The Chancellor delivered his second 2015 Budget this lunchtime. Here, we summarise the key points, including major changes to the way dividends are taxed, an Inheritance Tax overhaul, a possible fresh review of IR35, and a pension tax relief cut for the highest earners.
- The growth forecasts for the economy remain unchanged since the March Budget, with 2.4% forecast for 2015, 2.3% in 2016, and 2.4% in 2017.
- Government borrowing is expected to fall from just under £70bn this fiscal year to £43.1bn in 2016-17, and falling in successive years before a surplus is forecast for 2019-20.
- Over £7bn is to be raised via further anti-avoidance measures.
- Permanent ‘non-dom’ tax status is to be abolished from 2017. Individuals who have lived in the country for 15 or more of the past 20 years will be taxed at the same rates as UK taxpayers after this point.
- Tax relief on Buy to Let mortgage interest is to be restricted to the basic rate of income tax from 2017. This change will be implemented gradually over 4 years to minimise the impact on higher-rate taxpayers. Find out more about contractor mortgages here.
- Changes to Inheritance Tax. From 2017, an additional of £175,000 property allowance will be added to the existing £325,000 Inheritance Tax threshold. The additional allowance applies a main residence is passed on death to direct descendants. The allowance starts at £100,000 in 2017/2018.
- From next year, tax relief on pension contributions will be reduced for high earners. If you earn over £150,000, the tax relief available on pension contributions will fall by £2 for every £1 you earn over this threshold, to a minimum of £10,000.
- The Annual Investment Allowance (AIA) will be reduced to £200,000 from January 2016. It is currently £500,000, and provides tax relief for eligible investments in plant and machinery assets.
- Major reform to the taxation of dividends – see below for more details.
- Employment Allowance to be increased by £1,000 to £3,000 from April 2016. However, this allowance will no longer be available to companies where a sole-director is also the sole employee.
- The Chancellor has confirmed plans mentioned during the March 2015 Budget that tax relief on travel and subsistence expenses can no longer be claimed by umbrella employees who are ‘supervised, directed and controlled’.
- Corporation Tax will be cut from 20p to 19p (2017) and 18p in 2020.
- Personal Allowance will rise to £11,000 (from £10,600) from 2016.
- Higher Rate Threshold will rise to £43,000 (from £42,385) from 2016.
- IR35 ‘effectiveness’ questioned – see below for more details.
- New National Living Wage to be introduced in 2016, starting at £7.20/hour, to reach £9/hour by 2020.
- From November, the rate of Insurance Premium Tax (IPT) will be increased from 6% to 9.5%.
Dividend Tax changes
The Dividend Tax Credit has been identified as an “arcane and complex feature of the tax system.”
From April 2016, it will be replaced with a new tax-free Dividend Allowance of £5,000 p.a. for all taxpayers.
So, from April 2016, when the personal allowance rises to £11,000, taxpayers will be able to receive £16,000 tax-free (including £5,000 in dividends).
Thereafter, the rates of dividend tax will be:
- 7.5% (basic rate)
- 32.5% (higher rate)
- 38.1% (additional rate)
The Government says it only expects shareholders with ‘significant’ dividends (£140,000 per year or more) to be worse off as a result of these reforms. However, given that the current effective tax rates for each tax band are currently lower (0%, 25%, 30.56%), it appears that most limited company contractors will pay more tax as a result. Read our complete guide to the April 2016 tax changes here.
A further review of the effectiveness (or lack of) of IR35 is to be carried out. See this extract from the Budget document:
“As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough. Non-compliance in this area is estimated to cost over £400 million a year.”
“The Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The government wants to find a solution that protects the Exchequer and improves fairness in the system.”
You can access the official Budget site and documentation here.