Chancellor George Osbourne delivered the first purely Conservative government budget in more than 18 years today aimed at encouraging work and discouraging those who wish to live on benefits or avoid tax.
Welfare reforms announced should save £12 billion by 2019/20 including a reduction in the benefits cap to £23,000 in London and £20,000 elsewhere, a reduction in tax credits and a freezing of other working-age benefits. The government are hoping to raise a further £5 billion from measures to tackle tax avoidance, planning, evasion, compliance and imbalances in the tax system.
To encourage businesses and those who want to work hard there is an increase in the higher rate income tax threshold to £43,000 from next year and the personal allowance to £11,000, along with further reductions in Corporation tax to 19% then 18%, the setting of the annual investment allowance for small and medium sized businesses to £200,000 and an extension of the NIC employment allowance to £3,000.
Not such good news for the younger generation as university maintenance grants are to be replaced with loans for new students from 2016/17, a move that many argue will further discourage those from disadvantaged backgrounds from higher education.
Further announcements include the dividend tax credit, around since the abolition of ACT in 1999, being replaced with a tax free allowance of £5,000 followed by rates of income tax on dividend income being 7.5%, 32.5% and 38.1%, a further move aimed at benefitting those on modest incomes at the expense of higher and highest rate earners.
Mortgage interest relief on residential property is to be restricted to the basic rate of income tax, phased in over four years in an attempt to dampen the buy-to-let market in favour of home ownership. Tax relief for homeowners who rent a room is to increase from £4,250 to £7,500.
Following recent changes to the pension regime designed to encourage pension savings the £40,000 annual allowance available to all will be reduced to £10,000 for individuals on incomes above £150,000.
The highly anticipated increase in the IHT nil rate band, much publicised in the run up to the general election, was confirmed but not to be brought in until 2017 after which time a married couple could potentially pass on assets up to £1m, including the family home, tax free to the next generation. The additional allowance will be phased out for estates worth more than £2m.
Only time will tell whether the announcements today will balance the books as the Chancellor hopes and encourage a healthy and growing economy in which we can all enjoy the fruits of our labour.
Let’s hope that HMRC do not use the new measures to target those who have taken risks to grow a business and entered into legitimate tax planning arrangements in good faith and do not confuse these with more aggressive tax avoidance arrangements.