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UK Budget Targets 18 Percent Corporate Tax Rate

by Robert Lee, Tax-News.com, London

09 July 2015


UK Chancellor George Osborne has delivered the first Conservative-only Budget in 18 years, announcing a surprise corporation tax cut, the abolition of permanent non-dom status, and increases in income tax and inheritance tax thresholds.

In a speech to the House of Commons on July 8, Osborne said his Budget "sets out a plan for Britain for the next five years to keep moving us from a low wage, high tax, high welfare economy, to the higher wage, lower tax, lower welfare country we intend to create."

At 20 percent, the UK has the joint lowest rate of corporation tax in the Group of 20 Nations (G20). However, Osborne was clear that "the country cannot afford to stand still while others rush ahead." He will therefore cut the corporation tax rate to 19 percent in April 2017 and 18 percent in 2020. Osborne said the new rates will send out "loud and clear the message around the world: Britain is open for business."

Osborne did nevertheless stress that the corporation tax rate cannot be lowered "while such strong incentives are created for people to self-incorporate and pay the lower rates of tax due on dividends." As part of "a major and long overdue reform to simplify the taxation of dividends," the dividend tax credit will be replaced with a new tax-free allowance of GBP5,000 (USD7,693) of dividend income for all taxpayers. The rates of dividend tax will be set at 7.5 percent, 32.5 percent, and 38.1 percent. Dividends from pensions and Individual Savings Accounts will remain tax-free.

Osborne also unveiled plans to remove "fundamental unfairnesses" in the non-domicile regime. The Government will abolish the permanent non-dom tax status, meaning that anyone resident in the UK for more than 15 of the past 20 years will have to pay full UK taxes on all worldwide income and gains. The change will come into effect in April 2017 and raise an extra GBP1.5bn in tax by 2020.

After several temporary increases, the Annual Investment Allowance (AIA) was set to fall to GBP25,000 from January 1, 2016. Osborne announced that, from next year, the AIA will become permanently set at GBP200,000. The allowance enables businesses to deduct the full value of certain items, including equipment and machinery, up to the cap, from their profits before tax.

The Budget also contained the following tax-related measures:

  • The Government will abolish the corporation tax relief for companies that write off the cost of purchased goodwill and certain customer-related intangible assets. The relief will still be available if the goodwill is sold;
  • For companies with profits over GBP20m, corporation tax payment dates will be more closely aligned with the point at which profits are earned;
  • The Employment Allowance, which reduces the amount businesses pay in employer National Insurance contributions, will rise from GBP2,000 to GBP3,000;
  • The insurance premium tax will be raised to 9.5 percent, effective from November 2015;
  • The bank levy will fall from 0.21 percent to 0.18 percent from January 1, 2016. It will decrease each year until it reaches 0.1 percent in 2021. After January 2021, the levy will no longer apply to worldwide balance sheets;
  • From January 1, 2016, an eight percent surcharge will apply to bank profits, and the Government will restrict corporation tax relief on compensation payments paid by banks and building societies;
  • The Government will prevent losses and other surplus expenses from being set off against the CFC charge on the profits of controlled foreign companies (CFCs) for profits that arise on or after July 8, 2015;
  • The Government will attach a penalty to the general anti-abuse rule and will publish the names of those who repeatedly use failed tax avoidance schemes;
  • The capital gains tax (CGT) regime will be tightened, to ensure investment managers pay the full CGT rate on their carried interest;
  • HM Revenue and Customs will be allowed to access more data to identify businesses that fail to declare or pay tax, and the number of investigations the Department can undertake into complex tax crime will be tripled;
  • The Government will legislate for a "tax lock," which will prevent it from increasing the main rates of income tax, National Insurance, and value-added tax (VAT) for the next five years;
  • The personal income tax allowance will rise from GBP10,600 to GBP11,000 from April 2016, and legislation will be introduced to ensure that the personal allowance rises in line with the minimum wage;
  • The threshold for the 40 percent rate of income tax rate will increase from GBP42,385 to GBP43,000 from April 2016;
  • From 2017, the Government will phase in a new GBP175,000 IHT allowance. The new nil-rate band will be set at GBP100,000 in 2017-18, GBP125,000 in 2018-19, GBP150,000 in 2019-20, and GBP175,000 in 2020-21. The band will then increase in line with the Consumer Price Index. It will be available in addition to the existing GBP325,000 threshold, which will be fixed until the end of 2020-21. Both allowances can be transferred to a spouse or partner. Those who downsize their property will not lose any of the allowance from the property they previously owned. The relief will be tapered away for estates worth more than GBP2m;
  • The IHT reforms will be funded by a tapered reduction in pension tax relief for individuals with incomes of over GBP150,000, beginning in April 2016;
  • The mortgage interest relief individual landlords can claim on residential properties will be restricted to the basic rate of income tax (20 percent), and the rent-a-room relief will rise from GBP4,250 to GBP7,500 from 2016;
  • From 2017, there will be a flat road tax rate of GBP140 for most cars. Electric cars will not pay road tax, and the most expensive cars will pay more; and
  • Working age benefits, including tax credits, will be frozen for four years.

TAGS: individuals | capital gains tax (CGT) | inheritance tax | tax | investment | business | pensions | value added tax (VAT) | tax avoidance | tax incentives | interest | insurance | corporation tax | United Kingdom | tax thresholds | tax credits | tax authority | legislation | HM Revenue and Customs (HMRC) | dividends | G20 | HM Revenue and Customs (HMRC) | individual income tax

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