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The Chancellor’s Summer Budget 2015 claimed to put security first, both national security and economic security for working people. This involved significant changes to both the tax and welfare systems.

Introduction

Some of the measures can certainly be viewed as encouraging people into work and allowing those in work to keep more of what they earn. There were also many measures that will not favour low income workers, in particular announcements in respect of tax credits and Universal credit that the Low Incomes Tax Reform Group (LITRG) explores in its other articles.

LITRG has examined all of the Summer Budget announcements, to see how they will affect those on low to modest incomes. Some of the key facts and figures are explored below.

Personal Allowance 2016/17

The personal allowance is the amount of income you can have in a tax year before you become liable to income tax. The Summer Budget 2015 has announced that the personal allowance will increase to £11,000 from April 2016. It had previously been announced in the Budget in March 2015 that the personal allowance would increase to £10,800 in 2016/17 and £11,000 in 2017/18, so this measure brings forward the planned rise to £11,000.

The increase is welcome in that it reduces taxes for many basic rate taxpayers. For example, a basic rate taxpayer not claiming means-tested benefits will be £80 better off in 2016/17 as compared with 2015/16 (personal allowance of £10,600).

But raising the personal allowance is not necessarily the most efficient way of improving the financial position of people on low incomes, because of the interaction with means-tested benefits. An individual who both pays tax and receives means-tested benefits may find that, as a result of the increased personal allowance, they pay less tax but they also receive less in benefits. For example, basic rate taxpayers in receipt of Universal Credit will only benefit by £28, not £80, from the increase.

Perhaps more importantly, increasing the personal allowance does not benefit those on the lowest incomes at all – that is those who have income of less than the current personal allowance. This includes individuals who have earned the national minimum wage for 30 hours a week over the last year.

The increase in the personal allowance to £11,000 will simplify taxation for those born before 6 April 1938. The personal allowance will catch up with and overtake the age allowance for those born before 6 April 1938, which has been £10,660 since 2012/13. As a result, from April 2016, there will only be one personal allowance, applicable to taxpayers regardless of their date of birth.

Dividend Tax Allowance

The taxation of dividends is to be reformed, by replacing the Dividend Tax Credit with a Dividend Tax Allowance of £5,000 and setting new tax rates for dividend income. From 6 April 2016 the first £5,000 of dividend income will be free of tax for everyone. This £5,000 Dividend Tax Allowance is in addition to the £1,000 Personal Savings Allowance for savings income such as bank or building society interest, also being introduced in April 2016.

Dividend income in excess of £5,000 will be taxed at dividend tax rates which will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. At present dividends are paid with a “notional” tax credit (10% of the gross dividend), which effectively means that basic rate taxpayers do not pay tax on the dividends they receive. Higher and additional rate taxpayers pay tax at 25% and 30.55% on the actual dividend received.

Together, the £5,000 Dividend Tax Allowance and the £1,000 Personal Savings allowance may encourage individuals to save outside of the constraints of an ISA, and the position is likely to be simplified for those individuals with modest amounts of dividend income. There are potential complications, however. For example, some people on overall modest incomes may now have to start paying tax on their dividend income if it exceeds £5,000; as a result, they may also have to start submitting self assessment tax returns to enable HM Revenue & Customs to collect the tax due. In addition, small incorporated businesses may need to review the balance of dividends and salary.

Rent-a-room relief increase

A welcome increase in the “rent-a-room” relief limit to £7,500 per year from £4,250 will apply from 6 April 2016. LITRG has been calling for an increase in this limit for the past few years and ideally, the group would have also liked to see a commitment to up-rating the limit on a yearly basis.

Rent-a-room relief allows people to receive tax-free income from renting out a room or rooms in their only or main residential property. The relief also applies to someone who rents out rooms in a guest house or bed & breakfast, provided that the property is also that individual’s main residence.

Rent-a-room relief was first introduced with effect from 1992/93 and the rate of the relief has been fixed at £4,250 since 1997/98. Residential rents have risen significantly since 1997, and given the shortage of affordable housing, this increase is overdue.

The increase in the rent-a-room relief limit could help various groups, including first-time buyers, those struggling to meet mortgage payments and those seeking affordable housing. It may also allow some individuals to be taken out of self assessment, if they only complete a tax return because of rental income above the current rent-a-room relief limit.

Wear and Tear Allowance

Landlords will no longer be able to deduct the wear and tear allowance, which equates to 10% of gross rental income, from April 2016. In future, landlords of residential property will only be able to deduct costs that they actually incur on replacing furnishings. We understand that the Government intends to publish a consultation document on this change shortly.

Changes to Student Support

From September 2017, maintenance grants for new students from low-income households in England will be replaced with another student loan of up to £8,200 per annum if they are studying away from home and outside of London. Repayments on these new loans will only begin when graduates have annual earnings above £21,000.

LITRG is concerned that this is another financial burden that young workers will have to face, as well as repaying their Plan 2 student loans, income tax, National Insurance and pension contributions, and possibly postgraduate loans too.

Further unwelcome news for some students is that certain universities will be able to increase their tuition fees in line with inflation from 2017-18: this will result in students having to take out yet higher loans.

