In a bold opening statement on his first non-coalition budget, Chancellor George Osborne said that this Summer Budget 2015 puts security first; that recognises the hard work and sacrifice of the British people over the last five years and; that we will not put that at risk. This will be a Budget for working people.

We highlight some of the changes below:

The Economy and the Deficit

  • Economic growth forecasts held for 2015/16, but Gross Domestic Product (GDP) prediction for in 2017 to 2020 increased from 2.3% per year to 2.4% per year
  • Targeting full employment, Mr Osborne is looking to create another 2 million jobs
  • The OBR (Office for Budget Responsibility) expects pay growth to accelerate from 2.2% this year to 4.4% in 2020.
  • According to the OBR they predict that budget deficit will fall to:
    • 2.2% of GDP in 2016/17
    • 1.2% in 2017/18
    • 0.3% in 2018/19

Pay and Spending

  • New National Living wage to be increased to £9 per hour by 2020 (compulsory for those over 25) starting at £7.20 in April 2016 (Current National Minimum wage is £6.50 for over-21s). The OBR predicts that this will have a “fractional” effect on employment, with 60,000 fewer jobs as a result of the wage and 1million new jobs in the economy overall
  • Chancellor states that 6 million people will see their pay rise and that will make savings of £34 billion over this parliament half of which will come from government departments budgets and the other £17 billion will come from a total of £12 billion in welfare cuts and £5 billion from a crackdown on tax avoidance and loopholes
  • Public sector pay rises capped at 1% per year until 2019
  • £8 billion offered to the NHS

Income tax

  • Legislation on a tax lock to prohibit increases in income tax, national insurance and VAT for five years to be announced shortly
  • Tax-free personal allowance to increase from £10,600 to £11,000 in 2016 which shows the threshold rising in line with the minimum wage.
  • The 40% higher rate of income tax rate will be increased from £42,385 in 2015/16 to £43,000 in 2016/17, with 29 million people will pay less tax according to the Chancellor

Pensions

  • The tax free allowance for those earning an income of more than £150,000 will be gradually reduced from the current £40,000 per year to a minimum of £10,000.
  • A new ISA-style pension allowing savers pay tax on the income they put in, but not when they take it out is under consultation with the Government
  • From 6th April 2016 the 10% dividend tax credit will be abolished and replaced with a new dividend tax allowance of £5,000 a year.  New rates of tax on dividend income will apply above the allowance at 7.5% for basic rate tax payers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayer.

Corporation Tax

  • Corporation tax will be cut to 19% in 2017, and then 18% from 2020. That is down from 28% when he took over as Chancellor in 2010. Mr Osborne says this is an advert to tell the world Britain is open for business
  • Small firms’ NI contributions will fall, with a £3,000 employment allowance. So a small firm can hire four staff on the national Living Wage and pay no national insurance.
  • The annual investment allowance, which was a temporary tax break for firms, will be set at £200,000 permanently from January 2016.

Welfare and Benefits

  • Benefits will be capped to £23,000 in London and £20,000 in the rest of the UK.
  • People in social housing earning £40,000 in London and £30,000 elsewhere in Britain will now have to pay the market rate for their homes.
  • 18-21 year olds must “earn or learn”, Mr Osborne says otherwise they will lose their automatic entitlement to housing benefits.
  • All working parents of three- and four-year olds must be working to receive universal benefit as of April 2017, but will get 30 hours free childcare per week, increased from 15 hours, but tax credit and universal credit support to be limited to first two children from April 2017.

Housing

  • Mortgage interest relief on residential property to be restricted to the basic rate of income tax, phased in over four years from April 2017.
  • Home owners who rent out a room can earn £7,500 tax-free from their lodgers each year
  • From 2017 the inheritance tax allowance will be phased in over four years to 2020/21 providing an extra £175,000 for those who leave their homes to their children or grandchildren, in addition to the current £325,000 nil rate band. However, the relief will be tapered away for those with estates of more than £2 million.
  • For married couples, the current threshold and the new allowance can be transferred to the surviving spouse allowing them to each inherit up to £1 million tax-free.

Bank Taxes

  • An additional 8% tax on banks’ profits will be levied from January 2016 and will apply to their entire annual profits, with no relief given for losses made in previous years. However, the Chancellor reduced the bank levy from 0.21% to 0.18% in 2016, with a gradual reduction to 0.1% by 2021. The levy will only apply to the balance sheet of UK-based banks and not to their global operations.

Other Highlights in the Summer Budget 2015

  • An apprenticeship levy on large firms, meaning firms which train apprentices receive more money than they put in
  • Maintenance grants of up to £8,200 will replace student loans from 2016-17 to be paid back when they earn more than £21,000.
  • MOTs on new cars will be required when they are four years old as opposed to three years currently and fuel duty has been frozen for another year

Bridge Investments Partners Ltd are authorised and regulated by the Financial Conduct Authority. This summary represents our interpretation of current and proposed legislation and HMRC practices as at the date of publication.  These may change in the future.  The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

Angus Kirk

Financial Planner at Bridge Investments
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