Following the recent election which brought to an end the coalition government, we now have an all-Conservative Treasury, meaning that George Osborne, the Chancellor of the Exchequer, is not constrained by the Liberal Democrats. As such, he has taken the opportunity to issue this so called “Emergency Budget” to enact the policies outlined in the Tory manifesto during the election.
In a budget where the Chancellor has promised to make cuts of £12 billion from the Welfare bill, these measures take centre stage but there are also a few surprises in relation to the reforms of the taxation of dividends and controversial decisions such as the compulsory new Living Wage and a commitment to meet the NATO pledge to spend 2% of national income on defence.
The Chancellor proudly announced his budget as a “One-Nation Budget” for the working people of the UK and the contents are set out in detail below.
Economic Growth and Employment
Over the course of 2014, the economy grew by 3%, meeting the objective set in the previous budget. Growth forecast for 2015 has remained at 2.4%, with a dip in growth predicted for 2016 at 2.3% and a return to 2.4% for 2017.
The Chancellor has advised that he would like to have a further 2 million people in work by 2020 and it is currently predicted that 1 million extra jobs will be created over the next 5 years.
The Welfare savings of £34 million will come from a variety of sources, half of which will be levied from savings made from government departments. The remaining savings will be made from the £12 billion cut to welfare benefits and it is anticipated that a further £5billion will be produced from the Government’s continued efforts to clam down on tax avoidance schemes.
It is thought that more details about exactly how the savings will be achieved will be published in the Autumn Statement once the Government has found its feet.
The national living wage was a policy that divided even the Conservatives but it was announced that a wage of £7.20 per hour will be introduced from next April for all over 25 and that this will increase to £9 per hour by 2020.
Help to meet this high wage will be given to small and medium sized businesses in the form of cuts to National Insurance with a £3,000 employment allowance. In practice, this will mean a small company can hire 4 employees on the national Living Wage and not pay any National Insurance contributions.
Larger companies are also due to benefit with the introduction of a permanent annual investment allowance of £200,000 from 2016.
Borrowing and Debt
The Chancellor advised that he wants to put economic security first. The Office of Budget Responsibility forecasts a deficit fall to 2.2% of GDP in 2016-17, 1.2% in 2017-18, and 0.3% in 2018-19.
If all goes to plan, and the deficit reduces by around 1% of GDP each year, this will result in a surplus of 0.4% of GDP in by 2019-20 which would to lead to the biggest structural budget surplus in 40 years.
Welfare cuts and reform
As this is where most of the above mentioned cuts are coming from, there are bound to be some critical responses to the proposals.
The cap on benefits is to be cut by £3,000 to £23,000 in London and reduced to £20,000 in the rest of the UK. Working-age benefits (including tax credits and housing benefits) will be frozen for four years but maternity leave has been excluded from the freeze.
Working benefits will be cut for non-disabled individuals who have no children and the Chancellor announced that it is his aspiration that all young adults should “earn or learn”.
Social housing tenants on incomes of £40,000 or more in London and £30,000 in the rest of England will have to pay a market rent, or near market rent, from 2017/18 and from April 2017 onwards. Tax Credit and Universal Credit will be limited to two children in all new applications, although exemptions will be made for multiple births.
Good news for workers in that the main rates of Income Tax, National Insurance and VAT will be frozen for the next 5 years to prohibit increases.
The personal tax allowance will rise to £11,000 next year and to £12,500 by 2020/21, in order to meet the objectives set in the Conservative party manifesto. The transferable marriage allowance is set to rise in line with this.
The threshold for higher rate income tax will rise to £42,385 this year and to £43,000 next year to reach the target of £50,000 by 2020, also in line with the manifesto targets.
The Chancellor advises that this should result in 29 million people paying less tax.
George Osborne also declared that “Britain is open for Business” – though not if you are a nuisance caller from a claims management company. The amount charged by PPI or personal injury insurance companies will be capped, which the Government believes will reduce the number of calls we all receive at the worst possible moments.
As an enticement to the rest of the world, in 2017 corporation tax will be cut to 19%, reducing to 18% by 2020.
