08 Jul Flying Solo
Given the events in Greece over the past few days, the Summer budget was always in danger of being relegated to something of a sideshow. But that belies the importance of George Obsorne’s first budget being unconstrained by a Liberal Democrat alliance, and the first ‘solo’ budget speech by a Tory chancellor in 19 years.
The notion of robbing Peter to pay Paul means you can usually rely on the support of Paul! This is perhaps more noticeable with the content of the summer budget, where seemingly generous giveaways such as the increase in the higher rate and inheritance tax thresholds were counterbalanced by a reduction in the pensions annual allowance for high earners.
With the election out of the way, the tough business of repairing public finances started here, with the Office for Budget Responsibility (OBR) fearing a ‘rollercoaster’ drop in spending, particularly welfare. But with around half of this accounted for by pensions, which appears sacrosanct, his scope for radical surgery always appeared limited. And so it proved, with projected cuts in spending perhaps less profound, the unavoidable consequence is a return to fiscal surplus being deferred for a year to 2019/20.
We set out below our first-take on some of the highlights announced but some initiatives such as the promise of more radical pension reform to come, will clearly take shape over time. As we have in the past, the key messages are presented in three broad categories, loosely based around the economy, savings and taxation. Naturally if there are any aspects of the budget you would like to know more about, or have concerns over, please do feel free to contact your adviser.
The Economy and Business
The Economy is forecast to grow by 2.4% in 2015, which is a revised down from the 2.5% forecast in March. It is forecast to remain the same in 2016 and then begin to increase from 2017.
The Chancellor has moved out his plan to reduce the budget deficit by one year with a surplus now expected in 2019/2020.
CDC Comment – As we highlighted in our March Budget commentary we felt that the target to move to a budget surplus by 2018/2019 was ambitious and the Chancellor has now increased this by one year. This may well be partly due to lower growth forecasts but also because of a delay to what might have been more significant austerity measures. However, as we said with long term growth rates of 1.8%, there might be a need to move this out further.
The Chancellor said that the situation in Greece showed that there was a need to move ahead with the planned spending cuts, claiming that ‘Britain has turned the corner and left the age of irresponsibility behind”.
Corporation Tax is to fall to 19% in 2017 and to 18% by 2020, signalling that “Britain is open for Business”.
The introduction of a new national living wage of £7.20 per hour rising to £9 by 2020.
Cutting the income threshold for Tax credits limits for those with more than two children (affecting those born after April 2017).
CDC Comment – Of course this will be welcomed by business leaders, however, what might not be is the introduction of a living wage and also the addition of tighter deadlines for the payment of tax for larger companies.
Working age benefits to be frozen for four years, with the annual household benefit cap reducing to £23,000 in London and £20,000 elsewhere.
CDC Comment – George Osborne hailed his Budget as “Bold in building the aspirations of working people” , however, some will argue that in seeking to cut £12bn from the welfare bill by 2020, he is actually targeting those working people and making their lives significantly more difficult and with estimated savings required of over £30bn, this seems to be the tip of the iceberg.
Pensions and Savings
The Chancellor has signalled that he is likely to continue the radical pension changes he introduced in April this year, “making pensions more like ISAs”. However, there has been a delay of one year in the previously announced creation of a secondary annuity market.
He confirmed those earning more than £150,000 will no longer qualify for an annual allowance of £40,000. Instead, they will see their allowance curbed gradually from £40,000 to £10,000.
For every £1 of earnings over £150,000, the annual allowance will reduce by 50p so that those earning £210,000 and above would have an allowance of £10,000. The move will fund a more generous inheritance tax (IHT) allowance on family homes as pledged in the Conservative Party manifesto.
CDC Comment – George Osborne clearly has the bit between his teeth when it comes to pension reform and in “making pensions more like ISAs”, we might expect there to be more restrictions in contribution limits and tax reliefs but perhaps further freedoms in accessing the benefits at retirement age.
It was confirmed the inheritance tax (IHT) threshold will increase to £1m for couples. The Chancellor said the threshold at which the IHT is levied will rise for couples from £650,000 after April 2017.
The Conservatives pledged in their election manifesto that, from April 2017, parents would each be offered a further – and transferable – £175,000 “family home allowance”.
CDC Comment – This was a much anticipated move following their election pledge and it is good to see that they have delivered, however, as always the real story lies behind the headlines and as this is an additional allowance linked to the family home, there may well be added complications.
The way in which dividends are to be taxed will undergo a major reform with the introduction of a £5,000 tax free allowance and the introduction of three rates of tax from 2016.
Currently, those receiving dividends benefit from a 10% tax credit. Given the tax on dividends for basic rate taxpayers (those paying 20% income tax) is 10%, it means basic rate taxpayers receive dividend income tax-free. The tax credit meanwhile brings the 32.5% notional charge on dividend income for higher rate tax payers (those paying 40% income tax) down to 25%. The tax on dividend income for additional rate taxpayers (those paying 45% income tax) falls to 30.6%.
Under the new system, everyone who receives dividend income won’t pay tax on the first £5,000. Basic rate taxpayers will pay 7.5% tax on any additional dividend income, higher rate taxpayers will pay 32.5% and additional rate taxpayers 38.1%.
CDC Comment – The Chancellor has claimed that 85% of those receiving dividend income will pay the same or lower, however it is apparent that those who receive significant dividend income pay more.
The Personal Tax Allowance is set to increase to £11,000 from next year and the threshold for higher rate tax will rise to £43,000.
HMRC is set to receive an extra £750m in order to help it achieve the treasury’s target of a £5bn saving from tax avoidance.