On July 8th 2015, Chancellor George Osborne delivered the Summer Budget 2015. If, like many, you were enjoying a summer holiday overseas you may have missed it. If so, you will find this article of interest.
Every year, I wait anxiously for the government budget. I like to read it and carefully study all the changes announced by the Chancellor. This year, I had two budgets to read: the one before the election and the one after the election.
The difference between the first budget and second budget is clear. The story is always the same. The budget before the election was delivered to keep as many happy people as possible; there were many winners in the pre-election budget. The second budget had no winners whatsoever. It was made clear that all of us must contribute fairly to bring the UK back to prosperity but, once again, all of us small business owners will pay the bill.
For the first time ever, it took me almost two months to write down my budget comments. I am very surprised that the vast majority of people I speak to about the budget do not realise how deeply this budget will affect their lives.
Macro economically speaking, we should be happy that the UK economic recovery appears to be established and according to the Office for Budget Responsibility (OBR ), the UK economy is expected to grow 2.4% this year, 2.3% in 2016 and 2.4% in 2017 and for the rest of decade. It is good news, isn’t it?
The OBR also predicts that the deficit will fall to 3.7% of GBP this year, 2.2% in 2016-2017, 1.2% in 2017-2018 and 0.3% in 2018-2019. In 2019-2020 it forecasts a surplus of 0.4% and in 2020-21 a surplus of 0.5% per cent.
On the other hand, bringing the UK to a well-established strong situation has a very expensive price. The only way the government can control its bank account overdraft is this: It must earn more (obviously raising taxes) and spend less (cutting government spending, welfare benefits and controlling other public sector expenses).
George Osborne delivered a budget which will, for the first time, abolish permanent non-dom tax status and will also limit child tax and universal credits to two children from 2017. It will also freeze working-age benefits for four years.
Now, if you are an employee and over 25 years old, you will definitely benefit from what George calls the new compulsory national living wage. Those on the current £6.50 minimum wage will see their annual salaries soar by £5,000 by the end of the decade. All firms will have to pay £7.20 from next April (2016) and it is likely to rise to £9 an hour by 2020.
If you are a student you will not be very happy with the situation. The reason being is that all student maintenance grants will be replaced with loans to be paid back when you are earning £21,000+ a year. And if you are under 25 you will not benefit from the national living wage either.
Now, follow below the main budget announcements and my personal comments:
Economy Economy grows 2.4% in 2015, 2.3% in 2016, and 2.4% in 2017 and for the rest of the decade.
My comments: Very positive news, isn’t it? It seems to me that UK remains relatively strong, driven by solid employment growth and the recent upturn in real earnings. The UK is one of the fastest growing economies in G7.
If you want to make a comparison, the USA is expected to grow 2.4%, Canada 2.4%, France 0.4%, Germany 1.5%, Italy – 0.4%, China 7.4% and India 5.8%
Living Wage A compulsory national living wage for working people aged 25 and over will start in April 2016 at £7.20 an hour and reach £9 an hour by 2020.
My comments:This is very good news for all employees. Otherwise, if you are under 25 you will not gain from this benefit. Don’t you think that under 25 was supposed to have the same benefit as the over 25? According to my analysis, the new national living wage could make 60,000 people unemployed. At the same time, some employers will try to reduce employee’s working hours to try to compensate the effect of the labour cost increase in the company financial result. Another consequence could be that businesses will also increase its products and services price to balance the financial result.
Corporation tax Corporation tax to be cut from 20% to 19% in 2017 and 18% by 2020.
My comments: Very good news especially for small business owners that pay corporation tax. This change will also attract new businesses to be established in the UK to benefit from the corporation tax reduction.
Income tax Tax-free personal allowance at which a 20% income tax rate is payable to rise from £10,600 to £11,000 next year.
My comments: All of us taxpayers will benefit from the personal allowance increase but there is nothing new about this increase. Every year it should at least increase at the inflation level. If you don’t know, you only start paying income tax once your income is over exceeding your personal allowance.
Public Sector Rises in public sector pay restricted to 1% a year for the next four years.
My comments: The Chancellor claimed that keeping pay levels low would mean fewer jobs would be listed in public services. Otherwise, some public servants such as teachers have faced a 15% terms pay cut in salary since 2010 due to wage freezes.
Welfare A package of welfare reforms including a 4 year freeze for working-age benefit.
My comments: I read a Treasury document which claimed that while average earnings have risen by 11%, most benefits, such as Jobseeker’s Allowable (JSA) have risen by 21%. I understand that this move had been made to ensure that it always pays to work and that earnings growth should overtake the growth in benefits.
Tax credits Reduction from £6,420 to £3,850 in income level at which tax credits begin to be cut.
My comments: At the moment, any household earning up to £6,420 a year earns the full amount of whatever tax credits they are allowed to claim. People who earn more than that still get tax credits, but they are whittled down as income rises. This threshold is now being almost halved to £3,850 a year. That means tax credits will start being taken away much more quickly at a £3,850 income instead of a £6,420.
Children – Support for children through tax credits and universal credits to be limited to two children, affecting children born after April 2017.
My comments: I personally don’t believe support for children should be cut.
Benefits caps Benefits cap to be reduced from £26,000 per household £23,000 in London and £20,000 throughout the rest of the country.
My comments: The Chancellor said the benefit cuts were needed to secure Britain’s economic security. He told MPs: “If we are to build a more productive economy, and our country is to live within its means, then we have to make this fundamental change”. Welfare spending at the moment is not sustainable and because of that spending on things such as education and infrastructure that are vital to everybody has consequently suffered.
Housing Benefit Abolition of automatic entitlement to housing benefit for those aged 18 to 21.
