A stubbornly high deficit has to be repaid somehow - and taxation is the government’s means by which the debts can be paid.
The Office for Budget Responsibility (OBR) has forecast the UK deficit to be £79bn for 2015-2016 - a far cry from the promise made by the Chancellor in 2010, when he said it would be in balance.
In his 2010 Budget speech, George Osborne had promised: “The formal mandate we set is that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget.”
He also pledged: “In 2015-16, borrowing falls further to £20bn. As a share of the economy, borrowing will fall from 10.1 per cent of GDP this year to just 1.1 per cent in 2015-16.”
As we have seen in the current Budget, borrowing has fallen just over £10bn in the first 10 months of the fiscal year compared to the same period a year earlier, and is expected to be 4.2 per cent of GDP in 2015-2016.
The UK may be “all in it together” but we are not out of the woods yet.
Revenue is needed by the government and, according to Andrew Watters, senior tax partner at Thomas Eggar: “Mr Osborne would like to bridge this deficit through economic growth but that is slower than he would wish and the short-term alternative is higher taxes.
“The government had already announced changes to benefits which will affect on those less well-off and (it clearly wanted) to show that wealthier people are also sharing the burden.”
So while the Treasury seemed to be avoiding high-profile increases in rates of income tax, and making a £7bn “tax cut for our nation of shopkeepers”, there have been more measures designed to increase so-called ‘stealth’ taxes - and a bitter pill for fizzy drinks companies with a tax on sugar, which the OBR believes will levy £520m.
Personal taxes
Income tax
In 2015, the Conservative party pledged to increase the personal allowance from £10,600 to £12,500 by 2020/21 and ensure that people paid minimum wage did not pay income tax.
In austere times, the Chancellor was unlikely to cut income tax further. Instead he announced he was raising more people out of paying income tax altogether.
The personal allowance, below which no income is payable, will increase for those on a standard tax code from £10,600 to £11,000 on 6 April 2016 and again to £11,500 on 6 April 2017.
The threshold at which higher rate tax becomes payable by individuals with standard tax codes will also rise, from its current level of £42,386 to £43,000 this April and £45,000 in April 2017.
Capital Gains Tax
In his speech, the Chancellor said: “The headline rate of Capital Gains Tax (CGT) is now one of the highest in the developed world. We want our taxes to be among the lowest.”
He slashed the headline rate of CGT from 28 per cent to 20 per cent, and cut the CGT payable by basic rate taxpayers from 18 per cent to 10 per cent. These will come into effect in April.
Danny Cox, chartered financial planner for Hargreaves Lansdown, says: “A cut in CGT will help investors reorganise their portfolios for the right investment reasons and not be held back so badly by the ball and chain of tax.
“As we saw from the last time the rate of CGT changed, low tax rates stimulate activity and tax generation.”
However, these new, lower rates will not be applied to gains on residential property or carried interest.
Sue Moore, technical manager, private client, tax faculty for the Institute of Chartered Accountants in England and Wales, calls this move “the headline-grabber in the Budget speech”.
She points out: “This will ensure the new CGT charge on non residents on the disposal of residential property will still be charged at 28 per cent”.
National Insurance Contributions
While it would have made sense to integrate national insurance contributions (Nics) into income tax, the effect would have been to raise the headline rate of income tax. However, “this was unlikely to be the year of such rationalisation”, Mr Watters comments.
Instead, as outlined on page 42 of the Budget document, the government announced it would tighten the scope of the £30,000 exemption and “align the rules so employer Nics are due on those payments above £30,000 that are already subject to income tax”.
The first £30,000 of a termination payment will remain exempt from income tax and the full payment will be outside of the scope of Nics.
