Most radical budget in a generation? Also known as, what one hand giveth the other taketh away!
Firstly, the Chancellor was able to deliver some good news on the economy. For 2015, the OBR forecast for UK GDP growth remains unchanged at 2.4%. Osborne said: “That is faster than America, faster than Germany and twice as fast as France. For the second year in a row, Britain is expected to have the strongest economic growth of any major advanced economy in the world.”
My key points:
The move to exempt main home from inheritance tax had been a key election pledge for the Tories. A new £175,000 allowance for the main home when it is left to children or grandchildren. This sits on top of the existing £325,000 threshold. Both allowances can be transferred to a spouse or partner. Also, those who choose to downsize will not lose any of the allowance from the property they used to own. With last year’s generous death benefit rules for pensions, more and more money can now be handed down the family line tax free – potentially in excess of £3 million.
As expected, the Chancellor announced plans to taper pension tax relief for higher earners. For every £2 of adjusted income over £150,000, an individual’s Annual Allowance, the limit on the amount of tax relief available to an individual or their employer each year will be reduced by £1, from the standard £40,000 down to a minimum of £10,000 per year – effectively reducing the benefit of pension tax relief. Osborne also announced a savings ‘green paper’, to consult on whether the pensions regime should be more like the ISA regime. He said the Paper would “ask questions, invite views, and take care not to pre-judge the answer.” I would suggest the answer is already known! This is phase 1 on proposals for "a radical change" to pension saving system. Is this the end of the pension? Should Higher Rate Taxpayers be preparing to maximise their contributions whilst they can?
One surprise measure from the Budget was a simplification of the dividend tax credit rules. The dividend tax credit, controversially introduced by Gordon Brown, will be replaced for all taxpayers from April 2016 by a new £5,000 tax-free dividend allowance but compensating for it, tax rates on dividend income will be increased. Although the Chancellor said that this ‘simpler’ system would mean that only those with significant dividend income would pay more tax, it will hit the self-employed who trade through limited companies. However, that will be partially offset by Corporation Tax being cut to 19% in 2017 and 18% in 2020 and National Insurance Employment Allowance for small firms to be increased to £3,000 from 2016, meaning they can reclaim 50% more NI than before.
Changes to the buy-to-let system were not as drastic as feared: The amount buy-to-let landlords could claim in mortgage interest has been capped at 20%, but did not—as many had predicted—abandon the relief altogether likely fearing the impact it would have on the housing market. This ‘cap’ will be introduced over four years to minimise impacts. However, conversely you can now squeeze in some more students in your own home, with the ‘rent-a-room’ tax free allowance to rise to £7,500 next year, up from £4,250.
The Chancellor held with the Lib Dem commitment to “taking more people out of tax”. Personal allowances raised to £11,000 in 2016-17 and he re-stated his ambition to increase the Personal Allowance to £12,500 by 2020. The higher rate threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17, in previous years it has often dropped to offset the increase in the tax free allowance. This is designed to mean people working 30 hours a week on the minimum wage do not pay income tax.
Benefits Changes (or Older v Younger) (Or indeed, High Voting Turnout Demographic v Low Voting Turnout Demographic)
Subsidies for social housing will be phased out with local authority and housing association tenants who earn over £30,000 - having to pay market rent
The local annual household benefit cap will be reduced to £20,000.
18-21-year-olds will not be entitled to claim housing benefit automatically, with a new "earn to learn" obligation
Working-age benefits to be frozen for four years - including tax credits and local housing allowance, but maternity pay and disability benefits exempted
Tax credits and Universal Credit to be restricted to two children, affecting those born after April 2017
Free TV licences for the over-75s – not means tested! (Not long now Paul McCartney, Mick Jagger, Cliff Richards until you join Ringo Starr, Tom Jones & The Queen with free tele!)
Permanent ‘non-dom’ status to be abolished at last, as from April 2017 anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as the rest of us UK citizens, (raising an estimated £1.5bn). This is another move most would consider ‘about time’.
Probably in direct response to the threat from HSBC to leave the UK and take with it tens of thousands of high paid jobs, the bank levy rate to be gradually reduced over the next six years and a new 8% surcharge on bank profits introduced from 2016. Maybe the banks have been bashed a fraction too far? Even the pantomime villains have a limit.
A bad day for the public sector as a pay cap of 1% for 4 more years effectively reducing pay after inflation. In stark comparison, the new national living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020 - giving an estimated 2.5 million people an average £5,000 rise over the next five years. Plus large employers will be forced to pay an apprenticeship levy in an effort to encourage new positions.
And just for fun, we go through the same rigmarole of a Chancellor ‘predicting’ the future. Only economists are arrogant enough to use decimal points in guessing the future, but you read it here.. The economy will grow by 2.4% growth in 2015, (already 0.1% lower than predicted in March this year) , followed by 2.3%, 2.4% and 2.4% in the following years. And if that set of ‘numbers pulled out of the air’ isn’t enough, we are told borrowing is set to fall from £69.5bn this year to £43.1bn, £24.3bn and £6.4bn before reaching a £10bn surplus in 2019-20. In his 7 years of budgets, and in fact in the 70 preceding that, have any Chancellor’s predictions ever lasted until the new year? Unlike a dog, an economist’s expert opinion IS just for Christmas…
My personal favourite you may have missed ? George Osborne has set out plans to conduct a major review of claims management companies and cap their fees, stating the Government will scrutinise the regulation of claims management companies. Thank goodness the scourge of society are finally being watched.
My least favourite small print you may have missed? Increases in Insurance Premium Tax to 9.5%, effectively increasing all our insurance policies by 3.5%, just when you thought they couldn’t go up any more!
And my perennial statement, of course, the devil will all be in the detail….not the pizzazz of today’s show!