This was the first Budget since the General Election and without the Liberal Democrats involved it was always going to be interesting to see the direction George Osborne decided to take.
We all knew the Chancellor needed to find large savings, but few expected the dramatic announcement he saved until the end of his speech.
The economy & Government finances
The economy grew by 3% in 2014, well above predictions.
In 2015 the economy is predicted to grow by 2.4% and by 2.3% in 2016, driven by consumption and investment.
The deficit (the difference between the Government’s income and expenditure) is to be cut at the same pace as in the last Parliament and will be “achieved without a roller coaster ride in public spending.”
Mr Osborne confirmed he needs to find savings of £34 billion over the course of the next five years; £17 billion will come from welfare cuts, £5 billion from a crackdown on tax avoidance and the balance from Government departments.
Mr Osborne said he will continue to target full employment and he wants to create a further two million jobs.
However, the Office of Budgetary Responsibility (OBR) predicts that one million more jobs will be created over the next five years.
National Living Wage
Perhaps the biggest surprise came at the end of the Budget speech, when Mr Osborne announced the introduction of a National Living Wage, which will be set at £9 per hour by 2020 for people, aged 25 and over.
The new National Living Wage will start in April 2016 at a rate of £7.20 per hour, up from the National Minimum Wage, which is currently £6.50.
To soften the blow to businesses, Corporation Tax rates will be cut. Whilst small businesses will see their National Insurance contributions cut with a £3,000 employment allowance. This will mean a small business could hire four employees on the National Living Wage and pay no National Insurance.
Pay in the public sector will be capped at 1% for the next four years.
Permanent non-dom status will be abolished for people who have lived in the UK for 15 out of the last 20 years. Furthermore, it will not be possible for people to claim non-dom status because their parents had it.
According to the Chancellor the changes to the non-dom rules will raise £1.5 billion.
Pensioner benefits and the triple lock, which applies to the basic State Pension, will continue.
Disability benefits will not be taxed or means tested.
Working age benefits, which include tax credits and housing benefit will be frozen for the next four years; maternity pay will be excluded.
From 2017, all working parents of three and four-year olds must work to be able to claim universal benefit, however they will get more free childcare each week.
Cap on welfare benefits will be reduced from £26,000 to £23,000 in London and to £20,000 in the rest of the country.
Tax credits and Universal Credits will be limited to two children; this will be implemented from April 2017 for families who have a third and subsequent children.
Support for mortgage interest payments, will no longer be a welfare benefit but will be turned into a loan.
The rate of Corporation Tax will be cut from 20% to 19% and then to 18% in the following year.
Personal Allowance will be increased to £11,000 and will in future be increased in line with the minimum wage.
The rates of 20%, 40% and 45% will remain unchanged, however the higher rate tax threshold, where the 40% rate begins, will increase to £43,000, with the ultimate target being £50,000.
Following the changes to Income Tax, the Chancellor also announced significant changes to Dividend Tax, which will affect many people who are self-employed, as well as directors, shareholders and investors.
From 2016/17 everyone will be entitled to £5,000 of dividends tax-free, which will replace the dividend tax credit. The tax rate on further dividends will then increase from zero to 7.5% for basic rate taxpayers, from 25% to 32.5% for higher rate taxpayers and from 30.56% to 38.10% for additional rate taxpayers.
The changes won’t affect dividends received by ISAs and Pensions.
A Green Paper has been published to consider the future of pension funding, with the Chancellor open to “radical proposals.”
However, Mr Osborne gave a hint as to his thinking when he said that “pensions could be treated like ISAs” with no tax-relief on the way in, but a tax-free income when money is taken out.
It was also confirmed that those people earning more than £150,000 will have their tax-free Annual Allowance reduced from £40,000 per year to a minimum of £10,000 per year.
The launch of the Help to Buy ISA in the Autumn confirmed.
Buy to let landlords, who can offset mortgage interest against the income they receive, will have the amount they can claimed capped at basic rate.
Rent a room relief will be increased to £7,500 per year.
From 2017 a new £175,000 allowance will be introduced and will apply to the family home where it is left to children or grandchildren. This will be on top of the existing £325,000 Inheritance Tax allowance.
Both allowances can be transferred to your spouse or civil partner.
The Government will “taper the relief” away for estates worth more than £2 million.
The bank levy will be removed over the next six years; however a new 8% surcharge on profits will be introduced from January 2016.
Petrol & transport
New Vehicle Exercise Duty bands will be introduced from 2017 with the money raised being placed in a new fund to build and repair roads.
Fuel duty will remain frozen in 2015.
MOTs on new cars and motorcycles will be needed after four not three years.
Maintenance grants will be replaced by loans from 2016/17; students who qualify will be able to borrow up to £8,200 per year. The loans will not become repayable until the student earns more than £21,000 per year.
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