Furthermore, the government is considering limiting the range of benefits that attract income tax and Nics advantages, when they are provided as part of salary sacrifice schemes.
| Tax | 2015 Summer Budget | Changes in 2016 Budget |
| Income tax | Personal allowance to increase from £10,800 in 2015/6 to £11,000 in 2016/7. Increases in the main rates of income tax were ruled out but the higher rate threshold from will rise from £42,385 in 2015/16 to £43,000 in 2016/17 and to £43,600 in 2017/18. | Personal allowance to rise to £11,500 in 2017/2018. Higher rate threshold will rise by £2,000 to £45,000 in 2017/18. |
| Pension allowance | Lifetime allowance remained at £1.25m and annual allowance at £40,000. From April 2016 there will be a taper to the annual allowance for those with adjusted annual incomes, including their own and employer’s pension contributions, over £150,000. | No changes; Lifetime Isa introduced. |
| Capital gains tax | Rates unchanged but the government said it would stop investment fund managers from using tax loopholes to avoid paying the correct amount of capital gains tax on the profits of the fund payable to them. | From 6 April 2016, higher rate of CGT will be reduced from 28% to 20%. The basic rate of CGT will be reduced from 18% to 10%. Entrepreneurs’ relief will be extended to long-term investors in unlisted companies. This will provide 10% rate of CGT for gains on newly issued shares in unlisted companies bought on or after 17 March 2016. |
| Bank levy | A phased reduction of the bank levy rate was announced, from 0.21% to 0.18% from January 2016, 0.17% from January 2017, 0.16% from January 2018, 0.15% from January 2019, 0.14% from January 2020 and 0.1% from January 2021. A tax on banking sector profit from 1 January 2016, set at 8%. | No changes. |
| Inheritance tax | A transferable nil-rate band will be introduced from April 2017. This will apply when a main residence is passed on death to direct descendants. The allowance will be up to £100,000 in 2017/18, up to £125,000 in 2018/19, up to £150,000 in 2019/20, and up to £175,000 in 2020/21. There will be a tapered withdrawal of the main residence nil-rate band for estates with a net value of more than £2m. The existing nil-rate band will remain at £325,000 from 2018/19 until the end of 2020/21. | Government will legislate to charge IHT on all UK residential property indirectly held through an offshore structure, from 6 April 2017. |
| Corporation tax | The government will reduce the corporation tax rate from 20 per cent to 19 per cent in 2017 and 18 per cent in 2020. | Rate of corporation tax will be cut to 17 per cent by 2020. |
| Tax on savings interest | From April 2016 the government will remove the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. Combined with the personal savings allowance, from April 2016 individuals can receive up to £17,000 of income a year tax-free, and separately invest up to £15,240 a year through an Isa tax-free. Dividend tax rates set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. | Isa allowance to rise from £15,240 to £20,000 in April 2017. Any adult under 40 can open a new Lifetime Isa, saving up to £4,000 each year with a £1,000 government bonus Tax rules will be changed on Oeics, authorised unit trusts, investment trusts and peer to peer loans. This means income tax deductions on interest will no longer be payable from April 2017. Isa savings of deceased will benefit from tax advantages during the administration of their estate. |
Inheritance tax
Last year, the Chancellor announced an effective increase in IHT exemption up to £1m where the family home was involved, and the Budget confirmed and clarified some issues surrounding this.
They will be included in the Finance Bill 2016.
An individual could qualify for £20m at the entrepreneurs’ rate of 10 per cent if they invest and work in one business.
Undrawn funds within a pension fund that has been designated for drawdown by the member but not actually drawn at the date of the member’s death will not be liable to IHT. This measure will be backdated to deaths on or after 6 April 2011.
The residence nil rate band up to a maximum of £175,000 per person by the time it is fully introduced in April 2020, and £350,000 for a couple on second death, will still be available if the main residence has been ‘downsized’, provided the downsizing was on or after 8 July 2015.
The main residence at death or before downsizing has to be worth at least £350,000 for a couple to benefit from the maximum relief and it has to be bequeathed to direct descendants.
Anti-avoidance
As usual the government committed to stiffer penalties on people who avoid tax, especially where there are offshore assets involved.
There are already new international information sharing agreements in place, which will provide vast amounts of information to the UK authorities in 2018.
The Chancellor’s message is likely to be that anyone who has not ensured they are UK tax compliant by that point should expect, at best, even greater financial penalties with some falling foul of an HMRC that is increasingly empowered to follow a criminal route.
