Levelling the playing field
The overall effect may have been minimal, but there was a lot going on under the surface in this year’s budget.
The Chancellor tweaked income tax, capital gains tax and corporation tax, while at the same time introducing new tax incentives for savers. The rise in the higher rate tax band – from £42,375 to £45,000 – will lift over 500,000 taxpayers out of the 40% rate. Equally, the rise in the personal allowance – from £11,000 to £11,500 – will see more people pay no tax at all on their income. George Osborne claims that around 31m UK taxpayers will receive a tax cut from the measures.
More surprising was the announcement that capital gains tax will reduce from 28% to 20% in April. However, this excludes residential property, which is where the majority of people make their largest gains. This is another blow to second home-owners and buy-to-let landlords, following the increases to stamp duty land tax announced in the last budget. Nevertheless, it will allow investors sitting on large gains in their portfolios to realise them at a lower rate.
The situation was a little more complex for the self-employed. Those operating limited companies will receive a benefit from lower rates of corporation tax. These will fall from their current level of 20% to 17% by 2020. The self-employed will also see an annual tax cut of over £130 following abolition of Class 2 National Insurance contributions, though changes are planned to class 4 contributions in order to ensure that benefits entitlement is retained.
The Chancellor also announced a raft of savings incentives. The ISA allowance will rise from £15,240 in the 2016/17 tax year to £20,000 in 2017/18 for all investors. The Junior ISA allowance will remain at its current level of £4,080. At the same time, the Chancellor also announce the launch of a ‘lifetime Isa’ for those aged between 18 and 40. Up to £4000 a year can be invested alongside an existing Isa (subject to the overall £20,00 limit) and investors will receive a 25% boost on their annual contribution from the Treasury up to the age of 50. The proceeds from the Lifetime ISA can be put towards a first home with a value of up to £450,000 or set aside for retirement from age 60. Investors can use the money for other purposes, but they will lose the government contribution and associated growth, plus be subject to a 5% surcharge. Many saw the death-knell for pensions in the new boost for Isas, but for the time being, they remained untouched.