Austerity measures and tax rates were at the heart of the Emergency Budget this week, whilst salary sacrifice schemes remain untouched.
The Emergency Budget, so called because it was introduced just two months after the general election, is the first all-Conservative Budget since 1997 and has set out what was outlined in the Conservative Manifesto.
Here are some of the main issues which are likely to be of interest to UK employers and their staff:
Tax relief: The tax-free limit on pension contributions for those earning over £150,000 will be gradually reduced from April 2016. Currently, pension contributors are entitled to tax relief on contributions up to £40,000, but from April next year, the tax-free limit will be reduced by £1 for every £2 earned over £150,000. Ultimately, the tax-free limit will be reduced to £10,000.
Debbie Falvey, Head of DC Proposition at Aon Employee Benefits, said that whilst the change will affect a potentially small number of pension contributors, it is likely to be very complex for the individuals concerned.
Tax evasion: Measures to crackdown on tax avoidance have been announced, as first outlined in the manifesto. £5bn of revenues will be raised from the crackdown, which will see the abolition of permanent Nom-dom status. Those who have been UK residents for fifteen of the previous 20 years will now pay full UK taxes. In addition, Mr. Osborne has promised to name and shame tax avoidance schemes.
Tax thresholds: In a move which Mr. Osborne says will help take around 130,000 families out of the higher rate of income tax altogether, only those earning over £43,000 will have to pay the 40p higher tax rate from 2016. On the other end of the scale, those working full-time for national minimum wage (and therefore lower rate tax payers) will be exempt from income tax all together. Personal allowance will be raised to £11,000.
Inheritance tax: Properties worth up to £1million will be exempt from inheritance tax. The government have announced a new transferable ‘family home allowance’ worth up to £175,000 per person, which, when added to the current £325,000 tax-free allowance, makes a total of £500,000 for individuals and therefore, £1million for couples.
Commenting on the plans when they were first outlined in the Conservative’s election manifesto, Prime Minister David Cameron said the move would appeal to those wanting to pass something on to their children, which is ‘the most basic, human and natural instinct there is.’
Corporation Tax: Corporation tax will be cut to 19 per cent in 2017 and then 18 per cent in 2020.
Salary Sacrifice: Despite fears of government plans to abolish salary sacrifice in the Emergency Budget, there are no planned changes as yet, although salary sacrifice will be under governmental review.
Paul Nanon, Principle at Aon Employee Benefits said: “Rumours ahead of the Summer Budget 2015 that salary sacrifice schemes would be attacked failed to materialise, however the government explicitly called out that the growth of such arrangements and their financial impact is being monitored. Organisations looking to introduce salary sacrifice schemes, especially for pension contributions, should factor in the potential restriction or removal of these schemes in the short-term when deciding whether or not to implement.”
Pay and pensions: A new enforceable National Living Wage will be introduced, starting at £7.20 per hour from next April and will increase to £9/hour by 2020 for those over 25. It replaces the current minimum wage which is currently set at £6.50.
A green paper will be published on proposals for radical changes to the pension saving system including taxing pensions in the same way as ISAs are.
Falvey said: “Although this does appear to be a genuine consultation, it is more about whether the pension tax system needs to change, rather than how the system should be changed. There is a big link made between tax incentives and personal responsibility, but this fails to recognise the centrality of the role of the employer in pension savings and their role needs to remain central if we are to see realistic levels of retirement savings in the future.”
Childcare: As promised in their manifesto, working parents of three and four-years-olds will be entitled to up to 30 hours of free childcare from September 2017.