What are the key points from the Summer Budget?
George Osborne announced his first ‘true-blue’ Conservative Budget on 8 July – but what does this mean for the finances of people in the UK? We take a look at the announcement and what is means to your household finances, as the Chancellor implements his plan for reducing the deficit.
New National Living Wage
Aimed to help those on or under minimum wage, George Osborne announced the introduction of a compulsory National Living Wage for the over 25s from April 2016. Starting out at £7.20 an hour, this will rise to £9.00 an hour in 2020. If someone works 35 hours a week (seven hours a day), this will mean they will earn a minimum of £13,104 a year in 2016.
Increase in tax-free personal allowance
The tax-free personal allowance, the amount people earn before they have to start paying Income Tax, will increase to £11,000 in 2016-17. This will make a typical taxpayer £905 a year better off.
Osborne also revealed his ambition to increase the Personal Allowance to £12,500 by 2020.
The amount people will have to earn before they pay tax at the higher 40 per cent level will increase from £42,385 in 2015-16 to £43,000 in 2016-17.
Child Tax Credit
Child Tax Credit will be limited to two children, for children born from April 2017 (unless you have twins/triplets).
Working age benefits frozen
Working age benefits, such as tax credits and local housing allowance, are set to be frozen for the next four years. It is worth noting that this does not include maternity allowance, maternity or paternity pay, or sick pay.
In total, the household benefit cap will be reduced to £20,000 – or £23,000 in London.
It’s one of the issues that we all knew was coming out of the budget: the change in Inheritance Tax.
At the moment, Inheritance Tax is charged at 40 per cent on estates over the tax-free allowance of £325,000 per person. From April 2017, a family home allowance will be introduced, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21.
At the moment, most people are able to contribute up to £40,000 a year to their pension tax-free. From April 2016, this amount will be reduced for individuals with incomes of over £150,000, including pension contributions.
There could also be future changes to pensions, as Osborne announced a green paper with proposals such as treating pensions like ISAs, with users being able to pay in and take out tax free.
Those are the key issues raises that could affect the majority of Britain. To see the full budget and all the plans put forward, take a look at the full budget.
Let’s take a look at more specific changes, and how they will affect different sectors of the public.
Changes for parents
From September 2017, working families with three and four year olds will receive 30 hours of free childcare a week. At the moment, only 15 hours are offered.
Changes for young people and students
There will be a new obligation for those aged between 18 to 21 to ‘earn or learn’ – which means changes for those in this age range, including students. One of these changes includes the abolition of automatic household benefits for those within the 18 to 21 age range.
Those aged 18 to 21 who are on Universal Credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement six months after the start of their claim.
However, it is not all bad news for students: from the 2016-17 academic year, cash support for new students will increase by £766 to £8,200 a year. New maintenance loan support will replace student grants, with these loans only to be paid back when graduates earn above £21,000 a year.
Changes for landlords
At the moment, landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, providing them more benefits than homeowners. This landlord tax relief of 40 per cent is set to be cut to 20 per cent for all individuals from April 2016.
Also worth noting for landlords, the ‘wear and tear allowance’ which lets landlords reduce the tax they pay will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.
Changes for businesses
The National Living Wage is good news for employees, but could be bad news for smaller companies. Due to this fear, the government has pledged to cut the employer National Insurance bill of businesses by another £1,000 from April 2016. This means businesses will be able to employ four people full time on the National Living Wage and pay no National Insurance at all.
To help maintain and boost UK competitiveness, Corporation Tax will also be cut, from its current 20 per cent to 19 per cent in 2017.
Overall, George Osborne looked to provide a budget “for working people”, and that is what he delivered. Hopefully, these changes and increase in the personal tax allowance will loosen the strain on household budgets and support the continued growth in consumer confidence.