A guest article by Tim Warr of Warr & Co Chartered Accountants.
George Osborne delivered his third budget on 21st March 2012. Many of his proposals will not take effect until 2013 /2014.
Personal Allowances and Tax Bands
The increase in the personal tax band to £8,105 was announced in the 2011 budget. A further increase to £9,205 is to take effect in the 2013 / 2014 tax year. A reduction in the tax rate from 50% to 45% was also announced again to take effect in the 2013 / 2014 tax year.
In a surprise move the Chancellor announced that the higher age allowances available to those over 65 would be phased out.
The rates of tax applying will be as follows: –
|Taxable Income||2012 / 2013||2013 / 2014|
|Up to £8,105||0%||0%|
|£8,105 to £9,205||20%||0%|
|£9,205 to £42,475||20%||20%|
|£42,475 to £100,000||40%||40%|
|£100,000 to £116,210||60%||60%|
|£116,210 to £118,410||40%||60%|
|£118,410 to £150,000||40%||40%|
* 60% effective rate due to removal of £1 of personal allowance for every £2 of income over £100,000.
National Insurance (NI)
The rates of National Insurance for 2012 / 2013 will be: –
|Income||Employee’s NI||Employer’s NI|
|Up to £7,488||0%||0%|
|£7,488 to £7,605||0%||13.8%|
|£7,605 to £42,475||12%||13.8%|
The rate is increased by 15p per week to £2.65.
The rate is increased by 65p per week to £13.25.
The rates will be: –
|Up to £7,605||0%|
|£7,605 to £42,475||9%|
Capital Gains Tax (CGT)
The annual exemption remains at £10,600 and rates remain at 18% for basic rate taxpayers and 28% for higher rate tax payers. The 10% rate for Entrepreneurs relief remains with an unchanged lifetime allowance of £10 million.
Inheritance Tax (IHT)
There were no changes to the nil rate band, which remains at £325,000 or the rate which remains at 40%
The maximum contribution remains at £50,000 but as previously announced the pensions cap, known as the Lifetime Allowance, is reducing from £1,800,000 to £1,500,000 on 6th April 2012.
Tax Efficient Investments
The Individual Savings Account (ISA) investment limit will be £11,280 for the 2012 / 2013 year and up to £5,640 of that can be saved in a cash ISA. The Junior ISA limit remains at £3,600.
The amount that can be invested under the EIS is increasing to £1 million per year but the amount that can be tax efficiently invested in VCT’s remains at £200,000 per annum.
There was also the announcement of the Seed Enterprise Investment Scheme to encourage investment in very small companies on an investment of up to £100,000 per annum, an individual will be able to claim 50% tax relief. In 2012 / 2013 only, there will be a CGT exemption for gains relief on the disposal of assets that are invested in the scheme.
Cap on Income Tax Relief
From 6th April 2012, a cap will apply to income tax relief so that anyone seeking to claim relief of more than £50,000 will have the claim reduced to 25% of income.
A reduction of the main rate of Corporation Tax to 26% to take effect from 1st April 2012 had already been announced. However, it will now go down to 24% with further reductions of 1% in each of the next two years. The Chancellor set a goal of a 20% main rate.
The proposals last year to take away child benefit from families where one parent is a higher rate taxpayer caused widespread concern. It was seen as inequitable in two respects:
(a) the whole benefit was to be withdrawn when a persons income was just £1 over the basic rate threshold; and
(b) a couple where both parents worked and earned £40,000 per annum each would retain child benefit, whereas a couple where only one parent worked, but earned £45,000 per annum would lose their benefit.
The Chancellor went some way to dealing with these inequities. The new proposals will mean that:
(a) child benefit will not be lost unless one parent has income in excess of £50,000 per annum; and
(b) benefit will then be withdrawn on a tapered basis as income increase from £50,000 to £60,000.
The withdrawal of child benefit will apply from 7th January 2013.
Value Added Tax (VAT)
The VAT registration and de-registration thresholds were increased to £77,000 and £75,000 respectively.
A number of high profile individuals have attracted attention for using service companies to avoid employment taxes on roles that clearly had all the attributes of employment. Many of these individuals were actually working for government departments.
The government have said that they will introduce a package of measures to make the existing IR 35 legislation easier to understand.
Tax Implications For Small Businesses
Subject to consultation, a system will be introduced to allow unincorporated businesses with a turnover up to the VAT registration threshold to prepare accounts on a cash basis if they wish.
Large businesses will welcome the reduction in the main Corporation Tax rate.
Many pensioners will find themselves worse off after the phasing out of the age allowance.
It will be interesting to see whether there will be any substantial take up of the Seed Enterprise Investment Scheme.
The sting in the tail for many of our clients may be the “simplification” of IR35. HMRC already have a working definition for “service company” and it may be that there will be a move to make dividends drawn from service companies subject to employment taxes.
This document has been produced for general guidance only and does not constitute tax advice. Whilst every care has been taken it its preparation, Warr & Co Limited will not accept liability for any loss incurred as a result of any use made of this document or its contents. We will be happy to offer specific advice to clients when requested. Should you have any queries or wish to discuss any of the points raised please contact Tim Warr, Peter Edwards or Suresh Dhokia on 0161 477 6789