This was George Osborne's first Budget without the influence of the Liberal Democrats and only a few months since his previous Budget announcements. So what's new?
Overall the scale of the cuts are lower than expected and the austerity measures have been spread over a longer period than had been anticipated.
Following the announcement in March that the Personal Allowance would increase to £10,800 in April 2016, George has decided to increase the allowance further to £11,000 from that date.
Currently the allowance is £10,600 so from April an extra £400 can be earned without paying tax, saving £80 tax per annum.
The Government will seek over the lifetime of this parliament to increase the Personal Allowance to £12,500.
Taxpayers currently start paying higher rate tax (40%) once they are earning £42,386 and this will increase to £43,000 from April.
Dividends and small owner managed businesses
A significant overhaul of the taxation of dividends is planned and this will have a big impact on business owners who take their income as a mix of dividends and salaries.
Currently owner/managers of businesses who pay themselves by a mix of dividends and salaries don't have to pay any extra tax on dividends if they are basic rate taxpayers. The plan is now to introduce an extra tax of 7.5% on these dividends. This also means that higher rate taxpayers who effectively paid 25% on dividend income will in future have to pay 32.5%.
Analysis of the Governments figures show that they expect to take an extra £2.5bn in tax receipts next year because of this change.
In addition the Government estimates it will take an extra £190m in tax next year as a result of changes to the tax system which will reduce the incentive for small businesses to become companies.
While the Government has announced an increase in the Employment Allowance (see below) it is planning to remove the Employment Allowance completely from “single person companies”. So individuals who trade through their own limited company will lose this benefit, and the Government estimates that this change will save them £80m next year.
National Living Wage (NLW)
The Chancellor announced the introduction of the National Living Wage which will be mandatory for employers to pay any staff over the age of 25. Starting next April the NLW will be set at £7.20 per hour – the current minimum wage for anyone over 21 is £6.50 and this will represent almost an 11% pay increase for staff on the minimum wage.
It is intended that the NLW will rise to £9 per hour by 2020, giving an effective increase of 38% over 5 years.
On the other side of the coin, the Chancellor announced reductions to the amounts paid through the tax credit system and it is possible that some relatively low paid workers will be worse off overall as a result of these changes. The Treasury’s figures show that a saving of £4.5bn is expected next year as a result of the changes to the tax credit system.
Corporation tax and business allowances
Companies are going to face increased staff costs as a result of the introduction of the NLW, but a range of changes to taxes that businesses face will help ease the pain.
Corporation Tax on profits will reduce from its current 20% to 19% in 2017 and 18% in 2020.
The Employment Allowance which means employers currently don’t have to pay the first £2,000 of National Insurance each year will rise to £3,000 from April next year.
The Annual Investment Allowance, which gives tax deductions for businesses to encourage them to invest in capital and equipment, will be set at £200,000 from January 2016.
Other items in brief
Insurance premium tax will be increased to 9.5% from its current rate of 6% and this will increase car and household insurance premiums by 3.5%
An apprenticeship levy scheme will be developed which all large companies will have to contribute towards to help fund the 3 million apprenticeships that the Government has targeted. There’s no indication yet on the scale of the levy or what the definition of large is.
Increases in Inheritance Tax allowances have been announced
Changes to the tax treatment for Buy-to-Let Landlords are planned
Restrictions to be introduced to tax relief on pension contributions for those earning over £150,000.
As always, tax is a complex area and professional advice should be sought before making any changes. Contact Kesworth if you'd like to know more about how the Budget may effect you.