Budget 2015

5 Ways the New Conservative Budget Might Affect You

I know, I know, talking about the budget isn’t exactly exciting stuff, but if you care about your finances then knowing this stuff can have a real impact on your wealth, and that’s definitely interesting.

So as Adam has kindly allowed me to guest post on his blog, I thought I would take the opportunity to talk about the new budget and give you a quick guide to why you should care. These are the headlines, but for full Summer Budget coverage click here.

Tax Credits:

Tax credits have been big news lately, and child tax credits in particular. If you are a relatively low earning family and especially if you have children then there is every chance that this will affect you.

Child tax credits will soon only be available for up to 2 children. In the past, the more children you had, the more tax credits you were paid. But now, you will only receive that payment for the first 2 children.

This is probably based on the principal that if a couple has 2 children, the net effect on population growth is neutral. You are of course welcome to have more children, but this change may mean that having a larger family is not viable.

However, if you already have a big family, you should be ok. This rule will only affect children born after 6th April 2017. So if you were thinking of trying for another, you may need to reconsider.

Child Benefit:

Child benefits are separate to tax credits, and the good news is that these will not be affected by the new budget. So at least that payment is safe!

Increase in Income Tax Allowance:

The good news though is that the tax free allowance will be increasing fairly substantially in the new budget. In the 2016/2017 tax year the tax free allowance will increase to £11,000. It has been increasing gradually over the last few years and has risen much faster than inflation.

This means that although the rate of tax has not decreased, you will be paying tax on less money, effectively reducing your tax bill, and making you better off!

Dividend Allowances:

Bad news for business owners I’m afraid. Previously the cost of a dividend for basic rate tax payers was effectively 0% – admittedly after a 20% corporation tax bill. But even so, for business owners it was an effective way to take an income and minimise NI payments.

Soon there will be a £5,000 dividend allowance, meaning that the first £5,000 of dividends don’t factor in to your tax calculations. But after that basic rate payers will face a 7.5% bill and higher rate payers will pay 32.7% on all dividends.

On the upside, corporation tax will be reduced from 20% to 18% by 2020, so the exact results will depend on your business, but business owners who take £5,000 per year in dividends may well be better off and with a more profitable business.

You can read more about what dividend allowance is and how you can maximise it here.

However, if you are an employee with investments, then this could conceivably be a win, as any dividend income from your investments will now be tax free (up to the £5,000 allowance).

If you have a lot of investment income, our advice is to make sure your highest yield investments are sheltered within an ISA, and move your lower yield investments outside of your ISA, this will maximize your dividend allowance.

Investing In Property?

The final headline that may be of interest is the reduction in tax relief on mortgage interest for landlords.

Previously, you could treat the interest you pay on your buy to let mortgage as a business cost and use it to reduce your tax bill – just like a business would.

Unfortunately, from now on you can only claim interest as a cost against basic rate tax. So if you are a higher rate payer, at least a part of your buy to let mortgage interest will not be deductable against tax.

This is obviously a bad thing for anyone who plans to invest heavily in property, but there are ways to minimise the damage, and one interesting option could be creating a limited company to own the properties. Here’s an interesting article about mortgage interest.

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