George Osborne repeatedly referenced "the next generation" throughout his Budget, and his personal savings announcements were clearly aimed at helping the millennial generation.
Osborne looked to boost entrepreneurial spirits with reductions in Capital Gains tax (CGT), and an alternative to pension reforms a new Lifetime ISA scheme to encourage long-term saving.
Budget incentives for savers and entrepreneurs
Here is a brief summary of the highlights. Follow the links for more detail:
Before the Budget many predicted changes to pensions. While these changes didn’t happen, Osborne introduced the Lifetime ISA, which he called “the equivalent of tax-free savings into a pension”.
From April 2017, “anyone under the age of 40 will be able to open a Lifetime ISA and save up to £4,000 each year,” said Osborne. “And for every £4 you save, the government will give you £1.”
Savers will receive the government bonus added to their Lifetime ISA until they reach 50. The saver can use their Lifetime ISA to buy their first home any time from 12 months after opening the account.
The government expects the Lifetime ISA to be welcomed by the self-employed as a way to save for their retirement, and able to withdraw funds when needed from 60.
Jason Whyte, EY’s insurance sector team director, called the Lifetime ISA a disadvantage over pensions. “A pension can now often be passed from generation to generation without being taxed, whereas a Lifetime ISA would be subject to both income tax on the contributions and inheritance tax on the legacy,” he said.
AccountingWEB member 0098087 agreed, saying: “Lifetime ISA - so auto enrolment for nothing.”
As well as the Lifetime ISA, from next year ISA limits will increase from £15,000 to £20,000.
The Chancellor’s slow, but inexorable campaign against NICs continued this Budget with the announcement that Class 2 NICs will be abolished from April 2018. Since this is the tax collected from self-employed individuals to pay for their pension and healthcare rights, the charade of hypothecation will be shifted to Class 4 NICs in a separate reform project due for consultation.
The measure was presented as a side effect of the Lifetime ISA scheme, which the Budget report explained, “is more flexible way for the self-employed to save for their retirement”. The Office of Tax Simplification (and many AccountingWEB members) have mooted merging national insurance with income tax. Could all the recent tweaks suggest that the Chancellor has been listening, and is looking to achieve the death of NICs by a sequence of minor cuts?
Osborne continued his theme of putting the “next generation first” by increasing the personal allowance, which he hopes will act as an incentive to let working people “keep more of the money they earn”.
The Chancellor raised the tax free personal allowance from £11,000 next year to £11,500, in another step towards the government’s £12,500 personal tax threshold target by 2020.
The higher rate threshold rises from £42,385 to £45,000 in 2017/18.
“It is going to lift over half a million people who should never have been paying the higher rate out of that higher tax band altogether,” said Osborne.
A raft of CGT changes will be welcomed by investors and entrepreneurs, but those with residential properties will not be benefit from the changes as the old rates will stay in place.
From 6 April, the higher rate of CGT will be reduced from 28% to 20%, while the basic rate will also be lowered from 18% to 10%. These CGT changes will come into effect from 6 April 2016.
In addition, the government announced an entrepreneurs' relief (ER) extension for long-term external investors, giving them a 10% CGT rate on unlisted companies.
In contrast to predictions of a crackdown on ER, the Chancellor has extended the largesse in this area. For example, the Chancellor has introduced an individual limit of £100,000 eligible for CGT through an employee shareholder status.
“In this Budget we’re putting rocket boosters on the backs of enterprise and productive investment,” said Osborne.
Smith and Williamson’s Tina Riches said: "Not all investors or businesses count for the lower entrepreneurs’ relief rate, so the general reduction in CGT rates for higher rate taxpayers from 28% to 20% will encourage further investment in companies, helping to boost investment for those not eligible for entrepreneurs’ relief.”
Osborne appealed to the AirBnB generation with the promise of a £1,000 tax break for the micro-entrepreneurs who rent out their homes.
Osborne said: There will be no forms to fill in, no tax to pay – it’s a tax break for the digital age and at least half a million people will benefit.
Individuals who rent out their rooms with incomes below the allowance will no longer need to declare or pay tax on that income, while those with incomes above £1,000 will deduct the allowance.
While Osborne boasted about this AirBnB tax break in his speech, the actual information was tucked away in the Budget report, spanning just a single paragraph (1.170).
Responding to the announcement in blog post, Airbnb said: "This is good news for the growing number of Airbnb hosts in the UK who are sharing their homes, earning a little extra money to pay the bills and bringing new economic benefits to their communities."