The Chancellor George Osborne gave the Emergency Summer Budget on Wednesday in the House of Commons. The new Budget sets out a plan for Britain for the next 5 years, which Osborne claims will continue to move us from a low wage, high tax, high welfare economy, to a higher wage, lower tax, lower welfare economy. There are a number of key tax and spending changes he announced to put us on route to this new economy:

The Deficit

The deficit is expected to be 3.7% of national income this year, and is predicted to fall to 2.2% in 2016-2017, 1.2% in 2017-2018, and 0.3% in 2018-2019. The government will run a surplus of 0.4% of GDP in 2019-2020, and 0.5% in 2020-2021.

Bank Taxes

An additional 8% tax will be added on banks’ profits from January 2016. There will be no loss relief for losses made in previous years, but the tax will apply to banks’ entire annual profits.

The bank levy will be decreased, from 0.21% to 0.18 % in 2016, then gradually reduced to 0.1% in 2021. After 2021 the levy will only apply to the UK balance sheet of UK-based banks, instead of being applied to their global operations.

Tax Evasion

£750m will be used for HMRC to raise £2bn of additional tax contending tax evaders.

In terms of non-domicile tax rules, from 2017 non-doms who have spent 15 of the last 20 years in Britain will pay the same amount of tax as everyone else, abolishing their non-dom status and raising £1.5bn in the process.

Mortgages

Buy-to-let mortgages are now 15% of the market, so mortgage interest relief will be restricted to the basic rate of interest. Room rental tax relief will also be increased to £7500.

Inheritance Tax

From 2017 there will be a new £175,000 allowance on homes that are inherited by children or grandchildren. This new allowance will be additional to the current £325,000 threshold that is fixed until the end of 2020-2021. Both of these allowances will be able to be transferred to someone’s spouse/partner, meaning they will be able to inherit up to £1 million tax-free from each other.

The cut in inheritance tax will be funded by changes to the pensions’ tax relief to the highest earners. Osborne says that they will “taper the relief” away for estates that exceed £2 million in worth.

Pensions

Although not completely decided upon yet, the Government is consulting on the idea of pensions being treated like ISAs – savers would pay tax on the income they put in, but not when they take it out.

Those that earn above £150,000 will have their tax-free contributions allowance reduced gradually from its present £40,000 to a minimum of £10,000.

Dividends

Dividend tax credit will be replaced with a tax-free allowance of £5000 of dividend income for all taxpayers. However, the rates of dividend tax will be increase: from 0 to 7.5% for basic rate income tax payers, from 25% to 32.5% for higher rate taxpayers, and 30.56% to 38.1% for additional rate payers.

Corporation Tax

Corporation tax has already been cut to 20%, but it will be cut to 19% in 2017 so as to create more jobs, and then 18% in 2020.

Small firms’ national insurance contributions will decrease, with a £3000 employment allowance.

The annual investment allowance will be set at £200,000 permanently from January 2016.

Income Tax

There will be a tax lock to prohibit increases in income tax, national insurance, and VAT. The tax-free personal allowance will increase to £11,000 from 2016, towards a target of £12,500. The threshold for the 40p rate will be raised to £43,000 in 2016-2017, towards a target of £50,000.

National Living Wage

From April 2016, the minimum wage will increase by 11% to £7.20, and will be £9 by 2020 for those aged 25 and above. Osborne says this will result in 2.5 million people getting a direct pay rise. This will impact employers and result in 60,000 fewer jobs, although the corporation tax will help them and there will be 1 million new jobs in the economy overall.

Childcare

From September 2017, 30 hours of free childcare will be provided to all working parents of 3-4 year olds. Consequently, the government would expect those parents with a youngest child age 3 and who want to claim Universal Credit to look for work, even if they are a lone parent. Universal Credit will not be given to non-disabled claimants without children, and both Universal Credit and tax credits support will be limited to only the first two children.

Working Age Benefits

Working age benefits will be frozen for 4 years, so as to increase the earnings growth and overtake the benefits growth. Working age benefits to be frozen includes Tax Credits and Local Housing Allowance, although statuary payments such as maternity pay and disability benefits will be omitted from this freeze.

The £26,000 cap on benefits will be decreased to £23,000 in London and £20,000 outside London.

People on higher incomes in social housing will now have to pay the market rate for their homes. ‘Higher income’ is earning above £40,000 in London, and above £30,000 in the rest of Britain.

Apprenticeships

An apprenticeship levy will be introduced on all large firms. This should create 3 million more apprenticeships, and the money would be directly controlled by the employers. The idea of this is to tackle the free rider problems, and allow firms to “get more back than they put in”.

Northern Powerhouse

Manchester’s mayor will now have control of fire sires, land and child services, and Osborne is discussing similar deals with Leeds, Sheffield, and Liverpool. There will also be £30m used to supply Oyster card-style public transport payments in the North.

Travel

Osborne believes that it is not sustainable that by 2017 75% of new cars will pay no vehicle duty in the first year, so he has decided that from 2017 new cars will pay emissions-based vehicle excise duty – £140 on average after the first year. The duty will be updated for new technology, and so there will be three duty bands: zero emission, standard, and premium. Although no extra revenue will be raised, the money will be spent on roads.

Fuel duty has also been frozen for another year, and insurance premium tax is being increased from 6% to 9.5%.

IPSE (The Association of Independent Professionals and the Self Employed) will be raising their concerns about the negative impact some of the Summer Budget announcements will have directly with HMRC at a high level meeting next week, so we can hope that something will be done about these adverse plans before they are actioned.

Article written by Miranda Blake, BSc Hons and Sam Price, ACA IIT(DIP) MAAT from ICS. Sam is a Chartered Accountant and tax adviser who specialises in helping our contractors prosper. He achieves this through a proactive and bespoke approach to each client.