The Chancellor has delivered the first all-Conservative Party Budget for 18 years. We have set out the announcements that may affect your remuneration strategy. In addition, and for completeness, we have included details of changes announced in previous Budgets where these are still to take effect.
The personal income tax allowance (currently £10,600) will increase to £11,000 from April 2016 and to £11,200 from April 2017. The Chancellor also announced his intention to achieve an allowance of £12,500 by the end of this Parliament. The Government will legislate to ensure that once the allowance has reached £12,500, it will always be set at least at the equivalent of 30 hours per week on the National Minimum Wage.
The higher rate income tax threshold (currently £42,385) will increase to £43,000 from April 2016 and to £43,600 from April 2017. The Chancellor announced his intention to increase this to £50,000 by the end of this Parliament.
As previously announced, the Government will introduce legislation to set out that the basic, higher and additional rates of income tax will not increase above 20%, 40% and 45% for the duration of this Parliament. This will apply to earnings income in England, Wales and Northern Ireland and UK-wide savings income.
NATIONAL INSURANCE CONTRIBUTIONS (NICs)
The employer's NICs employment allowance (currently £2,000) will increase to £3,000 from April 2016.
As for income tax, legislation will ensure that Class 1 NICs rates payable by employers and employees will not be increased for the duration of this Parliament. The employees' main rate of NICs is currently 12% and the additional rate is 2%. The employers' rate of NICs is currently 13.8%.
ALIGNMENT OF INCOME TAX AND NICS
The terms of reference for the next Office of Tax Simplification (OTS) review on the closer alignment of income tax and NICs will be published shortly.
Following the OTS recommendation, the Government will consult on simplifying the tax and NICs treatment of termination payments and the tax treatment of travel and subsistence.
The Government will consult in the Autumn on abolishing Class 2 NICs and reforming Class 4 NICs. These are the NICs currently paid by self-employed individuals.
NATIONAL LIVING WAGE
From April 2016, a new National Living Wage will be introduced (via a premium to the current Minimum Wage) for employees over 25 years of age. It will start at £7.20 per hour and is predicted to rise to £9.00 per hour for the tax year 2020/21.
SALARY SACRIFICE ARRANGEMENTS
Salary sacrifice arrangements can allow some employees and employers to reduce the income tax and National Insurance that they pay on remuneration. However, the Government notes that they are becoming increasingly popular and the cost to the taxpayer is rising. It has stated that it will actively monitor the growth of these schemes and their effect on tax receipts. A hint at future changes perhaps?
The way in which employees save towards their pensions may be subject to "radical change" with the Government stating that it is "interested in exploring options for how the system of pensions tax could be reformed to strengthen the incentive to save".
A consultation Green Paper entitled "Strengthening the incentive to save: a consultation on pensions tax relief" has been published today and a copy can be found here. Responses to the consultation are requested by 30 September 2015.
In the meantime and from April 2016, the Government will introduce a taper to the Annual Allowance (being the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year - currently £40,000) for those with adjusted annual incomes (including their own and employer’s pension contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s Annual Allowance will be reduced by £1, down to a minimum of £10,000.
As previously announced, the life-time allowance for pension contributions that benefit from tax relief will be reduced from £1.25 million to £1 million from 6 April 2016.
The Government intends to launch a consultation on the circumstances in which fund managers’ performance-related returns are to benefit from CGT treatment. The consultation will set out and clarify the circumstances in which performance fees arising to fund managers from management activities will be capital in nature. The intention is to bring forward legislation as part of the Summer Finance Bill 2015 which will have effect on all carried interest arising on or after today's date (whenever the arrangements were entered into).
The Government recognises that many individuals choose to work through their own limited company. However, where people would have been employees if they were providing their services directly, anti-avoidance legislation commonly known as IR35, introduced in 2000, requires that they pay broadly the same tax and National Insurance as other employees.
However, reports from the Office of Tax Simplification and the House of Lords, have made it clear that IR35 is not effective enough. The Government states that non-compliance in this area is estimated to cost over £400 million a year.
The Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The government wants to find a solution that protects the Exchequer and improves fairness in the system.
ABOLITION OF A PERMANENT NON-DOMICILE STATUS
From April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes. In addition, it will no longer be possible for somebody who is born in the UK to parents who are UK domiciled to claim non-domicile status if they leave but then return and take up residency in the UK.
By way of background, individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains. Non-domiciled individuals are able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought (“remitted”) to the UK. To access the remittance basis, longer term UK resident non-doms currently need to pay an annual remittance basis charge.
The purposed changes will mean that the worldwide income and gains of a number of individuals who are currently non-domiciled in the UK will be brought within the UK tax net as these individuals lose their non-domiciled status.
EMPLOYEE BENEFITS AND EXPENSES
From April 2016, the £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed and replaced with new exemptions for carers and ministers of religion. In addition, certain reimbursed expenses will be exempt from income tax provided that they are not used in conjunction with salary sacrifice. Draft legislation to affect these changes has been published today. A copy of the draft legislation can be found here.