My comments: Chancellor Osborne is trying to convince any young individual that working is better than living out of benefits. There will also be an obligation for 18-21 years old to “earn or learn”. Those aged 18-21 who are on universal credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on to a work placement 6 months after that start of their claims (exceptions will apply for those considered vulnerable).
Defence 2% of national income to be spent on defence.
My comments: Reducing the defence spending could seriously undermine basic defence capability. I am happy to know that the UK will deliver what was promised: each member state should each spend a minimum of 2% of their national income or GDP on defence.
Buy-to-let landlords Mortgage interest relief will be limited to basic income tax rate.
My comments: Landlords pay income tax on the rent they receive by declaring the amount they earn on a self-assessment tax return. The tax is charged in line with their normal income tax banding – 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional-rate taxpayers.
Now, landlords are allowed to deduct their costs, including mortgage interest, from their profits before they pay tax, which the treasury says gives them an advantage over other home buyers.
The wealthiest landlords get tax relief at 40% and 45% and this is what is changing next year thanks to the Chancellors’ rule change – the tax relief will be restricted to 20 % for all landlords.
Osborne also announced that from April 2016, the existing “wear and tear allowance”, which lets landlords reduce the tax they pay, whether or not they replace furnishings in their property, will also be replaced. In its place will be a new system that only allows them to get tax relief when they actually do replace furnishings.
Non-doms Anyone living in Britain for 15 out of 20 years will pay UK tax on all worldwide income.
My comments: Foreigners who live permanently in Britain will be forced to pay full tax on their foreign earnings. Britons who currently qualify for non-dom status because their father was born overseas will also lose their eligibility. Non-doms are either rich foreigners who are resident in the United Kingdom, or Britons with ties overseas who are not eligible for tax on overseas income if they register their permanent home (domicile) as outside of Britain.
I am sure that this initiative could prompt wealthy people to leave Britain for other countries that have favourable tax regimes.
Road tax A huge shake up of road tax, with three new bands to help fund infrastructure.
My comments: I don’t agree with the initiative. Road taxes on luxury cards and eco-friendly hybrids will be hiked under this radical reform to fund road-building schemes. At the moment a quarter of all cars are exempt from vehicle excise duty because of their low CO2 emissions.
Inheritance tax A new £175,000 allowance for homes left to children or grandchildren, bringing couple threshold to £1 million.
My comments: Very good initiative. Indeed, I don’t really understand the reason you should be paying tax after you die.
Student maintenance grants Grants scrapped and replaced with loans to be paid back when earning £21,000 plus a year.
My comments: More than 500,000 students in England receive a maintenance grant from the taxpayer worth almost £1.57 bn a year. The cost can double to £3b in the next decade. Mr Osborne believes that it is unaffordable. On the other hand, I am sure that this maintenance grant could damage the poorest students who currently relied on the grant and could also risk putting many people off applying to university.
Insurance Premium tax to rise to 9.5 %.
My comments: Insurance premium tax is a tax on people and businesses at the point at which they buy a general insurance product. I am very sad to know that the increase represents almost 50% more than what we are actually paying at the moment, especially when the insurance industry stakeholders worked so hard in the last 10 years to bring down the cost of insurance.
New apprenticeship New apprenticeship levy on all large firms.
My comments: Large employers will be taxed to fund the government target of 3 million apprenticeship. Fair enough. The large employers should contribute more than the small ones.
Fuel duty remains frozen: Fuel duty is to remain frozen.
My comments: Very good news if you are a driver.
New dividends rate those who run their own business are expected to be among the biggest losers from the changes, which could see some business owners paying almost 20% more in tax. George Osborne said that the reforms – the biggest shake up to the treatment of dividends – will deliver a long-overdue up date to a very complex system. The treasury predicted that the reforms will bring in £6.75 billion over the course of the parliament and will raise an additional £500, 00 million a year from 2019/2020 by reducing what it called a tax motivated corporation. From April 2016, the tax credit applied to dividends is to be replaced with a £5,000 allowance, available to anyone with a dividends income, irrespective of their other earnings. Alongside the move, tax rates on dividends income will be increased to 7.5% for basic rate taxpayers, 32.5 % for higher rate taxpayers and 38.1 % for additional rate taxes.
My comments: Once more, the hardworking entrepreneurs will be the biggest budget losers. They are the risk-takers, the ones who create businesses and create new job opportunities. They must be compensated for taking the chance and risking all their savings when they start up a business.
Dividends is the distribution of the business profits to the business owners which means that if they are a very good entrepreneurs and run their company successfully they can cash the money out of the company in the form of dividends. If the company has accumulated losses the shareholder cannot cash the money out as dividends. The business owners are not supposed to be hit by a radical overhaul to the treatment of dividends, designed to clamp down on abuse by sole trader who pay themselves dividends rather than salary.
The government believes that the reforms will reduce the incentive for workers to register a company and paying themselves dividends rather than salary, reducing the tax liability. The government is punishing wealth and job creators. Business owners, especially family-owned, are not supposed to be hit by the government because big employment agencies set up personal service companies to its subcontractors to reduce their tax liability by paying dividends rather than salary. This is what we call “disguised employment”.
This change will hit small company directors who are likely to see this change as a personal direct attack. Most small businesses are structured as limited companies. This means that directors can opt to take rewards through dividend payments minimising personal tax liability. The new measures mean the option to make savings in this way is largely reduced and in some cases removed. I hope that in the next Budget April 2016 the government will think twice and will at least reduce the first dividends slice which is supposed to be taxed at 7.5% to NIL.
I hope you enjoyed the article. If you would like to make any comments or suggestions, please send me an email at Rodolfo.email@example.com
Rodolfo Basilio is a senior accountant working for Vertice International Accountancy and Consultancy (www.verticeservices.com )