Chancellor George Osborne’s emergency budget set out measures to raise income tax and inheritance tax thresholds, boost the minimum wage and also make welfare cuts in what he described as a Budget “for working people”.
There were winners and losers – as always – in this Budget, so here we go through a few of the changes and what they mean for you:
Insurance premiums set to rise
There was bad news for car owners, pet owners, homeowners and anyone who buys breakdown cover, as insurance premium tax will rise by nearly 60% from November from its current level of 6% to 9.5%. This will add around £17.50 onto the average ‘Shoparound’ quote according to Janet Connor, managing director of AA Insurance.
She said: “This couldn’t be a worse message for motorists from the Chancellor. The average Shoparound premium at the end of the first quarter of 2015 was £530, having fallen from a peak of £742 at the end of 2011, following a significant increase in the number whiplash injury claims and ‘cash for crash’ fraud. They have not yet fallen back to the £493 which was a typical premium at the beginning of 2010.
“The increase in IPT simply hasn’t been thought through and will have unintended consequences. Because of intense competition, new business is usually sold at a loss. This can therefore only put greater upward pressure on premiums as a whole.
“Premiums are beginning to rise again and the additional IPT burden will make insurers think again about their pricing and I would not be surprised to see an overall increase of 10% or more by the end of the year and continuing upward pressure into 2016.
“What’s more, those on the lowest incomes who struggle to pay for car insurance may well be tempted to attempt to drive without cover, undoing much of the good work carried out by the industry to curb this plague. Today is a very bad day for car and home owners.”
This tax already raises around £3 billion a year for the Government, said Adrian Smith, global head of IPT at KPMG, so this hike will add an extra £1.75 billion to the Treasury’s coffers each year.
He said: “However the increase in IPT might result in general insurance policyholders having insufficient cover, as they seek to balance an increase in price with maintaining the cover they require. While 9.5% is still a reasonably low rate compared to other countries, it could be enough to tip the point for a customer to reduce their cover, or opt for no cover at all.
“We may also see businesses choose to insure with overseas insurers who do not always correctly account for UK IPT. UK-based insurers could struggle to compete with these overseas insurers who, by not correctly charging this tax, are able to offer lower premiums. However businesses must be careful as these providers may not necessarily have the same level of regulation as UK insurers and, therefore, policyholders may not benefit from the same level of protection.
“The real challenge will be for UK insurers to help policyholders understand the balance between price and cover given the changes.”
Changes to Vehicle Excise Duty
If you buy a new car from April 1, 2017 then you will not be paying car tax at the same levels that you are now. For the first year, you will be paying a tax based on the emissions of your vehicle, which will range from nothing for zero-emission cars, up to £2,000 for cars emitting more than 255g/CO2/km. Cars worth more than £40,000 will also pay an additional £310 supplement for the first five years.
Following the first year, all cars – except zero-emission cars which will remain at zero tax – will pay £140 as a standard rate. In addition, all money raised from vehicle excise duty will be ring-fenced to go towards paying for road improvements in Britain.
The changes will only apply to new cars, no-one will face a rise in the cost of tax for the car they already own.
Inheritance Tax Threshold to rise to £1m for couples
The IHT threshold will rise to £1m for couples who are looking to pass their family home onto their children or grandchildren, but this will not be in place until 2020/21.
The current IHT threshold per person is £325,000 and married couples and civil partners are able to use any of their deceased spouse’s allowance left unused on their death, giving a possible £650,000 estate that can be passed on without IHT.
The £325,000 will rise by £100,000 in 2017/18, £125,000 in 2018/19. £150,000 in 2019/20 and finally £175,000 in 2020/21. It should make it easier to pass the family home on without a tax charge, but only if you have children.
Joan Foster, Tax Partner at Baker Tilly, said: “Spouses and civil partners will need to wait until 2020/21 to have the full benefit of a £1m IHT allowance when leaving a property to their direct descendants. The additional allowance will be tapered for those with estates in excess of £2m. Relief will be available against assets of a similar value to a previously owned property where the couple have chosen to downsize.
“But what of those with no children/grandchildren to inherit the property and what will ‘downsizing’ mean? Under current proposals, the allowance won’t be available. And will moving from London to a similar size, cheaper property protect the allowance or will this be measured by the property size? We will have to wait to see what HMRC interprets ‘downsizing’ to mean.”
Related content: Seven ways to cut your IHT bill now.
Buy-to-let mortgage relief to be cut
Landlords currently can offset their mortgage interest against their income, and receive tax relief at their highest marginal rate – which could be as much as 45%. But from April 2017, landlords will see the amount they can recoup in tax relief start to reduce, finally reducing to the basic rate tax of 20% by 2020/21.