Disability Benefits

There was welcome news in respect of disability benefits. Firstly, the Chancellor has announced that the Government will not tax or means-test disability benefits. Additionally, whilst many working-age benefits are now to be frozen for four years from 2016/17 to 2019/20, the freeze does not include disability benefits, such as Disability Living Allowance, Personal Independence Payment, Attendance Allowance and Employment and Support Allowance (Support Group).

National Minimum Wage increase

From April 2016, a new compulsory “National Living Wage” (NLW) rate will be introduced for the over 25s. This will be set at £7.20: 50p above the National Minimum Wage (NMW) rate that will apply from October 2015.

According to Treasury figures, many millions of workers are set to benefit. However, there are well-known issues around compliance with the NMW as it stands, in some sectors. The imposition of the higher rate NLW is likely to face similar or worse compliance problems, meaning HMRC may really have to step up in terms of their enforcement activity if low paid workers are to truly benefit from the new rate.

Furthermore, even in the absence of outright employer abuse, it may still not have the intended effect for some of society’s lowest paid workers, for example, care workers, unless there is also a rethink of the underlying rules that exclude much of their travel time and unreimbursed expenses from the NMW calculation. Whilst LITRG therefore views this announcement as largely positive, the group would urge a broader review of the NMW framework as soon as possible.

As noted above, the NLW only applies to workers aged 25 and over; the NMW rates will still apply to workers under 25 and apprentices. This means that from April 2016, if you are aged 21-24 you will continue to earn £6.70 per hour (the NMW rate from 1 October 2015), but if you are 25 or over you will receive an increase and earn £7.20 per hour.

There was promising news for apprentices in England, with the introduction of the apprenticeship levy for large UK employers, which will hopefully encourage more apprenticeships for young people aged 16 and over.

The Government has also promised to bring in legislation that will ensure that once the personal allowance has reached £12,500, those working up to 30 hours per week on the NMW will not pay income tax in the future.

Employers and Businesses

The Government recognises that the new NLW may increase costs for some businesses. With that in mind, other announcements concerning the Employment Allowance, Corporation Tax and the Annual Investment Allowance may soften the blow for some employers.

Employment Allowance

The Employment Allowance will increase by £1,000 to £3,000 from April 2016, which should help to support small businesses and charities to create jobs.

The Employment Allowance is a deduction of £3,000 from an employer’s National Insurance contributions (NIC) bill. Accordingly, an employer does not have to pay National Insurance contributions (NIC) if their employer’s NIC totals less than the Employment Allowance. When it was introduced in April 2014, the Employment Allowance offset the NIC costs of employing four workers full time on the NMW. The increase that has been announced will mean that employers can continue to employ four workers full time on the new NLW from April 2016, without paying any NIC.

The Government has announced that companies where the director is the sole employee will no longer be able to claim the Employment Allowance from 6 April 2016.

Corporation Tax

The rate of corporation tax will be cut to 19% from April 2017 and 18% from April 2020. These cuts will benefit small incorporated businesses as well as larger ones.

Annual Investment Allowance

The Chancellor announced that the Annual Investment Allowance (AIA), which allows a business to reduce its taxable profits by the full cost of the equipment, will be fixed at £200,000 each year for the rest of this Parliament and that this change will take effect from 1 January 2016. LITRG welcomes the certainty that this will bring to small businesses looking to make significant investments in capital equipment.

Consultation on Pensions Tax Relief

The Government recently introduced changes making pension savings more easily accessible, and therefore more attractive to many. As part of the Summer Budget, the Chancellor launched a consultation on pensions tax relief, which looks at the way the tax system supports those making contributions to a pension.

We are concerned that this suggestion of change may lead to uncertainty and an unwillingness to commit to joining a pension scheme – and that is counter-productive for a Government that wants to encourage more saving. LITRG will be examining the proposals in the consultation document closely and responding in due course.

Tax Lock

The Government has confirmed that it is introducing the “tax lock” promised during the election campaign earlier this year and announced in the Queen’s Speech in May. This means that the rates of income tax, VAT and NIC cannot be increased above the current levels during the life of this Parliament (i.e. until May 2020), providing a welcome degree of certainty to employees, pensioners, self-employed individuals and partnerships. This will help them budget more accurately for their business and employment taxes over the next five years, which should in turn aid the development of their business.

Digital measures

Budget announcements on digital matters were confined to building on the commitment already given in the March Budget to transform tax administration for individuals and small businesses. Small businesses will be able to manage their tax through a digital account linked to their business software. Additionally there will be provision of some funding for departments to deliver “redesigned, user-friendly public services, fit for the digital age”.

LITRG continues to support such changes, recognising that there are potential benefits for many citizens of being able to communicate with government departments online. However, the group advises caution given that an estimated 10 million users will need assistance using the digital services.

Government must ensure that in the quest for greater public sector efficiencies through exploiting digital channels, no-one is left behind due to lack of Internet access, age, disabilities or other circumstances, and that alternatives must always be available.

Conclusion

LITRG has welcomed a number of the tax measures announced in the Summer Budget to the extent that they benefit people on low incomes. The same cannot be said of the swingeing reductions in tax credits which will cut a swathe through the incomes of workers and non-workers alike, for which the living wage will generally not compensate, and which will damage work incentives.

The group would welcome a more holistic approach to the tax and welfare systems and one that recognises the interactions between the two. Where LITRG has concerns about announcements, the group will raise them in due course when the Government consults on them.