Summer Budget 2015
Listen. Analyse. Apply.
On 08 July 2015 the Chancellor delivered his Summer Budget to Parliament. The main announcements affecting employers are as follows:
- While main income tax rates remain unchanged the Chancellor announced several prospective changes to the personal allowance and income tax basic and higher rate thresholds.
- Further details have been announced in relation to the government’s aim to make tax easier to deal with.
- The amount an individual is able to save tax effectively into a pension scheme over the course of an individual’s lifetime will be reduced from £1.25m to £1m from 06 April 2016.
- Certain taxpayers will have their annual pension allowance withdrawn on the basis of £1 of allowance for every £2 of adjusted income that exceeds £150,000, subject to a minimum allowance of £10,000.
- The government announced changes to the UK non-domiciled regime, effectively eliminating the ability to claim this status for children of domiciled parents and for individuals who are tax resident in the UK for more than 15 years out of the previous 20 tax years.
- Further anti-avoidance measures were announced.
Tax rates and allowance
- Honouring an election manifesto pledge, the Chancellor confirmed that legislation will be introduced to ensure that the headline rates of income tax, VAT and NICs will not be increased during the course of the current five-year parliamentary term. As a result, the main income tax rates of 20%, 40% and 45% remain unchanged.
- At the time of the Spring Budget 2015 the Chancellor announced that the personal income tax allowance will be increased from the current £10,600 to £10,800 from 06 April 2016 and to £11,000 from 06 April 2017. Today he announced further increases and that the personal allowance would rise to £11,000 from 6 April 2016 and £11,200 from 06 April 2017.
- The government has an ambition to increase the personal income tax allowance to £12,500 by 2020, and a law will be introduced so that once it reaches this level, people working 30 hours a week on the National Minimum Wage will not pay Income Tax at all.
- The Chancellor also announced that from 06 April 2016 the basic rate limit for income tax would be increased to £32,000 and that the higher rate threshold where individuals pay income tax at 40% will be increased to £43,000. It is also proposed that with effect from 06 April 2017, the basic rate threshold will become £32,400 and the rate at which individuals pay tax at 40% will rise to £43,600.
- The National Insurance (NI) upper earnings limit will increase to stay in line with the higher rate threshold.
- The government will issue a consultation document in Autumn 2015 on the abolition of Class 2 NICs and how to reform Class 4 NICs for the self-employed.
- The government will also consult on the tax and NIC treatment of termination payments to make the system simpler and fairer.
- There were no further announcements on the previously proposed plans to restrict non-residents’ entitlement to the UK personal allowance from 06 April 2017.
- From 06 April 2016 dividends will no longer receive a 10% tax credit. They will be taxed at new rates of 7.5%, 32.5% and 38.1%, subject to a £5,000 tax-free dividend allowance.
These changes outlined are likely to be welcomed by employers who tax equalise internationally mobile employees. The increased personal allowance, basic rate and higher rate income tax thresholds should reduce tax equalisation costs, although in some cases the personal allowance will not be available due to the employee’s level of income.
Employers will welcome the consultation on how to simplify the treatment of tax and NIC on termination payments if it brings greater certainty, although limiting income tax relief to redundancy situations, as proposed by the Office of Tax
The government indicated its intention to actively monitor the growth of salary sacrifice schemes that reduce employment taxes and their effect on tax receipts. This may impact arrangements where an employee sacrifices salary in lieu of benefits including such things as pensions, childcare vouchers, bikes, etc.
The fact that no action has been taken presently will be welcome news to many employers. However, many employers may wish to carefully review the tax effectiveness and operation of any such arrangements to ensure they could not be considered abusive, such as arrangements where the employer takes on the tax or NIC savings.
Making tax easier
The government will publish a roadmap by the end of the year showing how it will transform tax administration for individuals and small businesses over this parliament. HMRC will be discussing the policy choices underpinning this with various stakeholders over the summer.
