The Chancellor surprised Parliament by announcing that the rates would fall again to 19% in 2017 and to 18% by 2020.
Many larger firms may welcome this news, says George Hay tax partner Phil Blackburn, but for smaller businesses there could be trouble on the horizon – Mr Osborne also announced reforms to dividend taxes.
Under these reforms, the Dividend Tax Credit will be abolished in April 2016 and a new Dividend Tax Allowance of £5,000 a year will be introduced.
The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
These significant changes to dividend taxation will impact on the overall tax rates for owner-managed businesses and the effective tax rates on extracting profits.
The Living Wage increase, putting minimum wages for those over the age of 25 up to £7.20 by April 2016 and to £9.00 by 2020 is a significant increase in the amount of monthly expenditure made by business and will place additional pressure on firms.
Landlords will see changes to tax reliefs they receive on costs deducted from profits. Currently they claim up to 45% tax relief on costs, including mortgage payments but this will be cut to 20% across the board by April 2020.
Mr Blackburn said: “Many commentators are hailing this Budget as a massive success due to the cuts to Corporation Tax, but they are missing the point that some smaller firms will end up paying more due to changes in how dividends are taxed and an increase in wages.”
Logistics sector to benefit from new Roads Fund
Commercial property consultancy Lambert Smith Hampton has welcomed plans to redeploy Vehicle Excise Duty directly to a new UK Roads Fund used solely for improvements to Britain’s road network from 2020.
Associate director – industrial & logistics Dan Jackson said: “The logistics sector in Luton and Dunstable is already benefitting from significant road improvement schemes. With this announcement, we hope that other similarly ambitious schemes will be announced in due course.”
Steve Williams, national head of industrial and logistics, said the move is “an important step in the right direction”.
He added: “In a sector where time is critical to success and margin, improvements in the road network can have a significant impact.”
Suzi Edwards, financial services expert at PwC in Milton Keynes and the South Midlands, said: “The Summer Budget will largely be viewed as mixed newsby groups in the insurance sector.
“The Chancellor has shown his commitment to ensuring Britain remains competitive by announcing a cut corporation tax to 18% by 2020. However insurance, particularly the London market, is a global business and it is important that the Chancellor ensures the UK remains the most competitive place in the G20 to do business.
“However this positive feeling will be tempered by the rise in the standard rate of insurance premium tax to 9.5% from November, changes to pension relief and greater regulation of claims management companies.
“It will be important that these new rules don’t create uncertainty and unnecessary cost for business. We are yet to see the detailed measures proposed.”
Suzi Edwards said: "The reform and reduction in the bank levy will be welcomed particularly by those banks with large overseas operations. However, the long term phased nature of the reform coupled with the new profits based 8% corporation tax surcharge means that the overall tax burden on the banking sector will go up during this Parliament.
“This sends very much a mixed message in terms of competitiveness of the UK as a place for carrying on banking business."
Steve Blackmore, pensions director at PwC in Milton Keynes and the South Midlands, said: “This review is long overdue as the tax treatment of pensions has got out of hand and is overly complicated.
“Continual changes have undermined confidence in pensions and this is a great chance to re-build that trust by overhauling how pensions are taxed once and for all.
“This could help address the fairness of tax relief for those members earning defined contribution versus defined benefit pensions.
“The Government’s focus on encouraging a saving culture is good news. But turning taxation on its head, while convenient from a fiscal perspective, is really hard to communicate to consumers – especially those coming into auto enrolment for the first time, who often do not have the support of employers’ with long pensions history themselves.”
Saving for pensions and ISAs should be kept separate as there are clearly distinguishable goals – saving for old age versus earlier life events. The danger is that combining pensions and ISAs will confuse people’s savings and could leave people short at retirement.
Consumers want both options and currently have this through their employer’s benefits programmes. Perhaps the tax advantage can be switchable, but funds need to remain separate.
Mr Blackmore said: “A radical change to taxing monies on their way in would effectively be a back door removal of the tax-free lump sum at retirement. It would be a major challenge for pension supporters if this was to happen, or if tax-free lump sum was to be removed for contributions already made.
“There is also a question now being implicitly raised by government as to whether employers should enjoy tax relief on contributions to pay off defined benefit deficits. This could have a major impact on employers’ willingness to engage in supporting sustainable long-term savings of any kind.
“The public sector is not mentioned explicitly but as the largest area of continued defined benefit cost, one wonders whether the green paper will focus on the tax cost of these to the country?"
The Chancellor announced above inflation rises to both the personal allowance and the basic rate band of income tax.
One analyst said: "The new basic rate band limit of £43,000 is a welcome first step up the basic rate band ladder to the manifesto promised land of £50,000 – but further steep, and expensive, rises will be needed to meet this target by 2020."
The promised inheritance tax boost for family homes was introduced, meaning a home jointly owned by a married couple worth up to £1 million will escape the inheritance tax net.
Dividends
The Chancellor announced a significant reform of the taxation of dividend income, with the introduction of new tax rates and a tax free dividend allowance of £5,000 per year.Reform of the tax treatment for will have a potentially very significant tax impact on the owner managed business sector, it is also a welcome simplification for many taxpayers who have some investments in shares.
Building on the ISA and savings reforms in the last Parliament, this reform will take those with modest dividend income out of the dividend tax system altogether."
