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The living wage and other Budget developments for employers

22 September 2015
by begbiestraynor -- last modified 22 September 2015

The summer 2015 Budget included a number of announcements that will have significant implications for UK companies. The main announcements are summarised here.


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National living wage (minimum wage)

Perhaps the most far-reaching announcement was what Chancellor George Osborne MP described as the ‘national living wage’. This will in fact take the form of a new mandatory minimum wage for all employees aged over 25. Staff will need to be paid at least £7.20 per hour from April 2016, and this will gradually rise to 60% of national median earnings (estimated at £9.35 per hour) in 2020.

Those aged 25 or under must continue to be paid the existing minimum wage. This is currently £6.50 for those aged 21 or over, £5.13 for those aged 18 to 20 and £3.79 for under 18s. The special apprentices’ rate is £2.73, which can only be paid to those aged 16 to 18, or those aged 19 who are in the first year of their apprenticeship. From October 1 these rates will rise to £6.70, £5.30, £3.87 and £3.30 respectively.

The new living wage is said in part to be compensation for the £12 billion of welfare cuts scheduled for the next few years. These include the restriction on child tax credit to the first two children in a household, affecting children born after April 2017, which will affect some families quite badly. However, the Government not only wishes to cut the UK’s deficit, but also wants to end the practice of companies paying low wages which the state then has to top up via tax credits.

The living wage though could represent a significant burden for some companies, especially given the new requirement to pay pension contributions for almost all staff. The Office for Budget Responsibility has estimated that the living wage will cost the average company 1% of their profits. However, it estimates that more jobs will be created as a result of a growing economy than the 60,000 posts companies are expected to axe as a result of the wage changes.

Corporation tax

Perhaps the best news for companies from the speech was an announcement of a further reduction in corporation tax. It will reduce from the current rate of 20% to 19% from April 2017 and 18% from April 2020. As recently as 2010, the rate stood at 28%.

Income tax

Companies will need to adapt their payroll systems to take account of the forthcoming changes to income tax bands. From April 2016, the income tax personal allowance will rise to £11,000 and the higher rate tax threshold to £43,000. The long term plan is to increase the personal allowance to £12,500 by 2020, although no firm commitments have been made regarding this.

Dividend taxation

Company owners that pay themselves via dividends should be aware of the significant changes announced to dividend taxation. At present, dividend payments are subject to 10% tax relief. The new system will see the introduction of a £5,000 tax free allowance, and dividend payments in excess of this amount will be taxed as follows:

  • 7.5% on the proportion falling into the basic rate income tax band
  • 32.5% on the proportion falling into the higher rate income tax band
  • 38.5% on the proportion falling into the additional rate income tax band

Annual investment allowance

The previous ‘temporary’ rise in the annual investment allowance to £200,000 will become permanent from January 2016. This means that companies can deduct up to £200,000 of the value of items such as equipment and machinery from their pre-tax profits. By granting tax relief in the year of purchase, cash flow should be improved.

All corporate entities except for trusts and mixed partnerships are eligible for this allowance.

Employment allowance

The employment allowance will rise from £2,000 to £3,000 from April 2016, thus cutting companies’ National Insurance (NI) bill. Under the new allowance, companies will be able to employ four staff at the level of the new living wage and not pay any NI.

The employment allowance can be claimed by almost all companies that pay Class 1 NI contributions. Exemptions include individuals who personally employ home helps, and companies that provide services to the public sector.

Apprenticeships levy

A new levy on large employers was announced, intended to provide funding for three million new apprenticeships by 2020.

Insurance premium tax

Insurance premium tax, paid on many common insurance policies such as household and motor insurance, will rise significantly, from the current level of 6% to 9.5% from November 2015.

Taxation of banks

Banks will be subject to a new tax on their profits from January 2016, to be charged at 8%. The bank levy, which is paid according to the size of their balance sheet, will gradually fall from the current rate of 0.21% to 0.1% by 2021.

Claims management companies

Claims management companies were warned that it is likely that they will soon be subject to a cap on the level of fees they can charge. The Government has also announced a fundamental review of the regulatory system they operate under.

Tax avoidance

The Chancellor pledged to cut down on aggressive tax avoidance by both companies and individuals. The specific measures announced include steps to stop fund managers avoiding capital gains tax on profits and to ensure overseas companies pay tax on profits which are diverted to the UK.

Sunday trading

A consultation was announced regarding whether to change the existing law that forbids large retail premises from opening for more than six hours on a Sunday. Indications are that the power to decide opening hours will be devolved to local authorities.

John Baird is a personal finance and insolvency expert from Scotland Debt Solutions. He specialises in advising people on how to manage their money and deal with their personal debt problems.

Scotland Debt Solutions specialise in helping Scottish residents with personal debt problems. The brand operates under the umbrella of the renowned Begbies Traynor Group which was established in 1989. Scotland Debt Solutions has a vast and experienced team of debt advisors and insolvency practitioners who offer individuals a free initial consultation to talk through their financial worries in an attempt to create a debt-free future.

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