Now that the dust has settled following the Summer Budget announced by the Chancellor George Osbourne on the 8th July, there are a number of areas that we feel require closer examination and explanation. As with most budgets, the devil is invariably in the detail.
Let’s start with Corporation Tax. The Chancellor announced that the rate of Corporation Tax would reduce to 19% in 2017 and 18% in 2020.
In principal, this looks attractive but for the majority of start-ups and small businesses who generate marginal profit, this will have minimal impact. Whilst this announcement says ‘the UK is open for business’ it will be interesting to gauge the response from members of the EU, many of which have higher rates of Corporation Tax.
The National Living Wage was the next big talking point following the budget announcement. As of April 2016, the Government is introducing a new minimum wage of £7.20 which will rise to £9.00 by 2020. This will have a significant impact on those small businesses employees’ large numbers of staff on the minimum wage.
However, George Osbourne did also announce a 50% increase in the National Insurance Employment Allowance from £2,000 to £3,000. This will help small business owners to reduce their wage bill and could possibly offset the increase in the National Living Wage.
A measure that is likely to affect many of our clients is dividend taxation. From April 2016, the Dividend Tax Credit will be abolished and a new Dividend Tax Allowance of £5,000 a year will be introduced. The new rates of tax on dividend income above the allowance will be 7.5% for basic tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate payers.
The other measure that also caught our attention was the Annual Investment Allowance. This allows SMEs to make tax-deductible investment in plant, equipment and machinery.
The allowance is currently set at £500,000 but it was set to be reduced to £25,000 from January, 1 2016. In the Summer Budget, the Chancellor announced that the allowance will now be set at £200,000. Whilst this is still a significant reduction, it is welcomed by those businesses who are proposing to invest in plant, equipment and machinery, particularly our agricultural clients. Our concern however is for those who perhaps invested earlier than they would have liked in order to avail of the higher allowance before it was slashed and its impact of their cash flow.
With so much talk pre-Summer Budget about anticipated changes to Inheritance Tax, when you look in detail at what George Osbourne announced in the budget you would be right to feel disappointed.
The IHT nil-rate band was previously frozen at £325,000 until April 2018. It will now remain frozen until April 2021. The Government will also introduce an additional nil-rate band when a residence is passed on death to a direct descendant. This will be £100,000 in 2017/18 and will increase by £25,000 each year until it is £175,000 in 2020/21. Sounds good doesn’t it? Perhaps not so. Whilst this could potentially allow families to pass on up to a total of £1 million to their children without paying IHT, this new measure will only affect individuals, with direct descendants, who have an estate which includes a private main residence with total assets above the IHT threshold (or nil-rate band) of £325,000.
Which brings us on finally to tax relief for landlords. We expect this to affect many people who have purchased rental property as a secondary source on income. The new legislation, which will be phased in from 6 April 2017, will mean that landlords will no longer be able to deduct all of their finance costs from their residential property income to arrive at their property profits. Instead they will receive a basic rate reduction from their income tax liability for their finance costs.
As we look more closely at the Chancellor’s budget announcement it is clear to see that the devil really is in the detail. What we are noticing each year is tax legislation is becoming more and more complex and HMRC being given more powers. This places great importance on individuals and business owners to seek professional advice from their accountant or tax advisor. Failure to do so could ultimately result in paying too much or not enough tax and not forgetting of course the risk of penalties, fines or investigations by HMRC.
If you are affected by any of the new measures announced in the Summer Budget 2015 and need advice, please contact your usual HLB advisor or call to speak to a partner at one of our regional offices.
Read our Summer Budget 2015 special reports.