July Budget

The Chancellor, George Osborne, unveiled the first all-Conservative Budget for 19 years on 8^th July.  With the previous Budget only taking place on the 18^th March, this was less about reacting to a changed economic environment and more about wishing to put a distinctive political stamp on economic policy.

On the overall economy, the Office for Budget Responsibility has slightly revised down its estimate of growth for 2015 from the previous 2.5% to 2.4%.  The UK economy is then expected to grow by 2.3%, 2.4% and 2.4% in the next three years.  Whilst austerity will continue, the pace will slow.  The Chancellor had originally pledged that the Government’s finances would be in surplus by the 2018-19 year.  With lower cuts, this will not now occur until 2019-20. 

 On specific points;

• The big headline in the Budget was a cut in welfare spending – focused mainly on Tax Credits.  To offset the effects of this (politically, if not, perhaps, financially) there is to be an upliftin the National Minimum Wage.  This is currently £6.50 per hour for those 21 years old and above (rising to £6.70 from 1^st October).  As from April 2015 it will be rebranded the ‘National Living Wage’ and rise to £7.20 for those 25 or over.  (Those 21-24 will continue to get the £6.70 per hour).  The National Living Wage (NLW) will rise to £9 per hour by 2020.  This could have a big effect on labour costs in sectors with relatively low wages – including parts of agriculture and horticulture. 
• Some measures have been announced that appear designed to offset the costs of the NLW for employers.  The first is a cut in the rate of Corporation Tax from the present 20% to 19% in 2017 and 18% in 2020.  This is not much help to employers who are not limited companies however.   A further measure is the increase in the Employers National Insurance Allowance that can be offset against NI contributions.  This will rise from £2,000 to £3,000.
• The Personal Allowance for Income Tax will rise from its current £10,600 for 2015-16 to £11,000 for 2016-17 and £11,200 the next year.  The Higher Rate Tax band will start at £43,000 in 2016-17, with the Additional Rate threshold staying at £150,000.
• A consultation has now been issued on how the extension to farmers’ profit averaging to 5 years from next April will work. 
• The Annual Investment Allowance which was due to fall to £25,000 from its current £500,000 on the 1^st January 2016 will be fixed at £200,000 for the lifetime of this Parliament.  This measure is seen as helping agriculture.  However, in the current climate there is likely to be rather less purchasing of plant and machinery than in recent years.  It does also not address the anomaly that it only incentivises investment in certain types of asset – there is no tax benefit for investment in agricultural buildings or other infrastructure for example. 
• The rules on pension contributions will be tightened.  The annual limit of £40,000 receiving tax relief will stay, but this will be progressively reduced for those earning over £150,000.  It will drop to a minimum of only £10,000 per year for those earning£210,000 per year or more.  Although perhaps not of great concern to many, there may be issues for an industry such as agriculture that can have ‘bumper’ years.  There will be less opportunity to siphon-off unexpected profits into a pension (although the farmer averaging rules will help).   
• The tax treatment of dividends is to change.  The Dividend Tax Credit is to be replaced by a Dividend Tax Allowance of £5,000.  Then there will be three rates of taxation on dividend income above the allowance – 7.5% for Basic Rate tax payers, 32.5% for Higher Rate taxpayers, and 38.1% for Additional Rate.  The effect is that it may become slightly less advantageous to incorporate businesses. 
• Interest on buy-to-let properties will be restricted to the Basic Rate of Income tax (20%).  The ‘rent-a-room‘ relief is to be increased to £7,500 from £4,250 as from April 2016.
• Insurance premium tax will rise from 6% to 9.5% from 1^st November 2015.  Vehicle Excise Duty is to be reformed.  For cars over a year old there will be three categories with most cars falling into a £140 per year band.  But there will be higher first-year charges which will help fund road improvements.
• A new ‘main residence’ relief is to be phased-in for Inheritance tax.  This will be in addition to the general allowance of £325,000 and will effectively mean that houses worth up to £1m will be able to be passed on to the next generation tax-free by 2020. 

The Budget was quiet on the economic subjects that are arguably the most important long-term issues in the UK – the woeful performance of UK productivity and the lack of housing.  The Budget speech made reference to productivity and many measures were spun as addressing this.  A ‘Productivity Plan’ was also published alongside the Budget (see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443897/Productivity_Plan_print.pdf ) which also touches on housing.  However, its contents are rather piecemeal and hardly seem set to transform the performance of the UK economy.