THE Chancellor vowed to help ‘working people’, but how will his tax and welfare changes affect Britain as a whole, asks Vishal Chopra
The Chancellor sought to present the first all-Conservative Budget for 18 years as one for “working people”, announcing measures which he hopes will create a “high wage, low tax and low welfare” country. But while the headlines indicate he’s on a path to achieve this, what does it really mean for those “working people” and others affected by the post-election Budget?
George Osborne introduced a number of measures aimed at encouraging companies to create jobs, including an increase in employers’ National Insurance contribution allowances and a reduction in the headline rate of corporation tax. However, the major announcements were those impacting individuals – and they were very much “carrot” and “stick”.
The “carrot” was the new national living wage. Starting at £7.20 per hour, it is envisaged that this will be £9 per hour by 2020 and will be equal to at least 60 per cent of the average earnings in the UK. This is an admirable policy, but it does not apply to those under 25 and the real impact of paying such a wage has yet to be seen.
The welfare cuts announced had been well trailed, but the changes are wide-ranging and will undoubtedly impact those who rely on benefits – from a reduction in the welfare cap for out-of-work families, to the “Earn or Learn” initiative for 18 to 21-year-olds and the limiting of tax credits to the first two children in each family.
For many people the impact of these measures will be exacerbated by the fact that public sector pay will only rise by 1 per cent a year for the next four years. This could have a significant impact in Scotland, given the country’s heavy reliance on this sector.
An increase from next April in the personal allowance threshold to £11,000 and in the higher rate band to £43,000 is, however, likely to reduce the impact of some of the cuts to tax credits and welfare spending. In fact, the Treasury claims that by 2017-18, eight out of 10 households will be £130 per year better off as a result of the changes announced on Wednesday.
Osborne also set out the controversial “tax lock”, introducing into law a pledge that the main rates of income tax, national insurance and VAT will remain as they currently are for this entire parliamentary session. Despite some scepticism that Osborne could easily change what is taxed or reduce the availability of existing tax reliefs, the commitment to stability and certainty will be applauded.
However, will we feel the benefit of this lock in Scotland? It is worth considering the impending devolution of income tax powers from April 2016. The Scottish Parliament will have the power to set the rates of income tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers. This means that even with the tax lock in place, Scottish taxpayers could find themselves paying different amounts of income tax than the rest of the UK.
Other than for investment fund managers, there were no significant changes to the capital gains tax regime, which is good news for investors. The measures announced on changes to the taxation of dividends means that investors with dividend income of up to £5,000 will now receive this tax free.
When it comes to pensions, it seems the age of pension simplification has yet to dawn as we are set to see even more change, including a tapering of annual allowances for higher earners as well as a consultation later in the year on more radical changes to pensions to encourage people to start saving for retirement.
There will also be an impact for those holding investment properties through the changes to buy-to-let tax reliefs. The budget outlined plans to restrict mortgage interest relief on rental properties to the basic rate of income tax. The policy objective of stabilising the property market appears sound, however the reality for many landlords who rely on the rental income could be significant. The Chancellor is encouraging them to focus on efficiency savings rather than simply pass on the cost of this by increasing rents.
A surprise announcement on the non-domicile regime is expected to raise an additional £1.5 billion in tax over this parliament, and will leave many needing to review current investment structures and planning arrangements.
Finally, inheritance tax (IHT) was originally introduced to address the wealthiest in society, however it has drawn more people into its net with the sharp increase in property prices over the past 20 or so years. The Chancellor announced a gradual increase in the nil rate band from April 2017 to be used only in respect of the family home. By 2020/21 a couple will be able to shelter £1m of assets (including the family home) from inheritance tax.
This was a big budget and, as the Chancellor said, an ambitious one. Its many changes will take time to filter through and be felt by those they affect.
• Vishal Chopra is Tax Director for Grant Thornton in Scotland