Thursday 9 July 2015

Key Announcements from the Summer Budget 2015


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This is a Budget that puts security first. It ensures economic security for working people by putting the public finances in order and setting out a bold plan for a more productive, balanced economy. It supports national security by investment in defence. It sets out bold reforms on tax and welfare, and introduces a National Living Wage so we move Britain from a low wage, high tax, high welfare economy to a higher wage, lower tax, lower welfare economy. It delivers on the promises on which the government was elected.
 

This Budget sets out the action the government will take to:
  • Eliminate the deficit and run an overall surplus to start paying down debt, while increasing spending on defence and the NHS.
  • Reward work and back aspiration, by introducing a new National Living Wage, cutting taxes so people can keep more of what they earn, and reforming the welfare system to make it more affordable and fair to the taxpayers who pay for it.
  • Back business and make the economy more productive, by cutting corporation tax and increasing the permanent level of the Annual Investment Allowance, and by undertaking major reform of funding for skills and infrastructure to ensure higher standards of living for everyone in the UK .
  • Secure a truly national recovery, by devolving powers and budgets to build a Northern Powerhouse, and create the right conditions for strong growth throughout the UK.
 
Here are the key announcements made by George Osborne in the summer Budget (8 July):
 
1) New national living wage
From April 2016, a new national living wage of £7.20 an hour for those over 25 will be introduced. This will increase to more than £9 an hour by 2020.
 
2) Tax-free personal allowance increased
The tax-free personal allowance – the amount people earn before they have to start paying income tax – will increase to £11,000 in 2016 to 2017.
The government has an ambition to increase the personal 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 won’t pay income tax at all.
 
3) Welfare system cuts
Working-age benefits, including tax credits and local housing allowance, will be frozen for four years from 2016 to 2017, however this excludes maternity allowance, maternity pay, paternity pay and sick pay.
As speculated, the household benefit cap will be reduced to £20,000 across the country and £23,000 in London.
Support through the child tax credit will be limited to two children for children born from April 2017.
Those aged 18 to 21 who are on universal credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement six months after the start of their claim.
Rents for social housing will also be reduced by 1 per cent a year for four years.
 
4) Reforming dividend tax
The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016.
Tax rates on dividend income will be increased.
 
5) Family home taken out of inheritance tax
Currently, inheritance tax is charged at 40 per cent on estates over the tax-free allowance of £325,000 per person. From April 2017, couples will be offered a £1m family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017 to 2018.
The allowance will be gradually withdrawn for estates worth more than £2m.
 
6) Limits to paying into pensions
The amount people with an income of more than £150,000 can pay tax-free into a pension will be reduced so that for every £2 of income they have in excess of £150,000, then their annual allowance is reduced by £1. Most people can contribute up to £40,000 a year to their pension tax-free.
 
7) Higher rate threshold will increase
The amount people will have to earn before they pay tax at 40 per cent will increase from £42,385 in 2015 to 2016 to £43,000 in 2016 to 2017.
 
8) Corporation tax will be cut
The main rate of corporation tax has already been cut from 28 per cent in 2010 to 20 per cent, in order to boost UK competitiveness but will fall further to 19 per cent in 2017, and then to 18 per cent in 2020.
 
9) Annual investment allowance will be increased
The annual investment allowance, which has previously been increased temporarily, will be set permanently at £200,000 from January 2016.
 
10) Employment allowance will increase
Businesses will have their employer national insurance bill cut by another £1,000 from April 2016, as the employment allowance rises from £2,000 to £3,000.
 
11) Insurance premium tax will increase
From November 2015 the standard rate of insurance premium tax will be increased from 6 per cent to 9.5 per cent.
 
12) Clamping down on claims management companies
The amount that can be charged by claims management companies – such as those that encourage claims for payment protection insurance or personal injury insurance – will be capped.
 
13) Restricting tax relief for wealthier landlords
Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax.
Wealthier landlords receive tax relief at 40 per cent and 45 per cent. This tax relief will be restricted to 20 per cent for all individuals by April 2020.
 
