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Business taxes
Corporation tax cut for large companies: The full rate of corporation tax to be reduced from 28% to 24% over the next 4 years by 2014. (Note: This is the rate paid on profits over £1.5 million).
Corporation tax cut for small companies: The tax rate for small companies to be cut from 21% to 20% from next April. (Note: Small companies are companies with profits up to £300,000).
Capital allowances reductions:
- The main rate of capital allowances on plant & machinery is reduced from 20% to 18% per annum from April 2012. The rate on fixtures is reduced from 10% to 8%.
- The annual investment allowance (this is the 100% first year allowance available to write off the cost of plant & machinery is reduced from £100,000 to £25,000 from April 2012.
(Comment: it is estimated that 2/3 of the corporation tax cuts will be recovered by a reduction in capital allowances for investment in plant, machinery and equipment from April 2012).
Capital gains
Capital gains tax rate rise: Capital gains tax on non-trading assets will rise from 18% to 28% from 23 June 2010 for higher-rate taxpayers. Basic rate taxpayers will continue paying CGT at 18%. (Note: Non-business assets include second homes, buy-to-let properties and shares. An individual’s capital gains will be added to their income in assessing whether they remained basic rate taxpayers for the purpose of the new higher rate of capital gains tax. The income threshold for the higher rate is currently £43,875).
Comment: Not many people will benefit from the 18% rate because, almost certainly, significant assets sales (property sales) will push a lot of lower-rate taxpayers into the higher rate of tax and hence taxed at 28%! Prediction: the no re-introduction of indexation allowance to eliminate effect of inflation on gains (or taper relief) will be more painful to investors than the rate increase! This will result in taxing the part of the gain that is attributable to inflation!!!
CGT annual exempt amount freeze: The tax-free allowance for capital gains tax remains the same at £10,100 per annum.
Entrepreneur’s relief increase to £5 million: The lifetime CGT allowance for entrepreneurs who sell their businesses is to be increased from £2 million to £5 million on gains arising from 23 June 2010.
Income tax
Personal allowance increase: Personal allowance (tax-free income) up by £1,000 to £7,475 from April 2011. This will take about £880,000 low-earners out of the tax system.
Higher rate threshold reduced: From April 2011, the threshold at which the 40% higher rate of income tax kicks in is lowered by £1,500 to £42,375. The new thresholds will be frozen for 3 years.
Comment: Taking into account the £1,000 rise in the personal allowances, the basic rate band is shrunk by a total of £2,500. This means that the basic rate limit, at which income is taxed at 20%, will fall from£37,400 to £34,900. This will result in about 700,000 more people falling into the 40% tax rate.
VAT
VAT increase: VAT standard rate is to be increased from 17.5% to 20% from January 4, 2011.
National insurance
NIC reduction for new regional businesses: Businesses setting up outside London, the South-East and East of England will be exempt from £5,000 of employer’s national insurance for each of the first 10 staff hired with immediate effect for three years beginning from September. Any new business starting up from 22 June 2010 will be eligible, subject to meeting various criteria. The tax break is worth up to £50,000 per business. HMRC has said that only those businesses carrying out a “new economic activity” will benefit.
Plan to lift employer’s NIC is partly axed: Employers employing staff earning less than £21,000 a year will be protected from a 1% increase in national insurance contributions from 6 April 2011. However, businesses with staff earning more than £21,000 will pay more. The so-called “jobs tax” brought in by Labour will not be abolished and the rise of 1% for employer’s and employee’s will go ahead from next April (Class 1 & Class1A)!
Employer’s NIC threshold rise: From 6 April 2011, the threshold at which employers pay Class 1 NIC on employees’ salaries will rise by £21 per week more than the annual increase in the RPI.
Comment: The rise above inflation together with protection from increase on lower paid employees has supposedly been introduced to mitigate the effect of the 1% hike on employer’s and employee’s national insurance contributions on salaries.
Consumer’s taxes
- No increase in alcohol and tobacco duties. Plan for 10% increase on cider is scrapped. No increase in fuel duty either. Government to launch a review of fuel duty that will link petrol duty to the wholesale price of crude.
Comments:
- The increase in VAT rate to 20%, coupled with rises in Labour’s Budget in March, will hit the cost of fuel, drinking and smoking.
- Could this lead to petrol prices at the pumps being less volatile and even lower prices when crude price drops?)
- Plans to levy 50p a month on every phone bill to pay for the introduction of rural broadband have been abandoned.
Families
Child benefit: 3-year freeze in child benefit. The benefit is worth £20.30 per week for the eldest child and £13.40 for any additional child.
Parents’ benefits cut: The £190 health-in-pregnancy grant is to be abolished from April 2011. The Sure Start Maternity grant worth £500 to mothers in jobseeker’s allowance would be limited to the first child. Lone parents will be expected to look for work when their youngest child starts school.
Tax credits cuts: From April 2011, the child tax credit (family element) worth £545 is no longer available to families with household income more that £40,000. But from April 2012, those families with combined income more than £28,000 will also lose the benefit, while those on £25,000 or above will see their payment reduced to £460. Furthermore, the child tax credit payable in the first 12 months after birth, worth £545 is abolished from April 2011. However, the child element of the child tax credit will increase by £150 a year for 2011/12 and by £60 f0r 2012/13.
Benefits
Housing benefit cap: Cap introduced to £250 for one-bedroom property and £400 for 4-bedroom property.
Disability living allowance: There will be medical checks for people on the benefit.
Pensioners
State pensions to be linked with earnings: From April 2011, pensions will rise from now by a minimum of 2.5% or in line with earnings or prices, whichever is greater.
Comment: Any rises will only be moderate and will not reflect the true effect of price rises as pensions will be liked to the Consumer Price Index (CPI) and not to the Retail Prices Index (RPI). RPI takes into account a wider range of costs including mortgage interest payments, which doesn’t the CPI.
State pension increase: State pension to increase by £1.45 next year.
Requirement to buy annuity extended to age 77: With effect from 5 April 2011, the age by which members of registered pension schemes have to buy an annuity will be increased from 75 to 77.
Retirement age increase:
- Government plans to increase state retirement age from 65 to 66 from 2016 rather than 2024.
- Default retirement age at 65 to be phased out. This means workers over 65 will not be forced to retire.
Old people’s benefits: Winter Fuel Payment and free bus travel not affected.
Registered pension plans
Pensions u-turn: The Finance Act 2010 restricts tax relief on pension contributions from 6 April 2011 for individuals with annual earnings of £150,000. However, this complex legislation is likely to be abolished, and replaced by a system of reduced annual allowances with a broadly similar effect (see below).
The Chancellor signalled a U-turn on previously announced plans to gradually withdraw higher-rate tax relief on pension contributions by those earning £130,000 or more. Instead, he is consulting with insurers and employers about drastically reducing the amount that can be saved into a pension annually and be eligible for tax relief to between £30,000 and £45,000. Doing so will still save the Treasury whilst being easier to administer. (Note: currently, contributions up to £255,000 per annum can be paid into pensions plan and qualify for tax relief).
Business start-up finance:
- The Enterprise Finance Guarantee Scheme that guarantees 75% of finance to small businesses with no assets as security will be extended by an additional £200m.
- The government also announced that it will set up a Growth Capital Fund as part of the Enterprise Capital Fund to tackle a shortage of private investment in young, growing companies with high growth potential by providing a further £37.5 million in equity finance.
And finally...
IR35 to be abolished?
Despite no announcements in the Budget, government small business minister M. Prisk announced that the spiteful and controversial IR35 will be abolished and that the government is looking at ways to replace it in a way that guarantees a lasting settlement.
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