The Chancellor presented his first budget since the autumn’s spending review, which outlined the Government’s cuts programme on Wednesday, 23rd March 2011.
From the outset we knew that this budget was aimed at reflecting the Government’s stated priorities of a strong stable economy, growth and fairness. It provided an opportunity for the Government to outline how it is implementing its fiscal consolidation plans, aimed at eliminating the current deficit and ensuring economic stability.
Times remain challenging for the economy; this was reflected in the Government reducing its forecasts for economic growth from 2.1% to 1.7% for 2011 and from 2.6% to 2.5% for 2012.
This Government sees the private sector as being the catalyst for economic recovery and the budget reflects this, with a number of announcements supporting business investment and entrepreneurship.In the budget, Mr Osborne highlighted his intentions to make the UK the best place in Europe to start, finance and grow a business, whilst setting out a number of proposals to help small businesses.
On the face of it, the budget looks attractive to the majority of individuals with the increase in personal allowance and reductions in motoring costs. However, the sting in the tail this year looks to have come in the form of switching the increases in a number of allowances from RPI to CPI, a generally lower inflationary measure. This has already been labelled a stealth tax by commentators.
The Finance Bill 2011, due to be published on March 31st 2011, comes hot on the heels of this year’s budget. We already know a lot about what it will contain because the Draft Finance Bill 2011 clauses were published for consultation in December last year.
Over the coming weeks and months, updates and further information on budget proposals, including consultations, will be announced. We will keep you updated on any change in legislation which may affect you.
If you have any questions or queries arising from this budget, then please do not hesitate to contact us.
Tax overview
From the outset, the Government pledged its commitment to improving the way that tax policy is developed, communicated and legislated.
It is now known that the current tax system will be simplified, responding to the work of the Office of Tax Simplification (OTS), abolishing 43 tax reliefs with the exception of the community investment tax.
In addition, a much more significant piece of work will be undertaken to look at merging income tax and national insurance. Any investigation and implementation of such radical change will take years to come to fruition but would be welcomed by many who believe the UK has an outdated tax system.
Income Tax
| What | Proposed increases in the personal allowance for under 65s by £630 to £8,105 for 2012-13. The Government has a stated aim of increasing the personal allowance to £10,000 by the end of this Parliament.
All other income tax, personal allowances and limits that are subject to indexation will be increased in line with the retail price index. There will be a reduction in the basic rate tax limit, equal to the increase in personal allowance. |
| When | From April 2012 |
| Comment | Basic rate tax payers will be up to £126 better off.
No change for higher rate tax payers as the increased allowance is offset by the reduction in the basic rate limit. More people will find themselves paying higher rate tax as the basic rate tax limit is not increasing in line with growth in earnings. |
| What | 50% tax rate. Mr Osborne revealed that he considers the 50% tax rate for high earners necessary but temporary. He said the time is not right to cut the levy but revealed HMRC will examine how much extra money it is bringing in. |
| When | Unknown |
| Comment | Likely to be too politically sensitive to remove the 50% tax rate at this time. A review of this at some point in the future looks certain. |
| What | Non domiciles whohave lived in the UK for 12 years will be charged a fee of £50,000, previously £30,000, to avoid paying tax on overseas income. The £30,000 charge for non-doms who have been here for seven years will remain. |
| When | From April 2012 |
| Comment | The tax position of non domiciles has been cause for media publicity in recent months. Non domiciles will be breathing a sign of relief as many were expecting a much firmer crackdown. |
National Insurance
| What | Consumer Price Index (CPI) of National Insurance Contributions rates, limits and thresholds. CPI is to replace the Retail Price Index (RPI) as the default indexation for all National Insurance (NI) contribution rates, limits and thresholds. This does not apply to employer NI contributions. |
| When | April 2012 |
| Comment | Both CPI and RPI are measures of inflation. The difference is that the CPI does not include housing costs, such as mortgage interest payments. CPI traditionally rises at a slower rate than RPI, so in effect the Chancellor is securing an increase in future tax income by slowing down the rate at which the NI threshold increases. |
Savings, Pensions and Investments
Savers got a small boost when the budget was announced. The Government’s saving organisation announced it would bring back a savings account that rises in line with inflation. NS&I expects to bring the savings certificates back on general sale in 2011/12.
