Budget Briefing 18 March 2015

Budget Briefing 18 March 2015

Your guide to the changes announced in the Budget

Key Points
As previously announced, the personal income tax allowance is to increase by £600, taking it from £10,000 to £10,600, for 2015/2016. In order that higher rate taxpayers do not benefit fully from the increase, the basic rate limit will reduce from £31,865 to £31,785 for 2015/2016.

  • The main rate of corporation tax is to be reduced from 21% to 20% for 2015, matching the small companies’ rate.
  • No major changes to the inheritance tax (IHT) regime have been announced, so that lump sum IHT solutions such as discounted gift schemes and loan trust arrangements remain attractive, particularly for those with larger estates.
  • No changes to the rates of capital gains tax were announced. The annual exemption will rise in line with CPI to £11,100 for 2015/2016.
  • Significant changes to the savings regime were announced, particularly in the areas of ISAs and pensions.

INTRODUCTION 

The Chancellor of the Exchequer, George Osborne, presented his sixth Budget to Parliament on 18 March 2015. This year’s statement was made against a backdrop of a General Election to come on May 7 and with a very truncated Finance Act to be published before Parliament rises on March 31. Whatever the outcome of the election, it seems certain that a further budget will be presented later in the year, once a new Government has been formed.

The key points for 2015/16 are:

PERSONAL INCOME TAX

Personal Allowances, Rates and Thresholds

  • As previously indicated, the income tax personal allowance for those under 65 is to increase by £600, taking it from £10,000 in 2014/2015 to £10,600 for 2015/2016.
  • The basic rate limit is to reduce to £31,785 (from £31,865).
  • Individuals who have “adjusted net income” of £100,000 p.a. or more will lose their personal allowance completely where income exceeds £121,200. These individuals will suffer an effective tax rate of 60% for income between £100,000 and £121,200.
  • The age-related allowance will rise by £100 to £10,600 for individuals aged between 65 and 75 and will remain at £10,660 for those aged over 75. These allowances will continue to be frozen at these levels until the “standard” personal allowance reaches those amounts. The income limit for personal allowances (for those born before 6 April 1948) increases from £27,000 to £27,700.
  • The married couple’s allowance (only available where at least one of the parties was aged 65 or over before 6 April 2000) will rise to £8,355 (from £8,165), and the minimum amount will be £3,220 (from £3,140).
  • The blind person’s allowance will rise to £2,290 (from £2,230).
  • The main rates of income tax will remain at 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers with “adjusted net income” in excess of £150,000 p.a.
  • From 2015/2016 the threshold for the starting rate for savings income will increase to £5,000 and the starting rate of 10% will be reduced to nil. Should an individual’s non-savings income exceed the starting rate limit for savings income, then this starting rate for savings income is not available.
  • From 2015/2016 spouses and civil partners who are not liable to income tax above the basic rate will be entitled to transfer £1,060 of their personal allowance to their spouse or civil partner provided the recipient is not subject to income tax at the higher or additional rate. This will mean that the receiving spouse/civil partner will benefit from a tax saving of £212 (i.e. £1,060 x 20%).
  • Non-domiciled individuals who have been UK resident for 17 out of the previous 20 years will, for 2015/2016, have to pay a higher remittance basis charge of £90,000 in order to continue to use the remittance basis.

Comment

The further significant rise in the personal allowance is designed to lift many people on low incomes out of the income tax “net” and ease the burden on basic rate taxpayers. The focus remains on increasing the tax take from individuals with higher incomes, and the reduction in the basic rate tax limit is likely to increase even further the number of higher rate taxpayers. For most people, higher rate tax will start at £42,385 for 2015/2016.

These measures would appear to continue to make non-income producing assets such as investment bonds and capital growth orientated unit trusts and OEICs attractive.

NATIONAL INSURANCE CONTRIBUTIONS (NICs)

  • The main rate of employees’ Class 1 NICs (between the primary threshold and the upper earnings limit) will remain at 12%, and the primary rate (above the upper earnings limit) will continue to be 2%.
  • The employers’ secondary threshold will be £156 per week, and the employers’ rate will remain at 13.8%.
    The primary threshold for employees’ and self-employed NICs increases to £155 per week (from £153 per week in 2014/15).
  • The upper earnings limit for NICs will increase to £815 per week (from £805).
  • For the self-employed, the rate of Class 2 contributions will be £2.80 per week.
  • The rate of voluntary Class 3 contributions will rise to £14.10 per week (from £13.90).
  • The rate of Class 4 NICs between the lower profits limit (£8,060) and the upper profits limit (£42,385) will be 9%, and above the upper profits limit will be 2%.
  • From 6 April 2015, employers will no longer be required to pay Class 1 secondary NICs on earnings paid up to the upper earnings limit in respect of any employee under the age of 21.
  • In addition, from October 2015, a new class of voluntary NICs (Class 3A) will be introduced that will give those who reach state pension age before 6 April 2016 an opportunity to boost their additional state pension.

