Budget 2016: a summary

Budget 2016 was presented by the Chancellor of the Exchequer to Parliament on 16 March. At the same time the Office for Budget Responsibility (OBR) published updated forecasts in its Economic and Fiscal Outlook.

This briefing provides an overview of the forecasts and announcements on the soft drink industry levy, personal independence payments, business rates, the discount rate for public service pensions, lifetime ISA, and schools policy measures. The briefing also discusses the Institute for Fiscal Studies' analysis of tax and benefit changes announced in the Budget on household incomes.

Budget announcements

• Tax-free personal allowance increased to £11,500 in April 2017 from £11,000 in April 2016; higher rate threshold increased to £45,000 in April 2017 from £43,000 in April 2016.

• The ISA tax-free allowance increased from £15,240 to £20,000 in April 2017.

• A Lifetime ISA introduced from April 2017. Adults aged under 40 will be able to save up to £4,000 each year and receive an additional 25% from the Government.

• The Government to consult on introducing a soft drinks industry levy from April 2018. The levy – paid by producers and importers of soft drinks – will be charged on according to sugar content. Revenue raised will be ring fenced for schools funding.

• Following a review of business rates:
  • business rates uprated by the Consumer Price Index from 1 April 2020. Business rates are currently uprated by the generally higher Retail Prices Index.
  • Small Business Rate Relief (SBRR) increased permanently from 50% to 100% in April 2017.
  • the threshold for receiving 100% SBRR increased from £6,000 to £12,000.

• Taxes on the oil and gas industry The petroleum revenue tax reduced from 35% to 0%. The supplementary charge on companies’ profits reduced from 20% to 10%. Both changes take effect from 1 January 2016.

• Corporation tax reduced to 17% in April 2020.

• New rules to limit the tax relief that large multinational enterprises can claim for their interest expenses introduced from April 2017.

• The higher rate of Capital Gains Tax reduced from 28% to 20% and the basic rate from 18% to 10%. These changes take effect from April 2016.

• Fuel duty frozen in 2016/17. Duties for beer, spirits and most cider also frozen.

• Discount rate used in valuations of unfunded public service pension schemes reduced with additional costs for public sector employers.

• Class 2 National Insurance contributions for the self-employed abolished in April 2018.

• The Carbon Reduction Commitment energy efficiency scheme abolished, and the Climate Change Levy increased from 2019.

• Stamp duty land tax (SDLT) on non-residential property transactions reformed.

• A range of measures designed to tackle tax avoidance and evasion, estimated to raise around £3 billion in 2019/20.

• From January 2017 savings made due to changes in assessment of Personal Independence Payment (PIP). PIP helps with costs caused by long-term ill-health or a disability.

• An efficiency review, aiming to save £3.5 billion from departments’ budgets in 2019/20, to report in 2018.

• Some capital spending – for housing, transport and flood defence – to be earlier in the Parliament.

• A £1,000 allowance for property income and a £1,000 allowance for trading income introduced from April 2017. These measures are aimed at those making incomes from the digital and sharing economies.

• The Government expects all schools to become academies, or be on the way, by 2020.

• Crossrail 2 and High Speed 3 – between Leeds and Manchester – to proceed.

• New mayoral devolution deals announced for Greater Lincolnshire, East Anglia, and the West of England and further devolution for Greater Manchester and Liverpool City Region.

Office for Budget Responsibility (OBR) forecasts and the fiscal rules

• The OBR revised down its forecasts for economic growth, saying that ‘economic developments have disappointed’ since its last forecast in November 2015. They report that the public finances look ‘materially weaker’.

• The OBR judges that the Government is on course to meet its ‘fiscal mandate’ of a budget surplus in 2019/20. Despite a deterioration in the underlying forecast, the Government has met its target in 2019/20 by:
  • decreasing departments’ current and capital spending;
  • introducing cuts to be identified by an efficiency review;
  • increasing public service pension contributions but not compensating departments for additional costs;
  • increasing tax revenues, largely by delaying a measure that brings forward large firms’ quarterly corporation tax payments; and,
  • reducing welfare spending, largely through tightening the disability benefits system.

• The OBR judges that the debt-to-GDP ratio will rise between 2014/15 and 2015/16, therefore the Government will miss its supplementary debt target.