| What | Legislation will be introduced in the Finance Bill 2012, making the following changes to the Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT):
|
| When | On or after April 2012
* Increase in tax relief under an EIS from April 2011 |
| Comment | This is policy that further encourages investment in the private sector. The broadening of investment opportunities will be a welcome boost to those looking to invest through these particular vehicles and may result in them appealing to a wider market.
As with all investments, investing through VCT and EIS schemes carry an element of risk and professional advice should be sought before investing. |
| What | Individual Savings Accounts (ISA) limits to increase by CPI not RPI. |
| When | April 2012 |
| Comment | The ISA limit is currently £10,680 and would expect to increase next year by nearly £600, based on the most recent RPI figure. The allowance increasing in line with CPI will mean that people will be able to invest less money in an ISA in the future compared to investment under previous rules. |
| What | The Hutton recommendations on public sector pensions have been accepted. |
| When | n/a |
| Comment | This will mean significant changes to public sector pensions over the coming years and one that will generate plenty of interest from the media, public and unions. We certainly haven’t heard the last of this reform. |
| What | The Chancellor has proposed the introduction of a flat rate state pension, eradicating the state second pension and pension credit. He stated that this would not apply to current pensioners. |
| When | No date set yet but could take years to come to fruition. |
| Comment | The state pension has become increasingly complex over recent years. Any changes aimed at simplifying the current system without disadvantaging those that have worked hard all their lives would be a welcome move. |
| What | Government to align state pension age to increases in longevity. |
| When | TBC |
| Comment | This is a stated intention to find a ‘more automatic mechanism’ linking life expectancy with the state pension age. As we all live longer there is no surprise that the Government is worried about the cost of funding an increased number of people in retirement. |
Capital Gains Tax
| What | The annual exempt amount for capital gains tax will increase in line with the Consumer Price Index (CPI). Previously this was the Retail Price Index (RPI). |
| When | From April 2012 |
| Comment | Both CPI and RPI are measures of inflation. The difference is that the CPI does not include housing costs, such as mortgage interest payments. CPI traditionally rises at a slower rate than RPI, so in effect the Chancellor is securing an increase in future tax income by slowing down the rate at which the CGT allowance increases. |
Inheritance Tax
| What | Encouraging charitable giving. A proposed reduction of the rate of inheritance tax from 40% to 36%. This applies only to estates leaving 10 per cent or more to charity. |
| When | From April 2012 |
| Comment | A move by the Chancellor to turn us into a nation of philanthropists perhaps. No beneficiaries will be better off, only the charities receiving the donations. |
| What | Inheritance tax has been frozen at its current rate of 40% on estates over £325,000 until 2015. |
| When | Until 2015 |
| Comment | The rate being set until 2015 will inevitably mean more people will be liable to pay inheritance tax. There are ways to mitigate your IHT liability and action taken earlier rather than later could reduce any potential IHT liability on death. |
Corporation Tax
| What | The main rate of corporation tax is to be cut by 2% to 26% from April this year and 1% in each of the following three years. This is an additional 1% than was expected. |
| When | From April 2011 |
| Comment | As the main rate is currently at 28%, for profits over £1.5m, the main rate reduction is significant and a welcome boost for larger businesses. It may prove to be attractive for businesses looking to base themselves in the UK.