He also pledged that large multi-nationals who have offshored many of their taxable operations to avoid paying into HM Treasury would no longer be able to shelter money owed to the UK government.
Other tax changes
Pensions
The market had expected swingeing changes to pension tax relief, such as reducing the amount of tax relief at the point of contribution for higher earners, or removing the 25 per cent tax-free lump sum on pensions.
Mr Osborne backed down from tinkering with the tax reliefs on pensions, introducing instead the Lifetime Isa (covered in other sections of this guide), which will come with a 25 per cent government boost to individual savings.
There was no introduction of a Pension Isa, which would have moved the pensions regime from an ‘exempt, exempt, taxed’ - EET - system to tax, exempt, exempt - TEE- which would tax pension savings on the way in.
However, Phil Brown, head of transformation and policy for LV=, says: “My view is we are at the start of a transition process to ‘pensions Isa’ that will facilitate in the coming years the removal of the current tax relief system.”
Taxes on property
In the Autumn Statement, Mr Osborne had announced that stamp duty on residential properties was set to rise to 3 per cent from April for people with more than one property. This was extended to commercial property in this Budget.
“This, together with a reduction on the ability to set mortgage interest against profits, makes letting properties less attractive”, Mr Watters adds.
Business taxes
Rajiv Vadgama, tax director for RSM UK, said the reduction in business rates - branded by the Chancellor as “the biggest tax cut for business” - would lift the fixed cost burden on many small enterprises, including advisory firms.
The current position is that 100 per cent relief is available for small businesses that occupy a property, such as a shop or an office, with a ratable value of £6,000 or less.
From 1 April 2017, this will be increased to a ratable value of £12,000, meaning such businesses with ratable values of less than £12,000 will pay no business rates.
There will also be a tapered rate of relief for businesses with property with a ratable value of up to £15,000 and a raise the higher rate from £18,000 to £51,000.
Mr Vadgama says: “In his speech the Chancellor advised this would mean 600,000 small businesses will pay no business rates and a further 250,000 businesses will see their rates cut.
“This is very welcome news for all small businesses.”
Advisers may also be encouraged by the Chancellor’s announced intention to cut the rate of corporation tax to 17 per cent by 2020.
It is currently set to be charged at a level rate of 20 per cent for all companies from 6 April 2016.
According to Clarion Wealth Planning’s latest client newsletter: “When this occurs it will be welcomed by business owners and could also benefit investors because it will increase the amount of post-tax profit available to businesses either to distribute as dividends or to reinvest, potentially improving capital values in the long term.”
Entrepreneurs’ relief
The Budget included an extension to entrepreneurs’ relief (ER). This relief will be extended to long-term external investors in unlisted trading companies.
The relief, up to a lifetime limit of £10m will apply to newly issued shares purchased on or after 17 March 2016 provided they are held for a minimum of three years from 6 April 2016.
This will enable individuals to finance a business and obtain the 10 per cent entrepreneurs’ rate without having to work in the business.
Potentially an individual could qualify for £20m at the entrepreneurs’ rate of 10 per cent if they invest and work in one business and help finance another.
Ms Moore also points out the Budget has corrected some “inadvertent consequences” of changes made to entrepreneur’s relief in the Finance Act 2015.
These include:
■ associated disposal of privately held assets when the accompanying disposal of business assets is to a family member
■ subject to certain conditions ER will be available on goodwill on incorporation
■ ER will be available in some cases involving joint ventures and partnerships where the minimum 5 per cent holding is not met.”
She says: “Several changes will be made to ER in the Finance Bill 2016 and backdated to correct some inadvertent consequences of changes made by Finance Act 2015.”
Levies
The Chancellor also backed down from higher duties on oil and petroleum, reducing the rate of petroleum revenue tax from 35 per cent to 0 per cent, and freezing the fuel duty for the sixth year in a row.
However, he imposed a strict levy on sugary drinks, increased the climate change levy from 2019, reduced by half the amount of profit that a bank could offset with pre-2015 losses and restricted to 50 per cent any losses on profit carried forward by companies with profits in excess of £5m. This latter measure will be in place from 1 April 2017.