As of April 6, 2017 landlords will only be able to claim higher-rate tax relief on 75% of their finance costs, with the remaining 25% available only as a basic rate tax deduction. The balance will go to 50%-50% in 2018/19, 25%-75% in 2019/20, and everything will be given the basic tax relief by 2020/21.
Brian Slater, Chair of the Charted Institute of Taxation’s Property Taxes Sub-committee said: “It is vital that adequate resources are devoted to explaining and publicising these quite complex changes that will affect a very large number of smaller landlords.
“Previous changes to the tax rules for deducting the cost of providing white goods such as free standing fridges, cookers and soft furnishings were introduced without adequate publicity. Inadequate information leads to inadvertent non-compliance and confusion.”
Nimesh Shah, Partner at Blick Rothenberg LLP said: “The Chancellor announced that tax relief for individual buy-to-let landlords will be restricted to the basic rate of tax, and this will be phased in from April 6, 2017 until relief is completely restricted to the basic rate by 2020/21. The Treasury projects this measure to raise £665m by 2020/21.
“What’s interesting is that the restriction applies to individuals owning properties and companies are not affected. With a further reduction in the main rate of corporation tax, companies may become even more popular structures for buy-to-let landlords.”
Ms Foster said: “Currently landlords receive full tax relief for their mortgage interest whilst homeowners receive none. This relief is to be tapered out over four tax years to be replaced fully by a basic rate tax deduction in 2020/21.
“For those currently receiving 45% tax relief this is surely bad news, however, for those with property losses, if this basic rate tax deduction is allowable against total income (and not just rents), will this bring tax relief forward, even if at a lower rate?
“Currently wear and tear allowance – equal to 10% of rents – is available to landlords regardless of what expenses they incur in respect of a rental property. From April 2016 this will be replaced with a new relief allowing residential landlords to deduct the actual costs of replacing furnishings. Landlords will now have to incur expenditure and keep related evidence to obtain relief. Good news for tenants in properties in need of refurbishment, although not if landlords increase their rent to compensate for these lost reliefs.”
Increase in rent-a-room relief
If you choose to rent out a room in your home, you benefit from this relief which allows you to currently receive tax-free income from that up to £4,250 a year, but from April 6, 2016 this will rise to £7,500 per year.
HMRC estimates that this change will bring around 10,000 people who do rent out a room out of the self-assessment tax system as a result.
Personal Allowance set to rise
The Chancellor outlined that from April 6, 2016 the personal allowance – the amount of money you can earn before you start paying any tax – will rise from its current level of £10,600 to £11,000 and then £11,200 by 2017/18. The higher rate tax threshold will rise from £42,385 now to £43,000 in 2016.
While this is good news, it is more of a headline grabber than a real benefit, said David Kilshaw, head of private client tax at EY.
He added: “The Chancellor clearly wants to boost people’s pay packets… but it is a very small post-election thank you. We still have not seen an increase in the threshold at which National Insurance (NI) is paid, which would have been helpful to the lower paid. And there is now almost a £3,000 difference in the limit at which NI and income tax bite.
“The Chancellor announced an increase in the personal allowance to £11,000 with effect from 6 April 2016, rising to £11,200 by 2017/18. The £11,000 personal allowance represents an increase of £400 on the current rate and £200 from the allowance announced in the March Budget. In total, this represents an annual tax saving of just £80 per year for a basic rate tax payer. Nothing to write home about but the change to personalallowances will grab the Chancellor some easy headlines.
“The Chancellor has also confirmed that he will raise the level at which individuals start paying tax at 40% from £42,385 per year to £43,000 for 2016/17 rising to £43,600 for 2017/18. This, combined with the increase in the personal allowance, represents a further small saving for higher rate taxpayers in 2015/16.”
Changes to dividend taxation
The Dividend Tax Credit will be abolished from April 2016, and instead there will be a new Dividend Tax Allowance of £5,000 a year, with tax on dividend income from that date set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
While the Conservatives have pledged not to raise income tax, National Insurance and VAT for this Parliament, Nimesh Shah, partner at Blick Rothenberg LLP, said: “The changes to dividend taxation announced in the Summer Budget are effectively an increase to personal income tax, going against the so-called ‘tax lock’.
“The current personal tax rates applying to dividends are effectively 0% at the basic rate, 25% for higher rate taxpayers and 30.56% for additional rate taxpayers – this is because when a UK company pays a dividend, there is a 10% ‘notional’ tax credit attached to the dividend.
“From April 2016, the 10% ‘notional’ tax credit applying to dividends will be abolished and the new rates of personal tax applying to dividends will be 7.5%, 32.5% and 38.1%. This is a real increase in the headline rates of personal tax applying to dividends.
“The Government will introduce a new ‘dividend tax allowance’ so the first £5,000 of dividends will be exempt, but under the current regime, an individual who has no other income can receive approximately £38,000 of dividend income tax free. From April 2016, the same individual will have a tax liability of £1,700.
