20 key announcements that could impact on your financial plans, both positively and negatively:
1. NEW NATIONAL LIVING WAGE OF OVER £9 AN HOUR BY 2020
From April 2016, a new National Living Wage of £7.20 an hour for the over-25s will be introduced. This will rise to over £9 an hour by 2020.
2. THE GOVERNMENT WILL RUN A SURPLUS IN 2019/20
The deficit is to be reduced by around 1% of GDP (the value of the economy as a whole) on average in each year, which is the same pace as over the last five years. This means a surplus (where more tax is raised than is spent) should be achieved in 2019/20, and debt falling annually. Included in this is:
- £12 billion by 2019/20 through welfare reforms
- £5 billion by 2019/20 from measures to tackle tax avoidance, planning, evasion, compliance and imbalances in the tax system
Plans for the remaining savings will be set out in the autumn following the spending review.
3. TAX-FREE PERSONAL ALLOWANCE TO BE INCREASED FROM £10,600 IN 2015/16 TO £11,000 IN APRIL 2016
The tax-free Personal Allowance – the amount people earn before they have to start paying Income Tax – will increase to £11,000 in 2016/17.
The Government aims to increase the Personal Allowance to £12,500 by 2020, and a law will be introduced so that once it reaches this level, people working 30 hours a week on the National Minimum Wage won’t pay Income Tax at all.
4. REFORMING THE WELFARE SYSTEM TO MAKE IT MORE AFFORDABLE
The welfare system will be reformed to make it fairer for taxpayers who pay for it, while continuing to support the most vulnerable.
- Working-age benefits, including tax credits and Local Housing Allowance, will be frozen for four 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 two 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 six months after the start of their claim
Rents for social housing will be reduced by 1% a year for four 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
5. TAKING THE FAMILY HOME OUT OF INHERITANCE TAX
Currently, Inheritance Tax (IHT) is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and registered civil partners can pass any unused allowance on to one another.
From 6 April 2017, each individual will be offered a new main residence transferable nil-rate band so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017/18.
The family home allowance will be added to the existing £325,000 IHT threshold, meaning the total tax-free allowance for a surviving spouse or registered civil partner will be up to £1 million in 2020/21. The allowance will be gradually withdrawn for estates worth more than £2 million.
6. THE AMOUNT PEOPLE WITH AN INCOME OF MORE THAN £150,000 CAN PAY TAX-FREE INTO A PENSION WILL BE REDUCED
Most people can contribute up to £40,000 a year to their pension tax-free. From 6 April 2016, this amount will be reduced for individuals with incomes of over £150,000, including pension contributions.
7. THE HIGHER-RATE THRESHOLD WILL INCREASE FROM £42,385 IN 2015/16 TO £43,000 IN 2016/17
The amount people will have to earn before they pay tax at 40% will increase from £42,385 in 2015/16 to £43,000 in 2016/17.
8. REFORMING DIVIDEND TAX
The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from 6 April 2016. Tax rates on dividend income will be increased.
This simpler system will mean that only those with significant dividend income will pay more tax. Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe.
9. THE EMPLOYMENT ALLOWANCE WILL INCREASE BY A FURTHER £1,000 TO £3,000
Businesses will have their employer National Insurance bill cut by another £1,000 from April 2016, as the Employment Allowance rises from £2,000 to £3,000. The Employment Allowance gives businesses and charities a cut in the employer National Insurance they pay. Next year, businesses will be able to employ four people full time on the National Living Wage and pay no National Insurance at all.
10. THE STANDARD RATE OF INSURANCE PREMIUM TAX WILL INCREASE TO 9.5%
From November 2015, the standard rate of Insurance Premium Tax will be increased from 6% to 9.5%.
11. RESTRICTING TAX RELIEF FOR SOME LANDLORDS
Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Individual landlords that receive tax relief at 40% and 45% will see their tax relief restricted to 20% from 6 April 2020.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay regardless of whether they replace furnishings in their property), will also be replaced by a new system that only allows them to receive tax relief when they replace furnishings.
12. ENDING PERMANENT NON-DOM STATUS
Non-domiciled individuals (non-doms) live in the UK but consider their permanent home to be elsewhere. The UK rules allow non-doms to pay UK tax on their offshore income only when they bring it into the UK.
Permanent non-dom status will be abolished from 6 April 2017. From that date, anyone who’s been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for tax purposes.
13. REFORMING THE WAY BANKS ARE TAXED
Following increasing bank profits, and to reflect changes in bank regulation, the Government is:
- Introducing a new 8% tax on banking sector profits from January 2016
- Introducing a phased reduction in the rate of the Bank Levy (which is charged on banks’ balance sheets) from 0.21% to 0.1% between 2016 and 2021
- Excluding UK banks’ overseas subsidiaries from the Bank Levy from January 2021
14. 30 HOURS OF FREE CHILDCARE FOR THREE AND FOUR-YEAR-OLDS
From September 2017, working families with three and four-year-olds will receive 30 hours of free childcare – an increase from the 15 hours they’re currently offered.
15. STUDENT MAINTENANCE GRANTS WILL BE REPLACED WITH LOANS
From the 2016/17 academic year, cash support for new students will increase by £766 to £8,200 a year, the highest level ever for students from low-income households. New maintenance loan support will replace student grants. Loans will be paid back only when graduates earn above £21,000 a year.
16. ROAD TAX WILL BE REFORMED AND THE MONEY RAISED SPENT ON THE ROAD NETWORK
The road tax system will be revised to make it fairer and sustainable. From 2017, there will be a flat rate of £140 for most cars, except in the first year when tax will remain linked to the CO2 emissions that cars produce. Electric cars won’t pay any road tax at all and the most expensive cars will pay more.
Existing cars won’t be affected – no one will pay more for a car that they already own. The money brought in from road tax in England will be spent on England’s roads from 2020.
The Government will extend the deadline for the first MOT of new cars and motorcycles from three years to four years.
17. PUBLIC SECTOR PAY WILL INCREASE BY 1%
Public sector pay will increase by 1% a year for four years from 2016/17.
18. CORPORATION TAX WILL BE CUT TO 19% IN 2017 AND 18% IN 2020
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20%. It will now fall further, from 20% to 19% in 2017, and then to 18% in 2020.
19. THE ANNUAL INVESTMENT ALLOWANCE WILL BE SET AT ITS HIGHEST EVER PERMANENT LEVEL AT £200,000
The annual investment allowance, which has previously been increased temporarily, will be set permanently at £200,000 from January 2016. The allowance means businesses can deduct the full value of certain items, including equipment and machinery, up to a total value of £200,000 from their profits before tax. This helps them with cash flow because it means the full tax relief is given in the year items are purchased, rather than over several years.
20. MAKING SURE INDIVIDUALS AND BUSINESSES PAY WHAT THEY OWE
The Government will continue to clampdown on tax avoidance, planning and evasion, as well as increasing resources for HM Revenue and Customs (HMRC) so they can make sure people pay the tax that’s due.
- Extra investment between now and 2020 for HMRC’s work on evasion and non-compliance
- Tripling the number of criminal investigations HMRC can undertake into complex tax crime, concentrating on wealthy individuals and companies
- Allowing HMRC to access more data to identify businesses that aren’t declaring or paying tax
- Stopping investment fund managers from using tax loopholes to avoid paying the correct amount of Capital Gains Tax on their profits from the fund (this is known as ‘carried interest’)
- Making sure international companies pay tax on profits diverted from the UK
- Introducing a ‘general anti-abuse rule’ penalty and tough new measures for serial avoiders, including publishing the names of people who repeatedly use failed tax avoidance schemes