For smaller businesses the tax rates are 21% (reducing to 20% see below) for profits of up to £300,000 with a ‘marginal rate’ of 29.75% on profits between £300,001 to £1.5m. |
| What | The small profits rate of corporation tax will reduce to 20% as previously announced. |
| When | From April 2011 |
| Comment | This was announced last year and is a welcome boost to small businesses. |
Business Tax
| What | Research and Development tax relief provisions for SMEs will increase from 175% to 200%. There are also proposals to increase this further from April 2012 to 225%. |
| When | April 2011 |
| Comment | These changes remain subject to EU approval but go some way to delivering the Government’s stated intention of supporting business growth. |
| What | An increase in the amount that can be claimed where employees use their own cars for business. This change is from the current rate of 40p to 45p per mile for the first 10,000 miles and 25p per mile thereafter. |
| When | April 2011 |
| Comment | Good news for many business motorists who will have been feeling the pinch of rising fuel prices. |
| What | Employees and directors who are provided with a car and also receive free fuel, will see an increase in the taxable benefit, as the figure which the calculations are based on will increase from £18,000 to £18,800. |
| When | April 2011 |
| Comment | An expected increase which will mean that individuals will continue to question whether or not to opt out of a company car scheme. |
Housing
| What | Profits from the bank levy will fund a new £250m shared equity scheme for first-time buyers, which will help 10,000 families get onto the housing ladder.Buyers will have to put up a 5% deposit. The government and home builder will cover 10% each and the remainder will be covered by a loan. |
| When | TBC |
| Comment | The news comes less than a week after a UK bank announced it had teamed up with local councils to help first time buyers raise a deposit for a house, the ‘Local Lend a Hand’ scheme.
Getting on the property ladder is a big decision and one that shouldn’t be taken lightly. There are fears that this may be an artificial stimulant to the housing market that allows house builders to sell property at over inflated prices – ‘buyers beware’ comes to mind. |
| What | Support for mortgage interest schemes with concessions being extended one year. Under the scheme, jobless home owners can claim up to 100% of their interest payments after 13 weeks of unemployment and for mortgages worth up to £200,000. This was due to revert back to a 39 week waiting time in January 2012. |
| When | Extended until January 2013 |
| Comment | The Government recognises the financial difficulty that many people face, especially with regard to mortgage loans where significant borrowing during the good years has left many with loans they can’t afford to pay back. |
Other
- No new regulations on firms with fewer than ten staff for three years.
- New planning rules that will require planners to prioritise growth and jobs.
- The main fuel duty rate will be reduced by 1p per litre and the intended 4p per litre rise due to come in the next month has been postponed.
- A fair fuel stabiliser will be introduced to help prevent spikes in fuel costs.
- £350 million worth of regulation on businesses to be removed.
- Bank levy to be adjusted so banks do not pay less tax as a result.
- 43 tax reliefs to be scrapped as part of a simplification of tax coding.
- Rate relief holiday for small businesses to be extended until October 2012.
- Further measures were announced as part of the crackdown on tax avoidance. These include new moves to address the abuse of stamp duty land tax rules, which come into effect from Thursday. It was also reported that it will be closing down three forms of stamp duty land tax avoidance schemes.
- David Cameron had already announced that ten new enterprise zones will be created at the cost of £100 million over four years, each of which will be given tailored tax breaks and incentivised to drive economic growth. In the budget, it was confirmed that this would be extended to 21.
- Funding for up to 50,000 additional apprenticeship places over the next four years.
- Funding for an additional 80,000 work experience places for young people, ensuring up to 100,000 places will be available over the next two years.
- Holidaymakers will benefit from a freeze on the planned increase in air passenger duty. Air passenger charges currently range from around £12 for a short trip in economy class to up to £170 for business class flights for long haul destinations such as Australia.
- There will be help for families who do pay their taxes but who struggle with the daily cost of living. The Government will outline measures such as council tax freezes, more child tax credit for lower income families and a “pay lift” for public servants on less than £21,000.
- Green taxes will increase as a proportion of total tax revenue. The Chancellor has also committed an extra £2bn to the Green Investment Bank, which will start work earlier than planned, in 2012.
*SOURCE – HM Treasury Budget 2011