This appears a welcome initiative likely based around HMRC’s digital programme designed to simplify the system of tax administration that should help employers and employees alike. Any simplification or reduction in cost for tax reporting and filing will likely be viewed as positive.
- As announced at the time of the Spring Budget 2015, the amount an individual is able to save tax effectively in a pension over the course of an individual’s lifetime will be reduced from £1.25m to £1m from 06 April 2016. A transitional protection for pension rights already over £1m will be introduced to ensure this change is not retrospective.
- The government will restrict the benefits of pension tax relief to those with incomes including pension contributions, above £150,000 by tapering away their existing annual allowance (£40,000) to a minimum of £10,000. This will be effective from 06 April 2016 and will affect individuals earning £110,000 or more where the employer pays the maximum tax relievable amount of £40,000.
- In addition, the government will consult on tackling the use of unfunded Employer Finance Retirement Benefits Schemes (EFRBS) to obtain a tax advantage in relation to employment earnings; and the government will consult on whether and how to undertake a wider reform of pensions tax relief.
As with previous reductions in the lifetime allowance, employers may wish to consider the impact on employees and any communications they may feel appropriate to inform employees of these changes. Employers with employees based in the UK and who participate in foreign based pension schemes may need to consider the impact of these changes.
The effective reduction in the annual allowance for certain taxpayers may cause some employees to question the relevance of saving for retirement via a UK registered pension scheme and employers may wish to consider what alternative reward strategies may be appropriate for employees impacted by this change.
Employers will be keen to better understand what the proposed consultation on pension tax relief will include, especially if it results in a further or complete loss of tax relief on contributions. Equally this may impact employees of foreign based schemes.
Non-UK domiciled individuals
The government will legislate so that from 06 April 2017 anybody who has been tax resident in the UK for more than 15 of the past 20 tax years will be deemed to be UK domiciled for UK tax purposes. In addition, individuals who are born in the UK to parents who are domiciled here will no longer be able to claim non domiciled status whilst they are resident in the UK.
These changes are likely to have an impact on employment costs, international mobility policies and their application, including tax equalisation or tax protection arrangements. In particular, where employers are meeting the costs of paying the Remittance Basis Charge (RBC) and / or where they fully or partly tax equalise or tax protect existing non domiciled employees on investment income and gains they may wish to review their existing approach.
Of note is that this proposed change will affect UK executives with a UK background who have genuinely emigrated and settled abroad but that are required to undertake a temporary UK assignment.
Other consequences of these changes may now include double taxation of investment income and gains for individuals presently claiming the RBC but who can no longer do so due to the change of rules, the additional complexities that this may create in relation to their tax return filing / reporting and complications for taxation of retirement benefits from foreign schemes.
From an individual perspective, individuals who currently consider themselves ‘non domiciled’ for UK tax purposes may now need to review the impact of these changes. Employers may wish to consider what alternative reward strategies may be appropriate for employees impacted by this change.
Restricting tax relief for landlords
- Many expatriates on overseas assignments from the UK may be impacted by the proposed changes announced today in relation to the restriction of tax relief for landlords.
- The key changes that tax relief on mortgage interest payments deducted against rental income will now be restricted to 20% by 06 April 2020. In addition, from 06 April 2016, the ‘wear and tear allowance’ will be replaced by a new system that only allows landlords to get tax relief only when they replace furnishings.
Many employees who are seconded overseas by their employers may be faced with an unexpected increased tax cost as a result of the changes. Employers may also wish to consider the impact where rental income is covered within their tax equalisation policies.
- Further anti-avoidance measures were announced today including new legislation and tougher measures for the operation of trusts, pension schemes, serial tax avoiders and promoters of tax avoidance schemes.
- The government has published a consultation document on proposals to restrict tax relief for travel and subsistence expenses for workers engaged through intermediaries such as ’umbrella companies’ or ‘personal service companies’. Any changes will be effective from 06 April 2016.
These announcements further confirm the Government’s intention to enforce compliance on a wide range of matters impacting employers, particularly their ‘affluent’ and high net worth ‘customers’.