If you are so minded, you are now able to see via HMRC’s self-assessment portal precisely how the government spends the money it exacts from you in taxation. The breakdown is revealing; one pound in every four that the government spends is on welfare benefits. And in 2015/16 some £30bn of that expenditure will be on tax credits. These, of course, are nothing to do with tax or credit but essentially subsidise the wages of low earners and are a legacy of Gordon Brown’s custodianship of the economy. Rightly or wrongly (we express no view), such subsidies have been criticised as perpetuating a welfare dependency culture and as rewarding employers who pay less than a living wage.
Mr Osborne’s aim has always been to navigate the ship of state away from the Scandinavian waters of high tax and high welfare (or high-dependency, depending on your politics) to which Mr Brown had set sail and for which Danny Alexander hankered; and now that the passengers have thrown the Liberal Democrats overboard he has his hands on the tiller at last. This, the first fully Conservative budget for 20 years, must be seen in that context.
But, although it is likely to be the benefits cuts which will make the headlines, there is so much more…
In parallel with cuts to tax credits, a new National Living Wage is introduced. Starting at £7.20 from April 2016 it will rise to £9 by 2020. It’s estimated to cost employers as a whole 1% of profit: and it’s compensated by a reduction in the rate of Corporation Tax to 19% in 2017 and to 18% in 2020. Large employers will also have to contribute to a Training Levy which will provide a fund to assist financing apprenticeships. This looks like a modest but welcome transfer of training costs to large firms from smaller ones. Smaller firms in particular will also welcome the decision to retain Annual Investment Allowance at a permanent level of £200,000 per year: it means that for many firms all capital expenditure on plant and machinery will be fully relieved in the year of acquisition. Smaller firms will also benefit from the increase in the Employment Allowance to £3,000 from April 2016 (equivalent to NIC on 4 full-time employees on the National Living Wage).
As expected, tax relief on pension contributions is to be restricted. From April 2016 the £40,000 annual exemption is to be reduced by £1 for every £2 by which your income exceeds £150,000 until (at income of £210,000 or above) the exemption has been restricted to £10,000. Changes are also made to align the “pension input period” with the tax year and thus to remove the scope for “double-dipping” by judicious selection of the PIP.
The Chancellor has started to deliver on his promise to take more estates out of IHT but the small print doesn’t quite yet deliver the “£1m per couple” which has been bandied about. Nothing at all changes until April 2017; thereafter an additional “family home allowance” is introduced starting at £100,000 per person and creeping up by stages to £175,000 from April 2020. The allowance is principally available against the deceased’s home, and – like the existing £325,000 nil rate band – can be passed on to a surviving spouse. Helpfully, it will be available even following down-sizing; less helpfully it starts to be tapered away once the estate exceeds £2m.
The news for non-doms is partly bad and partly very bad.
The bad news is that from April 2017 significant changes to the rules are proposed, the main effect of which will be that anyone who has been resident in the UK for 15 of the previous 20 years will be treated as domiciled in the UK for all tax purposes. The detail of the proposals and their interaction with the existing deemed domicile rules (which apply only for IHT purposes) are complex.
The very bad news – applying to all non-doms –is a proposal that all UK residential property owned by non-doms will fall within the scope of IHT, even where it is owned indirectly via trusts or offshore companies. Nor will this apply only to property occupied by the non-dom: it will apply to all UK residential property whether occupied or let and of whatever value. The only crumb of comfort seems to be that the government recognise that as a result many non-doms may wish to “de-envelope” properties and hold them directly, and there is a hint that relief may be given from the tax charges arising from such de-enveloping.
On the business front, HMRC have long since been tetchy about “tax-driven incorporation”, especially of one-man businesses. Where two otherwise identical businesses are carried on, one as a company and one as a sole trader, the tax and NIC payable by the two can be very different. Imposing NIC on dividends is technically difficult. So Mr Osborne has solved his problem a different way. In future, dividends will carry no tax credit. There will be an annual exemption of £5,000. Dividends in excess of that amount will be taxed at 7.5%, 32.5% or 38.1% depending on whether you are a basic, higher or additional rate taxpayer. It will not increase the tax payable by holders of modest portfolios of quoted shares – in many cases it will reduce it. But it will make trading through the medium of a company less attractive, though not terminally so. The change comes in from April 2016: company owners may wish to consider taking accelerated dividends before then.
The boom in buy-to-let is another area which has given Mr Osborne cause for concern. A modest change, intended to dampen down the market, is that relief for interest on loans taken by individuals to acquire residential investment properties is to be restricted to relief at the basic rate. It will make acquiring a buy-to-let with borrowed money a little less attractive, but the change is phased in over 4 years so should not cause any immediate rush to abandon the sector.
Any unequivocally good news? Well, yes. Those of us who pay enormous amounts of Vehicle Excise Duty (aka Road Tax) for the privilege of driving an elderly (but oh so stylish!) car with enormous CO2 emissions have long been niggled by the number of new cars on which no VED is payable, but which nonetheless clog up the roads for which we are paying. No more: from 2017 there will be a flat rate of £140 for most new cars: and – even better – the proceeds of the tax will be earmarked exclusively for spending on roads.