June 2015 Budget Update
Income Tax
Income tax rates
The income tax rates applying from 6 April 2015 are:
• Basic Rate 20%
• Higher Rate 40%
• Additional Rate 45%
• Marginal Rate 60% (due to withdrawal of the personal allowance)
• Dividend Rates 10%/32.5%/37.5%
The rates are to remain unchanged for 2016/17 except for dividends (see below)
Income tax personal allowances
From 6 April 2015, the personal allowance for individuals born after 5 April 1948 remains at £10,600 rising to £11,000 in 2016/17 and £11,200 in 2017/18.
The basic rate limit remains at £31,785. The limit will then increase to £32,000 for 2016/17 and £32,400 for 2017/18.
Changes to the taxation of dividends
The Chancellor announced a major overhaul of the taxation of individuals receiving dividends. Currently, a tax credit of 10% of the gross dividend is available, with dividend tax rates of 10% for basic rate taxpayers, 32.5% for higher rate and 42.5% for additional rate taxpayers. Under new rules applying from 6 April 2016, the government will abolish the dividend tax credit and replace it with a new dividend tax-free allowance of £5,000 per year. Dividend income above that amount will then be charged at 7.5% for basic rate taxpayers, 32.5% for higher rate and 38.1% for additional rate.
Rental profits for individual landlords – restriction of tax relief on finance costs
The Chancellor announced a restriction of income tax relief for finance costs on residential properties to the basic rate. These include mortgage interest, interest on loans to buy furnishings and fees incurred whilst taking out or repaying mortgages or loans. Currently, taxpayers can claim full relief against these expenses at their marginal rate of income tax.
The restriction will be introduced gradually as follows:
- from 6 April 2017, 75% of finance costs can be claimed fully as currently allowed, with the remaining 25% being available as a basic rate deduction;
- from 6 April 2018, 50% can be claimed fully, and 50% as a basic rate deduction;
- rom 6 April 2019, 25% can be claimed fully, and 75% as a basic rate deduction;
- from 6 April 2020, all finance costs to be claimed as a basic rate deduction.
Rental profits for individual landlords – abolition of wear and tear allowance
Landlords of furnished residential properties are currently able to claim a 10% wear and tear allowance. The government announced that from 6 April 2016, this would be scrapped and replaced with a new system enabling landlords to only deduct the costs they actually incur. We await further details as to the mechanics of the proposed new system.
Increase in rent-a-room relief
Rent-a-room relief provides a tax-free annual allowance for individuals renting out one or more rooms in their only or main residential property. This annual amount has remained at £4,250 for many years. The Chancellor announced that this would be increased to £7,500 per year from 6 April 2016.
Employment Tax
Employment allowance
This is to be increased to £3,000 per employer from April 2016 but will not apply for companies where a sole director is the only employee. The exemption for one-employee companies will not apply until April 2016 so the allowance for 2014/15 and 2015/16 will remain claimable.
Other changes
There will be further consultation and discussion papers issued on a number of employment tax related areas:
- home to work travel for employees using intermediaries such as personal service companies and agencies;
- Unfunded Employer Benefit Schemes (EFURBS);
- termination payments and their specific tax rules;
- simplification of the current travel and subsistence rules.
Capital Gains Tax (CGT)
As announced in the 2014 Autumn Statement, the CGT annual exemption is set at £11,100 for 2015/16. The exemption for trustees is £5,500 for 2015/16.
The CGT rates for 2015/16 remain the same at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
Entrepreneurs relief: restricting unfair tax advantages on incorporation
As announced in the Autumn Statement, sole traders and partners can no longer be able to claim ER on the disposal of the goodwill in their business to their wholly owned company when they incorporate.
Corporation Tax
Corporation tax rates
Corporation tax remains at 20% until 1 April 2017 when it will reduce to 19% and then reduce further to 18% from 1 April 2020.
Annual investment allowance
The current Annual Investment Allowance of £500,000 will be permanently reduced to £200,000 from 1 January 2016. It was announced in the last budget that this was expected to reduce to £25,000 from 1 January 2016.
Restriction of corporation tax relief for amortisation of goodwill
Currently goodwill purchased by a company on the acquisition of a business is relieved for tax purposes as it is written off in the accounts. There is no parallel relief if the company acquires shares in another company rather than acquiring the business and assets.
Tax relief for acquisitions of goodwill and customer-related intangible assets is now withdrawn, for accounting periods beginning on or after 8 July 2015, except for acquisitions made before that date (or under an unconditional obligation entered into before that date).
Savings
From April 2015, individuals will not have to pay tax on interest income if their taxable income is less than £15,600.
From April 2016, a new tax free personal savings allowance will be introduced of £1,000 for basic rate tax payers and £500 for higher rate tax payers. Additional rate tax payers (whose taxable income exceeds £150,000) will not be eligible for the personal savings allowance.
From April 2016, banks and building societies will stop automatically deducting basic rate (20%) income tax from the interest earned on savings held outside of an ISA.
VAT
VAT rate
The basic and reduced rates of VAT remain unchanged at 20% and 5% respectively.
VAT Registration Limits
The VAT registration threshold remains at £82,000 with effect from 1 April 2015.
The deregistration threshold remains at £80,000 with effect from 1 April 2015.
Inheritance Tax (IHT)
Additional nil-rate band
There is to be an extension to the inheritance tax nil-rate band to enable family homes to a value of £1 million to be taken outside the scope of inheritance tax (IHT). The additional main residence nil-rate band starts at £100,000 from 6 April 2017 and increases to £175,000 from 6 April 2020. This means for a couple, an effective IHT threshold of £1m. A taper will apply of £1 for every £2 over £2 million. The existing nil-rate band remains at £325,000 from 2018/19 to the end of the 2020/21 tax year, after which it will be increased by the consumer price index.
The enhanced relief is available where a residence is passed on death to a direct descendant, being broadly defined as a child (step-child, adopted or fostered) or grandchild classified as the lineal descendants of the child.
The additional relief is limited to one residential property but personal representatives can nominate the property to which the relief should apply where more than one property is comprised in the estate. However, a property which was never used as a residence of the deceased, such as a buy to let property, will not qualify.
Any unused additional main residence nil-rate band will be transferable to a spouse or civil partner where the second death occurs on or after 6 April 2017 irrespective of the date of the first death.
The additional main residence nil-rate band will be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants
National Insurance Contributions
As from 6 April 2015 the Employees rate of NIC will continue to be 12% and the Employers rate will remain unchanged at 13.8%.
The above is for information only and is not intended to offer specific advice
For further information please contact
Ayres Bright Vickers
E-mail: pas@ayresbrightvickers.co.uk
