Written by Ray Coman
With just 50 days before the election, the Chancellor's announcements included a number of tax-saving proposals. The Budget statements are made in the context of a strengthening British economy, helped (as Mr Osborne grants) "by falling world oil and food prices." His speech declared a national "comeback", with:
- A growth in the UK economy of 2.6% in 2014, the fastest in the G7 group of nations.
- The number of people in work at a historical high.
- Britain measuring its lowest recorded level of inflation.
Starting 6 April 2015, the limit on the yearly amount that can be invested in an ISA increases by £240 to £15,240. The annual limit for a junior ISA also increases to £4,080 up £80 from 2014/15.
ISA rules will be more flexible from 2015/16. Previously the limit was measured with regard only to the amount paid into the ISA. However, under new rules the limit will be measured by net contributions in the year. It will be possible to draw funds out the ISA and re-invest them, provided the difference between what is invested and what is withdrawn, the same tax year, does not exceed the limit.
Help to Buy ISA
A new type of ISA will be available for first time buyers from Autumn this year. Under the Help-to-Buy scheme, the government will add £50 to the ISA for every £200 contributed by the saver. An investment can be made up to an overall yearly limit of £15,000. The maximum is therefore £12,000 contributed by the saver and £3,000 contributed by the government. The limit is 10% of £150,000 which is the Treasury estimate of about the average UK property price.
The chancellor announced that from 6 April 2016, there will be no tax payable on the first £1,000 of interest income. Currently, 20% tax is deducted at source from most interest, and 40% taxpayers are therefore required to pay back an additional 20% in tax. The limit is reduced to £500 for higher rate taxpayers so that the relief is no greater for those on higher income. The measure is expected to relieve 95% of taxpayers from the burden of tax on their interest.
There is a lifetime allowance on the amount that can be invested, tax free, in a pension. The value of the pension is measured against this limit when it vests. A pension usually vests when the pension holder starts drawing on the pension. There is a tax charge on the value of the pension over the lifetime allowance on the vesting date. The government proposes to reduce the annual limit from £1,250,000 to £1,000,000 from April 2016.
A pensioner will also no longer be forced to buy annuity from next April. In other words, a pensioner will no longer have to receive a fixed annual payment, calculated partly by reference to life expectancy. Instead pension holders will be able to access their pension funds as cash withdrawals.
Under the current rules, a taxpayer would have to pay tax at a rate of 55% when they sell their annuity. This will be altered so that a taxpayer will pay tax at their marginal rate (for instance, at 20% if a basic rate taxpayer.)
The personal allowance, or the amount of income that a person can receive tax free, is set to increase over the next three years. With effect from 6 April 2016, the personal allowance will rise to £10,800, a £200 increase from 2015-16. The personal allowance is also set to rise again to £11,000 on 6 April 2017.
So that higher rate taxpayers are no worse off following the personal allowance, an increase the basic rate threshold is also due to rise. Starting 6 April 2015, an individual must earn £42,385 before paying tax at the higher rate of 40%. This basic rate tax threshold will rise by £315 in 2016-17, and by £600 in 2017-18. The basic rate band will therefore be £43,300 in 2017-18. The escalation in the limit is above inflation and therefore prevents us paying more in real terms, an effect known as fiscal drag.
Married couples' allowance
Where a spouse has income less than the personal allowance, they can transfer some of their allowance to their married partner. Consequently, the married partner can benefit from a higher tax free amount that their spouse is not using. From 6 April 2015, the amount of allowance that can be transferred will rise to £1,100.
Class 2 NICs
Class 2 national insurance is a fixed amount payable by self-employed individuals. The government has announced that it will abolish this tax from the next Parliament.
Under 21 NICs
From next April, there will be no employers' national insurance liability arising from salary paid to an employee under twenty one.
Where an employer provides a company car, the employee is taxed on this benefit in kind. The higher the Carbon Dioxide emissions of the car the more benefit the employee is deemed to have received. This is to encourage companies to provide more fuel efficient work vehicles. The government announced, that in 2019/20 the rate applicable to low-emission vehicles will be lower than previously announced. On the other hand, the rate for other vehicles will increase 3%.
From early 2016, the government plans to scrap the Tax return, and instead introduce digital tax accounts. Further details are awaited.
Annual investment allowance
There is currently an annual allowance in place to enable business to immediately deduct the cost of purchasing assets, such as computer equipment, from taxable profits. The rate is currently £500,000 but due to fall to £25,000 at the end of this year. In his speech the chancellor confirmed that this considerable drop will not occur.
As part of a previously announced measure the rate of corporation tax will lower again to 20% from 1 April 2015. Britain will have one of the lowest company tax rates of any major economy in the world.