The 2015 Summer Budget contained a few surprises for everyone, and whilst we all await the fine print in the actual legislation, there are three main issues that are likely to affect our clients.
Living Wage
Put simply, the National Minimum Wage for over 25’s will increase to £7.20 in April 2016 – from £6.50 at the moment and with a planned increase to £6.70 in October – with a plan for this to increase to £9.00 per hour by 2020.
This will hurt small businesses, who will carry the majority of this cost from the Budget, along with the impact of Auto Enrolment where 1% of the gross salary will have to be paid into a pension for the employee.
You need to plan and budget for these increases now as they could be more expensive than you think.
Tax credit on dividends
This one is a bit confusing at the moment. It appears that the first £5,000 of dividend income will be tax-free each year, but that the tax credit on the dividend will not be deductible.
The allowance of £5,000 per annum is welcome for small investors who have perhaps a large number of small shareholdings than generate small sums, but we worry that they will still have to report this income each year – with the associated costs – to claim the exemption. So it may not be as generous as it first appears.
Loan interest restriction on buy-to-let
This is a classic piece of micro-management of the tax system that we though had gone with Gordon Brown, but it has been resurrected in this Budget. The good news is that it will be implemented in stages between now and 2020. Just how is anyone’s guess.
This is ridiculously complex, and frankly will be a nightmare for anyone who prepares a tax return manually and has to calculate their own tax liability.
Loan interest will be a deduction from rental income, but will only be eligible for tax relief at the basic rate. How this will be implemented is mind-boggling.
The interest paid will be allowed in full in computing your profit or loss, but will then be adjusted so that the Basic Rate band is reduced by the loan interest paid, so that more of your income is taxed at the higher rate.
Got that?
If pension payments increase the basic rate band to give you higher rate tax relief, then the loan interest payments will decrease the basic rate band to reduce higher rate relief.
We’re going to wait for the actual legislation to be sure on this one, but it is a mess, and we have already spotted and apparently simple loophole in the draft guidance.
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