Summer 2015 Budget surprises
Mr Osborne’s seventh Budget – and his first free of coalition constraints – contained plenty of surprises.
The Budget immediately after an election is often the most interesting – and taxing. In its post-Budget analysis, the well-respected Institute for Fiscal Studies (IFS) noted that “post-election Budgets tend to raise at least £5bn in tax – and this one expects to bring in a little more than that”.
One of the most significant changes and revenue-raisers for the Exchequer was the reform of dividend taxation from 2016/17. The 10% (non-reclaimable) dividend tax credit will disappear, replaced a new £5,000 dividend allowance, which will be separate from the personal allowance. Once that allowance is exceeded, the new dividend tax rates will apply: 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
While 85% of those who receive dividends will see no change or will be better off, if you are a company owner who draws dividends instead of a salary, you could be considerably worse off. Now is the time to consider drawing a dividend, something the Treasury expects many directors to do before next April.
The end result will be to expose more rent to income tax. However, there was one small piece of good news on the residential letting front: after an 18 year freeze, rent-a-room relief will rise from the current £4,250 to £7,500 from 2016/17.
Residential buy-to-let investors were also targeted for more tax.
From April 2016, the 10%wear and tear allowance will be replaced with a new relief based on the actual costs incurred in replacing furniture. Then, over a period of four years from 2017/18, the rate of tax relief on finance costs (primarily interest) will be phased down to basic rate for individual investors.
The big freeze for IHT
Unfortunately the Chancellor also extended another freeze for a further three years. The inheritance tax nil rate band will now remain at £325,000 until April 2021. But there will be a new transferable main residence nil rate band, initially £100,000 in 2017/18, rising by £25,000 a year to £175,000 in 2020/21. The net effect of this will be that from April 2020 a couple with an estate of up to £2m will be entitled to nil rate bands totaling £1m (2 X £325,000 + 2 X £175,000), provided that they have (or, in most cases, have had) property worth at least £350,000 which is passed to direct descendants. Above £2m, the new band will be subject to a 50% taper.
The new IHT allowance is being funded by yet another cut of pension allowances: from 2016/17 the annual allowance will be reduced if your total income exceeds £110,000 and your total income plus all pension contributions exceeds £150,000. Once again a 50% taper applies, but this time with a minimum – £10,000 annual allowance once income plus contributions reach £210,000. The lifetime allowance – the maximum tax-efficient value of pension benefits – will also be cut by 20% to £1m from 6 April 2016 and a fourth set of transitional reliefs will be introduced. Longer term the whole issue of pension tax relief could disappear, as the Treasury issued a consultation paper alongside the Budget on “strengthening the incentive to save”. Among other ideas in the paper was the replacement of tax relief on contributions with a government top-up.
The many changes in this second Budget of 2015 mean tax strategies will need careful review well before the end of the tax year. We are here to help.
Advisory fuel rates
The latest update to HMRC’s advisory fuel rates is something of a mixed bag, with one reduction amongst the increases and unchanged rates. The rates, which can be used where an employee has a company car, are shown below. Hybrid cars are treated as either petrol or diesel cars for this purpose. The rates will be reviewed again on 1 September, although current rates can be used for a further month after that.
Discuss these changes further with a member of our team, to see how you could be affected.
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