The Conservative Party released their first Conservative only Budget in 19 years on 8 July 2015. This was a budget for working people and his message was clear – he wants to increase employment, make work pay and reduce the welfare bill. To support this approach, the Government will introduce a new National Living Wage for all workers aged over 25. This will be set at £7.20 from April 2016, 50p higher than the National Minimum Wage due to take effect from October 2015.
The Budget set out 4 statements that were sure to hit PSC’s (Personal Service Companies) hard and caused a lot of discussion in contracting circles. I will outline these below and then briefly go through some other key points in the Budget.
Firstly, the changes in dividend tax to be introduced from 06 April 2016. Shareholders can no longer receive a 10% tax credit but will now just have a £5,000 tax-free dividend. After that, all dividends will be taxed at
7.5% for basic rate payers;
32.5% for higher rate payers;
and 38.1% for additional rate payers.
This means, assuming a salary of £12000, that from 06 April 2016 you will now be paying £1950 in tax on dividend up to the basic rate threshold whereas before you were paying nil.
Secondly, the announcement that all umbrella companies and PSC’s that are working under the supervision, direction and control of the end client will no longer be allowed to claim travel and subsistence expenses. For many contractors, travel is among their biggest claimable expenditure, this will surely hit many hard.
Thirdly, while employer NIC allowance was raised from £2,000 to £3,000, it was announced that PSC’s with one sole director and employee would no longer be able to claim this.
Finally it was announced that IR35 was not effective enough and therefore would be scrutinised. In light of the above impending changes ensuring that the necessary steps to ascertain IR35 status is going to be more prudent than ever & you may find that you need urgent advice in this area. We would recommend Qdos Consulting for this advice.
Some other salient points from the Budget.
The rate of corporation tax will be cut from 20% to 19% in 2017 and to 18% in 2020. The Chancellor also announced that the future level of the annual investment allowance would be set at £200,000 for the life of this Parliament.
Tax avoidance and evasion
As usual the Government has proposed a number of proposals to tackle tax evasion and avoidance, including further measures to counter identified tax avoidance schemes. This is a continuing theme from the previous Parliament whereby the lines of tax evasion, avoidance and aggressive avoidance are being blurred so that all fall under the umbrella of evasion which is illegal. With the triple lock on tax – namely no rises in rates of income tax, national insurance or VAT, the Government is going to raise the excess revenues from tax avoidance and evasion as well as the cuts to the Welfare Bill. The most pertinent point though is that the Chancellor announced a whopping increase in HMRC’s budget of £750m to tackle tax avoidance and evasion.
The problem here is the reduction in the interest that can be offset against income. For all those people with interest only mortgages that are only just covered by the rent, there is a nasty surprise in the next few years in the guise of a tax bill when the interest is gradually disallowed. At present interest is 100% allowable. In 2019/20 only 25% will be allowed.
In April 2016, landlords who let out furnished property will lose the 10% wear and tear allowance, which will instead be replaced by a new system that only allows them to get tax relief when they replace furnishings.
The lifetime allowance is to be reduced from £1.25m to £1.0m from 6 April 2016. Transitional protection for pension rights already over £1m will be introduced alongside this reduction to ensure the change is not retrospective. The lifetime allowance will be indexed annually in line with CPI from 6 April 2018.
IHT (Inheritance tax)
The IHT nil rate band will be frozen at £325,000 per person until 6 April 2021.
The Government is introducing a new extra nil rate band to be applied only to the value of a home left on death to a direct descendant of the deceased. This home-related nil rate band will start at £100,000 per person from April 2017 and increase over four years to £175,000 per person, allowing a couple to eventually pass on a family home worth up to £1m with no
IHT (2 x £375,000 plus 2 x £175,000).
The home-related nil rate band will not apply in full if the total estate is worth over £2m, and will not apply to a house that has never been used as a residence by the deceased (e.g. a buy-to-let property).
Where after 8 July 2015 someone downsizes their home, or ceases to own a home, thus turning the IHT-relieved property into cash, assets of an equivalent value will also be eligible for the relief.