Low tax, low welfare: All you need to know about George Osborne’s Summer Budget

It’s the first Conservative Budget in 18 years. AAT decodes everything you need to know about George Osborne’s Summer Budget.

Income tax

The tax free personal income threshold was raised higher than many anticipated, from 10k to 11k. At the other end of the scale, the 40% rate threshold was also raised to £43,000.

Wages

Osborne’s grand reveal was of course the new compulsory National Living Wage, which will reach £9.00 per hour in 2020 and will be set at £7.20 per hour starting April 2016. How does this compare to the National Minimum Wage we already have?

The National Living Wage will be compulsory for earners over the age of 25, while the National Living Wage applies to everyone over the age of 21. The National Minimum Wage will be £6.70 from October 2015 giving approximately 2.5m people 50p more than they would have got otherwise from April next year.

Business boosts?

Brian Palmer, AAT Tax Policy Adviser, said “the announced cut to Corporation Tax in the latter part of the decade was a good move.” He also commented, “I am also pleased that Annual Investment Allowance, currently £250,000 per annum, is to be continued, albeit at £200,000, and is to be made permanent. Both of these measures are extremely good news for businesses planning their cash flow and capital expenditure into the future.”

However, there was a mixed bag for SMEs. For most small businesses, there will be a further decrease in NI contributions for employers, with the Employment Allowance raised by £1,000 to £3,000 from April 2016. However, in the longer run there is uncertainty as to whether this is of much benefit in terms of offsetting the increase in wages that now must be paid under National Living Wage.

In addition one-man companies will lose their ability to claim the Employers Allowance altogether from next year. At the same time they (the shareholding owner-manager) will lose their ability to mitigate tax on their profits extracted from their company by supplementing their salary with dividends through the replacement of the dividend tax credit with a new tax-free allowance of £5,000 on dividend income coupled with rates of dividend tax to be set at 7.5%, 32.5% and 38.1% on amounts over the allowance.

“While I have some sympathy in what’s being attempted”, says Palmer, “I am quite concerned that this measure might stifle entrepreneurship. Some change on dividend tax planning has been expected, but it is a surprise that the Chancellor announced this yesterday.”

Tax credits and families

The proposed reductions in working tax credits total £4.5bn and could be seen as somewhat contradictory to the government’s pledge to support hard working families. Referred to as the ‘two child policy’ as family tax credits and Universal Credit will apply to the first two children, this will come into play from April 2017 for new recipients. The tax credit threshold will also drop from £6,420 to £3,850, meaning they will now only be available to the very lowest income families.

Education and young people

As expected, the low income maintenance grants for university students is to be scrapped. This will become a loan, which will be introduced in the 2016/17 academic year. The maximum of £8,200 is to be paid back when earning £21,000 or more, and could potentially increase the burden of debt for many graduates.

Focusing on forging skills for jobs, he pledged three million more apprenticeships to be created this year, with an apprenticeship levy on large firms. Young people aged 18-21 are to be expected to ‘earn or learn’ and to further drive home that obligation, they will also no longer have automatic rights to housing benefits.

Property owners and tenants

With the focus very much on home ownership mortgage, interest relief for buy to let property will be restricted to basic tax rate by April 2017. However, those renting out rooms in their own homes will see a significant increase in the current tax relief from £4,250 to £7,500.

There will be a reduction in housing association rents by 1%, and housing association tenants earning more than £30k (£40k in London) will pay market rate rents.

Tax evasion and nom-doms

There were strong words on both tax evasion and avoidance, with a change in the law to stop the abuse of offsetting losses, and HMRC are poised to get £750m extra to combat tax fraud. In something of a turnaround for Osborne, he announced that permanent non-dom status will be abolished, saying it is unfair for people born in the UK to non-dom parents to then claim to be non-dom themselves. Those living in the UK for 15 years or more will pay same tax as everyone else.

Other announcements

Benefits cap – Cut to £20,000 (£23,000 in London).
Inheritance tax – Family home allowance of £175,000 will be phased in by 2020 to reduce burden.
Pensions – There was less on pensions than had been expected, with a green paper to be published soon that will invite input.
Public sector – A cap of 1% on pay rises will stay in place for the next four years.
Car tax – If you’re buying a car from 2017 there will be new Vehicle Excise Duty (VED) bands with most buyers paying a standard charge of £140.

Big ambitions

While obviously drawing a line under the coalition, the main difference between now and March’s Budget was the sheer scale. This budget is huge. The proposals are estimated in total to bring budget gains of £18.bn, compared to previous budgets that aspired for significantly less. The savings came mostly from the welfare budget, with £12bn to be cut.

It may be big but Palmer feels the Chancellor missed an opportunity to be bold: “[There could have been] an announcement of a merger of Income Taxes and National Insurance into one headline rate of tax and also the alignment of National Insurance threshold with a tax payer’s personal allowances.”

“Overall, this was a budget with several interesting new measures. On tax avoidance, I was pleased to see that HMRC is going to receive extra funding, and I welcome egregious tax avoidance being tackled. However, I would have also liked to see more money allocated to customer support. Although HMRC have been taking huge strides in making their services digital, I would like to see additional resources put towards helplines until their digital transformation is complete and robust.”

What do you think of George Osborne’s Summer Budget? Tell us in the comments below.

Kayleigh Ziolo is a freelance journalist and writer based in Ireland.