out of Inheritance Tax for all but the wealthiest with a new transferable nil-rate band.”
Currently, Inheritance Tax is charged at 40% on estates over the nil rate band of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another, making £650,000.
From April 2017, each individual will be offered a main residence nil-rate band so they can potentially pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18. The new allowance will be added to the existing £325,000 Inheritance Tax nil rate band, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million by 2020-21.
The main residence nil rate band will be introduced at up to £100,000 in 2017-18, gradually increasing to £175,000 in 2020-21. The existing nil‑rate band will also remain at £325,000 from 2018-19 until the end of 2020-2021. This ensures the effective Inheritance Tax threshold will be up to £1 million by the end of the parliament.
The intention is that the new main residence nil rate band will be gradually withdrawn for estates worth more than £2 million.
The new main residence nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to £175,000 in 2020-21, are passed on death to direct descendants.
One particular area of the Chancellor’s focus was the fact that the number of buy-to-let landlords is increasing. This follows the recent warning from the Bank of England that buy-to-let mortgages could pose a threat to the stability of the UK. Under the current rules, landlords are able to “offset” their mortgage interest against their rental income, reducing their overall Income Tax bill. For additional-rate taxpayers, this has the effect of saving 45p in Income Tax on the rent for every £1 of mortgage interest paid.
From April 2017, the Government is planning to restrict the amount of tax relief available to landlords to the basic rate, phased over the following four years. This will mean that they will eventually only be able to reclaim a maximum of 20p in Income Tax for every £1 of mortgage interest paid.
In addition to this, the Government has also proposed to scrap the 10% “wear and tear” rent allowance. This will mean that landlords are no longer able to deduct 10% of their rent to account for wear and tear irrespective of their costs (i.e. costs for redecorating, replacing furniture etc.). Instead, they will only be able to claim tax relief for costs actually incurred.
Taxation of dividends
Taxation of dividends will be reformed. The 10% dividend tax credit will be abolished, replaced by a dividend tax allowance of £5,000 (dividend income up to this amount will not be taxed).
Tax rates on dividend income above the £5,000 allowance will be as follows:
- 7.5% for basic-rate taxpayers
- 32.5% for higher-rate taxpayers
- 38.1% for additional-rate taxpayers
- There will be no change to treatment of dividends in pensions and ISAs.
Whilst we await details, the Chancellor stated in his statement that “those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax”.
A summary of Income Tax changes from April 2016:
- The Income Tax personal allowance will be raised by £400 to £11,000
- The higher-rate (40%) threshold will increase from £42,385 to £43,000
From April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance. For other companies, the employment allowance will be raised from £2,000 to £3,000.
Ben Seager-Scott, Director in our Investment Office, has also produced a macroeconomic review of the summer Budget. You can read it here.