Two months and a day after the general election, George Osborne presented his seventh Budget – and second of 2015 – against a political background which few had expected in early May. This was the first purely Conservative Budget since Ken Clarke’s finale, back in November 1996. According to some press reports Mr Osborne had not expected the Conservatives to win the election outright, a factor which may have had a bearing on some of the tax proposals in the Conservative’s manifesto. As it was, Mr Osborne was left with no excuses not to begin implementing those manifesto pledges, which he duly did, both in terms of reducing the impact of inheritance tax and cutting pensions tax relief.
The economic backdrop for this Budget was little changed from that of March. Although at a recently revised 0.4% the UK’s first quarter growth was lower than expected, the Office for Budget Responsibility (OBR) has marginally reduced its forecast for the year to 2.4%. However, it has cut its projections for government borrowing in 2015/16 by nearly £6bn to reflect the marginally lower than predicted outturn for the last tax year and the buoyancy of tax income in the first two months of 2015/16. For 2016/17 and beyond the OBR has also revised borrowing numbers in response to a welcome change in the government’s spending plans: the previous ‘rollercoaster profile’, which had drawn criticism from the OBR’s chairman, has been smoothed out considerably.
Inflation, running at 0.1% on the CPI measure and 1.0% on the now discredited RPI yardstick has continued to help the Chancellor: the OBR thinks the Treasury will have save about £0.3bn in 2018/19 on debt servicing costs because prices are rising so slowly. Even so, government borrowing is still forecast to be nearly £70bn for 2015/16, a long way from the Chancellor’s recently announced plans, repeated in the Budget, to legislate for a surplus in ‘normal times’.
Low inflation should continue to benefit the Exchequer in coming years according to the OBR: it does not now foresee the CPI returning to the Treasury’s 2% central target until 2020. There is one exception to the low inflation assistance: pension increases. The political battle for pensioners’ votes means that the government is committed to maintaining the ‘triple lock’, which implies next year’s basic state pension rising by 2.5%, or more if earnings growth is higher (which, for now, it is).
Traditionally the first Budget after an election is the one in which Chancellors administer their most controversial fiscal medicine as, by definition, it is furthest away from the next visit to the polling station. In this regard, Mr Osborne did not disappoint – this was a radical Budget, with hints of more to come. His main proposals were:
- Major cuts to working age welfare benefits, in part counterbalanced by a new compulsory National Living Wage for those aged 25 and over, starting at £7.20 an hour in 2016/17.
- A further rise of £200 in the personal allowance to £11,000 for 2016/17 and £11,200 for the following tax year.
- An overhaul of the tax treatment of dividends which will increase tax bills for the very wealthy, but reduce or eliminate them for many other investors from next tax year.
- Confirmation that the new personal savings allowance, announced in March’s Budget but not legislated for, will be introduced from April 2016.
- The gradual reduction to basic rate of the tax relief on finance costs for individual buy-to-let investors by 2021/22 and the replacement of the 10% wear and tear allowance.
- A new round of restrictions on tax relief for pension contributions.
- The introduction of a new transferable main residence IHT nil rate band, starting at £100,000 in 2017/18 and rising to £175,000 by 2020/21.
- Tougher rules on non-UK domiciled individuals, including an end to non-domiciled tax status once the period of UK residence exceeds 15 of the last 20 years.
- A reduction in the rate of corporation tax to 19% in financial year 2017 and 18% three years later.
- A raft of yet more strengthened anti-avoidance and evasion measures.
In this Bulletin we look at the impact of the main changes on different groups of taxpayers. Inevitably the categorisation is somewhat arbitrary, so it pays to read all sections. Similarly, some tax planning points – such as those listed below in our 12 Quick Tax Tips – are universal.
If you need further information on how you will be affected personally, you are strongly recommended to consult your financial adviser.