This has been an interesting Budget.
Many of the announcements have been fairly standard, for example increases to the Personal Tax-Free Allowance (from £10,600 this year to £11,000 from April next year) and the higher rate Income Tax threshold (from £42,385 this year to £43,000 from April next year).
However, there have been a few changes that are slightly more radical. I have discussed three of these in a little more depth, and given a brief summary of a few other changes below.
Note that this is not a comprehensive summary. Our focus is on financial products and services, so some of the announcements that do not relate directly to advice we may provide are not covered.
From April next year, the Government has proposed to ‘simplify’ tax on dividends.
At the moment all dividends have a 10% tax credit, which means they are effectively taxed at source and you receive 90% of the dividend. This is the case regardless of whether or not the shares are held within an ISA or a pension. If the shares are not held within an ISA or a pension then higher and additional rate tax payers are required to pay a further 22.5% and 27.5% through their annual tax return (basic rate tax is already covered in full by the tax credit). It is not exactly a simple system, and the tax credit cannot be reclaimed within ISAs or pensions.
The new proposals are to pay all dividends gross, scrapping the tax credit altogether, and giving investors a £5,000 tax-free Dividend Allowance. For those who exceed the Dividend Allowance from investments held outside ISAs and pensions, tax will be due at a rate of 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate tax payers. This will result in some investors paying more tax.
ISAs and pensions will now benefit from receiving the gross dividend and will not have any tax to pay, so are a very attractive proposition for the income investor with a larger portfolio. It’s, therefore, even more important to make use of ISA and pension contribution allowances where possible.
For anyone receiving dividends from a business, that arrangement should be reviewed to ensure that it remains tax-efficient.
From April next year, for those earning over £150,000, including pension contributions made by them and their employer, the £40,000 annual allowance will be reduced by £1 for every £2 over to a minimum of £10,000.
These rules don’t apply to those earning less than £110,000 before accounting for pension contributions, and they are, therefore, still able to contribute the equivalent of their annual occupational earnings up to a maximum of £40,000 per year.
The Government is consulting on pension tax relief reforms and whether there is a case to change the current system. They have said that they are going into the consultation with open minds, but it seems there are likely to be yet more changes to pensions before long.
As pre-election discussions have been indicating, the Chancellor has announced his plans to remove family homes from inheritance tax when they are passed to children or grandchildren.
From April 2017, each person will have a ‘main residence’ nil-rate band of £100,000, rising to £125,000 in 2018, £150,000 in 2019 and ending up at £175,000 in 2020. This will apply to the family home and will pass to a spouse or civil partner if unused.
Where you downsize or sell the family home, the ‘main residence’ nil-rate band will still be applied to the equivalent sale value.
The current nil-rate band will remain in place at £325,000, so by 2020 the effective nil-rate band will become £1 million for couples with children or grandchildren. If the total estate is worth more than £2 million, the ‘main residence’ nil-rate band will be tapered off.
Of course, this is only going to benefit those who have children or grandchildren to pass their home onto, but it’s still a significant step to removing more people from inheritance tax.
Other Budget Announcements
From April 2016 the Personal Tax-Free Allowance will increase to £11,000. The Chancellor has set out the Government’s ambition for this to increase to £12,500 by 2020 and to permanently remove those who work 30 hours per week earning the minimum wage to be removed from income tax.
For higher rate tax payers the threshold will be increased to £43,000 from April 2016.
A new ‘national living wage’ is to be introduced in April 2016 for workers over age 25. This will start at £7.20 per hour and will be increased to £9 per hour by 2020.
Finally, the Help to Buy ISA is set to be available from 1st December this year.
If you have any queries relating to the Summer Budget and how you might be affected, please do get in touch.