Summary of Budget 2016

Summary of the key announcements from the Chancellor George Osborne's July 2015 Budget
       
New National Living Wage
From April 2016, a new National Living Wage of £7.20 an hour for the over 25s will be introduced. This will rise to over £9 and hour by 2020.

Tax Free Personal Allowance to be Increased
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. The Government aims to increase the Personal Allowance to £12,500 by 2020, and a law will be introduced so that once it reaches this level, people working 30 hours a week on the National Minimum Wage won't pay Income Tax at all.

Inheritance Tax
Currently, Inheritance Tax (IHT) is charged at 40% on estates over the tax free allowance of £325,000 per person. Married couples and registered civil
partners can pass any unused allowance on to one another. From 6 April 2017, each individual will be offered a new main residence transferable nil-rate
band so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017/18.
The family home allowance will be added to the existing IHT threshold, meaning the total tax-free allowance for a surviving spouse or registered civil partner will be up to £1 million in 2020/21. The allowance will be gradually withdrawn for estates worth more than £2 million.

Higher Rate Threshold
The amount people will have to earn before they pay tax at 40% will increase from £42,385 in 2015/16 to £43,000 in 2016/17.

Reforming Dividend Tax
The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from
6 April 2016. Tax rates on dividends income will be increased. This simpler system will mean that only those with significant dividend income will pay more tax. Investors with modest income from shares will see either a tax cut or no charge in the amount of tax they owe.
For dividend income above this allowance, basic-rate taxpayers will pay 7.5%, while higher-rate taxpayers will pay 32.5% tax, and those who pay the additional rate of 45% will pay 38.1% tax.


The Employment Allowance
Businesses will have their employer National Insurance bill cut by another £1,000 from April 2016, as the Employment Allowance rises from £2,000 to £3,000. The Employment Allowance gives businesses and charities a cut in the employer National Insurance they pay. Next year, businesses will be able to employ four people full time on the National Living Wage and pay no National Insurance at all.

Restricting Tax Relief for Landlords
Currently, individual landlords can deduct their costs - including mortgage interest - from their profits before they pay tax, giving them an advantage over other home buyers. Individual landlords that receive tax relief at 40% and 45% will see their tax relief restricted to 20% from 6 April 2020.
In addition, from April 2016, the 'wear and tear allowance', which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property), will also be replaced by a new system that only allows them to receive tax relief when they replace furnishings.

A rise was also announced in the rent-a-room allowance, which allows individuals to let rooms in their main home to lodgers tax-free up to a prescribed limit. The threshold is being increased from £4,250 to £7,500 per annum.

Reformed Road Tax
The road tax system will be revised to make it fairer and sustainable. From 2017, there will be a flat rate of £140 for most cars, except in the first year
when tax will remain linked to CO2 emissions that cars produce. Electric cars won't pay any road tax at all and the most expensive cars will pay more.
Existing cars won't be affected - no one will pay more for a car that they already own. The money brought in from road tax in England will be spent on England's roads from 2020. The Government will extend the deadline for the first MOT of a new car and motorcycle from three years to four years.

Corporation Tax
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20%. It will now fall further, from 20% to 19% in 2017, and then to 18% in 2020.

Annual Investment Allowance
The annual investment allowance, which has previously been increased temporarily, will be set permanently at £200,000 from January 2016.
The allowance means businesses can deduct the full value of certain items, including equipment and machinery, up to a total value of £200,000 from their profits before tax.
This helps them with cash flow because it means the full relief is given in the year on items purchased, rather than over several years.

Pensions
A further change which will considerably simplify the Annual Allowance is the alignment of Pension Input Periods (PIP) to the tax year. A PIP is the period over which an individual's pension savings are tested against the Annual Allowance. It has previously not always been aligned to the tax year, but all existing PIPs open on 8 July 2015 automatically ended on this date. A new PIP then opened on 9 July and will run to 5 April 2016.
Future PIPs will then be aligned with tax years. For those who have made contributions in the PIP ending 8 July 2015, the Annual Allowance for 2015/16 could be as much as £80,000. The £80,000 allowance is split between contributions paid in the two PIPs. Any allowance not used up to 8 July 2015 could be carried forward to the post-8July PIP, but up to a maximum of £40,000.
This provides a one-off opportunity to those who have paid contributions in the pre-8 July 2015 PIP and have sufficient earnings to use against an additional contribution in the current tax year.

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