“An additional important point is that the Treasury is projecting that this measure will raise £2.5 billion in additional tax revenue in 2016/17 so it’s a significant change for the Government.”
Pensions set to become more like Isas
The Government has announced a consultation on fundamental changes to the pension system, with a view to bringing it more in line with individual savings accounts (Isas). But some changed will impact on higher earners much more quickly.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The government’s laudable ambition is for a pension system which is simple, sustainable and transparent and which encourages individuals to take personal responsibility for their retirement savings; whether they can ever find this Holy Grail remains to be seen. This is likely to mean a closer alignment between pensions and Isas but probably not merging them into one system.”
“Any reform in the future is likely to be weighted in favour of lower earners and will probably result in the further erosion of tax breaks for higher earners.”
The Chancellor has also carried through the Conservative’s pre-election pledge to cut the pension annual allowance, which is likely to affect those with taxable income above £110,000.
Mr McPhail said: “Anyone caught by this restriction, who isn’t fortunate enough to already have enough in their pension, is going to find building up a decent retirement income has now become hugely challenging. This change also marks the beginning of the end for the existing system of pension taxation. Higher earners should make the most of it while they still can. ”
The loss of the Annual Allowance means that someone earning over £210,000 will see a £30,000 reduction in their Annual Allowance, resulting in the effective loss of £13,500 in pension tax relief, said Mr McPhail.
This means that a 40 year old with an existing pension fund of £200,000 who now sees their annual allowance cut from £40,000 to £10,000 would also see their projected pension fund at age 67 cut from £1.45 million to £552,000.
He added: “Transitional arrangements announced by HMRC mean that anyone who has already contributed up to £40,000 in the current tax year will have a further Annual Allowance of £40,000 between now and the end of the tax year.
“It looks like investors get two bites at the cherry in the current tax year. Even if they have already used up their Annual Allowance for the current tax year, they can contribute up to another £40,000 between July 9, 2015 and April 5, 2016. This will be particularly relevant for 45% taxpayers, who are never going to get it this good again.”
New national minimum wage
The National Minimum Wage will rise to £7.20 an hour from April 2016, and increase to more than £9 an hour by 2020.
Maintenance grants for students to be replaced with loans from 2017
Maintenance grants for students from low-income households will be removed, and replaced with more loans of up to £8,200 a year if the student is studying away from home and outside London. In addition, some universities will be able to increase their tuition fees in line with inflation from 2017/18.
Anthony Thomas, chairman of the Low Incomes Tax Reform Group, said: “Repayments on these new loans will only begin when graduates have annual earnings above £21,000, but this is yet another financial burden that young workers will have to face, as well as repaying their Plan 2 student loans, income tax, National Insurance and pension contributions and possibly postgraduate loans too1.
“Further unwelcome news for some students is that certain universities will be able to increase their tuition fees in line with inflation from 2017-18, which will result in their having to take on yet higher loans.
“Although the Chancellor announced some good news with the introduction of the National Living Wage, unfortunately this only applies to workers aged 25 and over, and the National Minimum Wage will still apply to workers under 25 and apprentices. This means that from October 2015, if you are aged 18-20 you could earn as little as £5.30 an hour, or £6.50 if you are aged 21-24, and from April 2016 if you are over 25 £7.20 per hour.”
30 hours of free childcare for working families with 3-4 year olds
From September 2017, families will see the amount of free childcare they can receive each week doubled from 15 hours to 30 hours.
Welfare system to be reformed to make it more affordable
There are wide-ranging changes to the welfare system that the Government has said will include:
- working-age benefits, including tax credits and Local Housing Allowance, will be frozen for 4 years from 2016-17 (this doesn’t include Maternity Allowance, maternity pay, paternity pay and sick pay)
- the household benefit cap will be reduced to £20,000 (£23,000 in London)
- support through Child Tax Credit will be limited to 2 children for children born from April 2017
- those aged 18 to 21 who are on Universal Credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement 6 months after the start of their claim
- rents for social housing will be reduced by 1% a year for 4 years, and tenants on higher incomes (over £40,000 in London and over £30,000 outside London) will be required to pay market rate, or near market rate, rents
Source: HM Treasury
The aim, according to the Government, is to make the system fairer for the taxpayers who pay for it while continuing to support the most vulnerable.
HMRC to get the power to raid your bank account from this summer
HM Revenue & Customs (HMRC) is to be given the power to raid the bank accounts of people who owe the Exchequer more than £1,000, and it will not have to go to court to get permission to take the money owed, although you will be able to appeal against this action.
This measure was announced back in 2014, but could come into effect in the next few months. Once the Summer Finance Bill receives Royal Assent, the new powers will enable HMRC to take money owed across all and any accounts held by an individual, providing an aggregate of £5,000 minimum is left in their possession across all accounts. The measure will apply to both individuals and businesses.