The chancellor delivered the first 100% Conservative budget last week, it was one of the most significant budgets I can remember. Now we’ve had some time for the dust to settle what does it all mean? The key highlights and lowlights are:
- The new 7.5% dividend tax will hit most business owners.
- The new living wage will help the low paid (at the expense of their employers).
- The wealthy will be taxed more with the dividend tax and restricted pension payments.
- Corporation tax will go down to 18%.
- A couple will (eventually) be able to leave £1million to their heirs.
- Higher rate tax relief for landlords will end.
- Non-domicile status will be severely restricted.
- Lower benefits.
- Lots of anti avoidance legislation.
Understanding where he is going with all of this will help us plan for the future. The main themes as I see them are, anti avoidance, balance, making the ‘under taxed’ pay more, and giving the UK a competitive tax regime.
He does seem to be serious about this. He is going to spend significant money on a new tax investigation unit. Yes this is multi faceted, including bring more criminal investigations, tackling non compliance and aggressive tax planning even breaching confidentiality by naming and shaming. It becomes ever more important to use a respectable firm of Chartered Accountants who do things correctly and have an appropriate level of competence.
Politically the Chancellor wanted to ensure that he did not come across as a ‘Just another Tory taking from the poor and helping the rich’. Therefore cuts in benefits are balanced with higher taxes on the wealthy. The cutting of Inheritance Tax is balanced with reducing the pension allowance on the wealthy. There was no reduction in the 45% income tax or the 60% effective tax rate if you earn a little over £100,000 pa.
The ‘under taxed’
No one I know feels under taxed. The general rule is ‘I pay more than enough; it’s other people that don’t pay enough’. I think Osborne is homing in on those that he thinks don’t pay enough. Who seem to be:
- People who abuse the rules.
- People who live and bring up their families in the UK but because of a foreign ancestor claim not to be UK domiciled.
- Personal service companies. (e.g. for IT consultants)
- Small businesses.
Numbers 1 and 2 are the ‘usual suspects’.
Personal service companies can bring someone’s tax and national insurance down very substantially, there are hundreds of thousands of them, so the tax loss is huge. Osborne tightened the rules by making director only companies pay a bit more national insurance and he is going to restrict the travel expenses they can claim. Not major but I think it shows his trajectory. He has announced a review and I think we can expect a significant tightening of the rules in the Autumn Statement.
It is common for personal service companies and small companies to pay the owner directors in dividends rather than salary saving National insurance and reducing their tax from 46% to 20%. The new dividend tax of 7.5% goes some way towards equalising this. The Chancellor’s stated aim is to merge Income tax and National Insurance. This is a small step towards this goal. I must admit I was not expecting a Conservative chancellor to increase tax on small business owners, perhaps the sign of a confident man unworried about taking on the vested interests of his supporters?
Corporation tax was at 28% when Osborne took over at the Treasury, it is now at 20% with further reductions to 18% announced. His stated aim is to reduce this to the lowest in the G20. In my opinion 18% does not achieve this, I would expect further reductions to say 15% maybe lower in the coming years. The purpose is simple, to have a lower rate than the other European counties so businesses bring their head quarters and their operations to the UK….together with all those high paying jobs! Ireland has had a 12.5% rate for many years which has helped them attract many Tech companies, and helped Ireland to have a higher income per capita than the UK – unimaginable a generation or so ago.