Comment
The maintaining of the employer NIC rate at 13.8% for 2015/2016 should continue to encourage employees to forego salary for commensurate employer pension contributions, particularly where an employer is prepared to feed their NIC savings into the payment. In these circumstances, the contribution in respect of a basic rate taxpayer can effectively be enhanced by almost 34% compared to the employee paying the contribution directly. Exchanges within the higher rate band can enhance contributions by nearly 18%. However, care is needed regarding the level of the Annual Allowance (£40,000 for 2015/2016) and its impact on salary sacrifice arrangements.

CAPITAL GAINS TAX (CGT)

  • No major changes to the taxation of capital gains were announced, and the rates of CGT remain at 18% for non, starting and basic rate taxpayers, and at 28% for higher and additional rate taxpayers, and most trusts.
  • The annual exemption has increased in line with CPI to £11,100 (individuals) and £5,550 (most trusts).
  • The lifetime limit on gains which qualify for entrepreneurs’ relief will remain at £10,000,000 for disposals on or after 6 April 2015. Eligible gains up to that amount will be taxed at 10%.

INHERITANCE TAX (IHT)

  • As previously announced, the nil rate band will be frozen at its current figure of £325,000 up to and including the tax year 2017/2018.
  • The Chancellor announced his intention to conduct a review on the avoidance of IHT through the use of Deeds of Variation; a wide range of views will be sought and the review should report in the Autumn.

Comment
There continues to be a need, particularly for those individuals with larger estates, to consider the impact of IHT and the steps that can be taken to mitigate it. In this regard, tried and tested lump sum IHT solutions such as discounted gift schemes and loan trusts, as well as appropriate life cover for the potential liability, will continue to offer valuable solutions.

PENSIONS

  • The Lifetime Allowance will remain at £1,250,000 for 2015/2016 but will reduce to £1,000,000 for 2016/2017.
  • Transitional Lifetime Allowance protection will be available to protect those whose pension funds exceed this figure.
  • The Lifetime Allowance will increase in line with CPI from 2018/2019.
  • The Annual Allowance will remain at £40,000 for 2015/2016.
  • It is proposed that from 6 April 2016, lifetime annuities may be sold in return for a cash lump sum. This may be paid direct to an individual or transferred into a flexi access drawdown. It will be taxable as income on the individual at the point it is received (paid as lump sum or withdrawn from flexi-access drawdown).

A consultation is to be launched for response by 18 June 2015 to consider :

* The market for annuities – who can purchase annuities and the regulations that will be required.

* Consumer protection – what is a fair price for an annuity and the information required by the consumer to understand the implications.

* Legislative changes – what legislation will need to be enacted to enable these changes to be made.

CORPORATE

Corporation Tax rates

  • The main rate of corporation tax is to reduce to 20% (from 21%) for the financial year commencing 1 April 2015 and will thus be unified with the small companies rate which remains at 20%.

Comment
The alignment of the main rate of corporation tax with the small companies rate is designed to stimulate business and encourage growth in the private sector. It will also significantly simplify the corporation tax system as there will no longer be any requirement for marginal relief calculations. Corporate planning should continue to focus on the use of salary/bonus and pension contributions. Owner-managed companies should review their approach to remuneration to ensure maximum tax efficiency.

Employer National Insurance Contributions (NIC)

  • The employers’ NICs rate will remain at 13.8% for 2015/2016.
  • The level at which employers start to pay Class 1 NICs (the secondary threshold) will be £156 per week.
  • As previously announced, every business and charity will be entitled to an annual £2,000 Employment Allowance towards their employer NICs bill.
  • From 6 April 2015, employers will no longer be required to pay Class 1 secondary NICs on earnings paid up to the upper earnings limit in respect of any employee under the age of 21.

Comment
Those in business should seek the advice of a Financial adviser to help incorporate more comprehensive  pension planning to stretch benefits even further.

VAT

  • The standard rate of VAT remains at 20%.
  • The VAT registration threshold will be increased to £82,000 from 1 April 2015. The corresponding rate whereby a person may apply for deregistration will be £80,000.

SAVINGS

Individual Savings Accounts

  • The overall contribution limit will rise to £15,240 for 2015/2016. It is now possible to contribute up to the full amount to a cash account.
  • The maximum contribution under a Junior ISA will increase to £4,080.
  • The maximum contribution to a Child Trust Fund (CTF) will also increase to £4,080 and it will be possible from 6 April 2015 to convert a Child Trust Fund to a Junior ISA.
  • From 6 April 2015 it will be possible for surviving spouses or registered civil partners to inherit their partner’s ISA tax advantages when they die by making additional permitted subscriptions, on top of the annual subscription limit based on the value of the deceased’s ISA at the date of his or her death where that occurred on or after 3 December 2014.
  • Regulations will be introduced in Autumn 2015 to enable savers to withdraw and replace money from their cash ISA without it counting towards their annual subscription limit.
  • From Autumn 2015 “Help to Buy ISAs” will be introduced, whereby a government bonus of 25% of the ISA savings (subject to a maximum of £3,000) will be available for first time buyers purchasing UK property.

SUMMARY

This Technical Briefing represents our current understanding of the major issues arising from the Budget. Inevitably some further details will emerge over the coming weeks and the impact of the changes can then be assessed.

 

AXA 18March 2015