14) Ending permanent non-dom status
Non-domiciled individuals live in the UK but consider their permanent home to be elsewhere.
The UK rules allow non-doms to pay UK tax on their offshore income only when they bring it into the UK. However, permanent non-dom status will be abolished from April 2017.
From that date, anyone who has been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for tax purposes.
 
15) Changing the way banks are taxed
Following increasing bank profits, and to reflect changes in bank regulation, the government is introducing a new 8 per cent tax on banking sector profits from January 2016.
The government is also introducing a phased reduction in the rate of the bank levy (which is charged on banks’ balance sheets) from 0.21 per cent to 0.1 per cent between 2016 and 2021.
 
16) Student maintenance grants will be replaced with loans
From the 2016 to2 017 academic year, cash support for new students will increase by £766 to £8,200 a year, the highest level ever for students from low-income households.
New maintenance loan support will replace student grants.
 
17) Road tax reform
The road tax system will be revised to make it fairer and sustainable.

From 2017, there will be a flat rate road tax of £140 for most cars, except in the first year when tax will remain linked to the CO2 emissions that cars produce. Electric cars won't pay any road tax at all and the most expensive cars will pay more.
 
 
References:
 
 


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Tuesday 7 July 2015

Pension Withdrawals - Paying your Tax


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Since the new pension freedoms were announced in April 2015, if you are over 55 you have been able to withdraw money from your pension in a whole new way, you can now even withdraw the entire pension pot if you wish. However, before you make a decision on withdrawing money from your pension it is a good idea to familiarise yourself with the new tax implications so that you do not pay too much tax. The key point to understand is that money that you take from your pension pot may be added to your taxable income for the current period and will be taxed at your marginal rate. Therefore, if you don’t need to take a large cash lump sum from your pension, you could save yourself a big tax bill by choosing to go into flexible drawdown and take money from your pension pot over a number of years instead.
 
For example, if you have £30,000 income a year, your marginal rate of tax is currently 20%. If you cash in a pension pot worth £90,000, even after taking your tax-free lump sum (currently 25% which equates to £22,500), your total income for the year will be £97,500. This pushes you over the 40% tax threshold (£31,785 in the 2015-16 tax year after the personal allowance). Below the 40% tax threshold you will be taxed at 20% for everything above £10,600. £10,600 being the 2015-16 allowance that everyone can earn tax-free. This would mean that your tax payable would be £28,403 on your total earnings, or £16,403 on your pension pot for the tax year 2015-16 (if you have no other income).
 
Or, if you have £45,000 income a year, your marginal rate of tax is 40%. If you cash in a pension pot worth £300,000, even after taking your tax-free lump sum (currently 25% which equates to £75,000), your total income for the year will be £225,045. This pushes you over the 40% tax threshold and into the additional tax bracket (over £150,000 in the 2015-16 tax year). Below the 40% tax threshold you will be taxed at 20% for everything above £10,600. £10,600 being the 2015-16 allowance that everyone can earn tax-free. Above the 40% tax threshold you will be taxed at 40% for everything above £31,785 up to the additional rate tax threshold (currently £150,000 for the 2015-16 tax year). Anything above £150,000 will be taxed at 45%. This would mean that your tax payable would be £122,476 on your total earnings, or £83,153 on your pension pot for the tax year 2015-16 (if you have no other income).
 
Whether you wish to take a lump sum, go into pension drawdown or take out an annuity will be a decision based on your individual circumstances and needs. The key to reduce your tax liability is to understand the trigger events and work with the tools available to you so that you are not paying undue tax on your pension pot. Although the new pension freedoms look simple enough on the surface, it is always worth talking through your options with an independent financial adviser at the outset. Your adviser will be able to offer advice on all areas of retirement planning including: triviality and small pots; flexible drawdown; annuities; and tax liability on death, so that you can put a plan in place that efficiently takes you from where you are now, to where you need to be in the future in the most tax efficient way possible.


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