An apprenticeship levy will be raised on large firms with 3 million apprenticeships to be created by 2020. Firms that offer training will be made a promise that they will get back more that they put in but details are yet to be finalised.
Not such good news if you are a middle income buy-to-let landlord though as the higher rate tax relief on mortgage interest payments is going to be reduced to the basic rate of 20% by April 2020.
Pensions and Savings
Tax relief will be reduced for those earning over £150,000 to a minimum of £10,000 per annum but details are still to be ironed out.
Tax relief on pensions will be reduced for people with an income of more than £150,000 a year but details of when and how are still to be ironed out. It has, however, been confirmed that the allowance will be at least £10,000 per year.
Lump sum death benefits from registered pension schemes, where taxable, will be taxed at the recipient’s marginal rate instead of the current 45% with effect from April 2016.
The Chancellor also mentioned in his report that there needs to be an incentive for younger workers to start saving. He had not had time to work this into the current budget but announced that a green paper inviting comments on a new ISA-style pension will be issued.
The taxation of dividends has also been reformed and a tax free allowance of £5,000 will be introduced to replace the tax credit system.
Dividend income tax rates will increase to:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers; and
- 38.1% for additional rate taxpayers.
Substantial changes have been made to how estates will now be taxed on death, particularly in relation to the family home.
The inheritance tax threshold will be increased to £1 million for couples from 2017 with a further relief which will be called the “family home allowance” and will be phased in at £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. This will be worth £175,000 to parents leaving their family home to their children (including step-children, adopted children and foster children) or further lineal descendants and is in addition to the current tax free allowance of £325,000.
However, if the net value of the estate is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
Eventually the estates of qualifying individuals who die can pass on assets worth up to £500,000, including a home, to their children or grandchildren without being charged any inheritance tax.
Non-domicile status will not longer be inheritable with effect from April 2017.
Individuals who have been UK resident for more than 15 of the past 20 tax years but are foreign domiciled under general law will be deemed domiciled for all tax purposes in the UK with effect from April 2017. Measures are also being put in place to make it harder for individuals who have a UK domicile at the date of their birth to claim non-dom status if they leave the UK, acquire a domicile in another country, but subsequently return here.
Residential property in the UK owned through “excluded property” trusts set up by non-doms will be treated as situated in the UK with effect from April 2017.
Education and health
In a bit to meet the “earn or learn” objective, the cap on student numbers is being removed
However, Britain cannot afford to pay for all of these students and as such, maintenance grants for students from lower income families are to be cut and replaced by further loans of up to £8,200 which will be repayable once the individual earns over £21,000.
The government are committed to the NHS and to the implantation of the Stevens Plan which is the Five Year View produced by head of the NHS in England, Simon Stevens. They will advance an additional £8billion funding in addition to the £2 billion already promised.
The Government will continue its efforts to clamp down on tax avoidance schemes and aim to raise £5 billion worth of savings by tackling aggressive tax avoidance.
Following the “no” vote delivered in the Scottish referendum earlier this year, plans have been devised to fully devolve income tax rates and bands to Scotland, with the first 10 percentage points of Scottish VAT revenues staying in in Scotland.
There are also plans to devolve powers to local governments in England, Wales and Northern Ireland. As part of his “Northern Powerhouse” plan, the power over fire services and children’s services is to be passed to Manchester’s mayor and the Chancellor is working with Sheffield on a similar deal.
Duty on cars will be changed to reflect the age and efficiency of the vehicle as it was felt that the current rules penalised those who could not afford to purchase a new car.
An average road tax of £140 will be levied and all of the proceeds from this tax will be used to fund new roads across the UK, particularly in the North to improve the transport links.
Due to the current stabilisation of fuel prices, fuel duty rates will be unchanged for the current year.
The government have committed to meet the NATO guideline spend of 2% of GDP on defence each year.
They will also increase spending on defence and security by 0.5% above inflation each year to 2020/21 and have advised that, if needed, an additional £1.5 billion per year will be available to military and intelligence services.