Budget 2012

Budget Highlights

• Rise in Income Tax Threshold to £9,205 in 2013
• 50p top rate of income tax reduced to 45p from April 2013
• Tax reliefs claimed by individuals capped at 25% of total income
• Main rate of Corporation tax cut to 24%
• Age related allowances to be frozen in what has been dubbed the “Granny Tax”
• New 7% Stamp Duty Land Tax (dubbed the “Mansion Tax”) on properties worth over £2m
• No planned restrictions to pension contributions as initially proposed

Overview

The budget announced by George Osborne did not contain many surprises in what has been labelled the most “leaked” Budget ever as the various factions within the coalition government have sought to take credit for different policies that suit their political agenda. There literally where no major surprises this year as all significant topics had been leaked to the press earlier in the week.

George Osborne began his Budget speech with a pledge to support working families and stated that the Budget supports  Britain’s working families, unashamedly backs our business and shows that we can earn our way in the World”.

The UK’s economic growth forecast for 2012 is estimated at 0.8%. The chancellor is clearly concerned with the UK’s international competitiveness and has cited this as a reason for reducing the 50p top rate of income tax.

Income Tax

The top rate of income tax was reduced from 50p to 45p effective 6 April 2013. The Chancellor explained that the 50p rate was required in order to improve Britain’s international competitiveness and will bring the rate closer to that of other top European nations. He also claimed that the 50p rate did not bring in significant amounts of tax and that the shortfall would be more than compensated through a restriction in reliefs available to high earners.

The personal allowance threshold will increase to £8,105 next month and will rise to £9,205 in 2013/14. This represents the largest ever increase in the personal allowance and is expected to increase to £10,000 in 2014 in line with Nick Clegg’s manifesto pledge on behalf of the Liberal Democrats. The changes mean that some of the lowest earners will be taken out of the tax system altogether.

The threshold for higher rate tax will fall in April 2013 from £42,475 to £41,450 in what has been dubbed the Chancellors “sleight of hand” and is expected to drag over a million more people into the 40% tax band.

The only “shock” announced in the budget was the decision to freeze the age related personal allowances. The allowance for people aged 65 to 74 will be frozen at £10,500 from 6 April 2012 and £10,660 for those aged 75 and over. The allowances will also be stopped for anyone turning 65 after 6 April 2013. The move has been dubbed the “granny tax” as pensioners will be worse off as a result of the change.

Plans to withdraw the Child Benefit for higher rate taxpayers have been revised. Child benefit will no longer be withdrawn from individuals earning £42,000 but instead will be tapered for those earning over £50,000 on a partial basis up to £60,000 whereby the benefit will be lost entirely. The benefit will be taken away in the form of an additional income tax charge effective 7 January 2013. Individuals will lose 1% of their child benefit for every £100 earned over £50,000. The additional charge will be levied on the parent with the highest income.

The new policy on Child Benefit is controversial as the tax is based on an individual’s earnings rather than the combined household income and therefore will leave single parent families at a disadvantage. Under the current rules, two parents earning £40,000 for example will be able to retain the Child Benefit despite having a combined income of £80,000. However a single parent earning £62,000 will lose the benefit entirely. The new policy will require families who receive child benefit to complete additional paperwork and file their self assessment tax returns in order to declare the additional income tax charge payable on this benefit.

The additional tax rate for dividends will increase from 32.5% to 37.5% from 6 April 2013.

Capping of reliefs

From 6 April 2013, a new cap will be applied to tax reliefs of £50,000 or 25% of total income (whichever is greater). The government have not clarified which specific reliefs will be capped although early indications suggest that these will include reliefs claimed through offsetting trading losses against other income. Contributions to pension schemes and investments in things like enterprise investment scheme already have limits and are not further affected.

Full time entrepreneurs can currently offset unlimited losses against tax. Cutting such relief does not seem fair to small business. It is also unclear as to whether the cap will apply to charitable donations and gift aid. Charities are quite rightly concerned that charitable donations could be affected if they no longer benefit from full tax relief.

The capping of reliefs has been primarily set up to discourage the practice of setting up loss making businesses purely to claim tax relief.

Capital Gains Tax (CGT)

The annual exemption for individuals for 2012/13 is £10,600. Gains that fall within the individual’s basic rate tax band are taxed at 18%. Gains above that limit are subject to 28% CGT.

Stamp Duty

The 2011/12 stamp duty holiday for properties worth up to £250,000 has not been extended.

A new 7% Stamp Duty Land Tax (dubbed the “Mansion Tax”) has been introduced for residential properties worth over £2 million. This is effective 22 March 2012.

All residential properties valued at more than £2m and bought through a company will face a 15% stamp duty land tax charge. In addition, the government is proposing to introduce an annual charge on residential properties valued over £2m and owned through a company.

The government also confirmed it would consult on the introduction in April 2013 of an annual charge on residential properties over the value of £2m that are already contained in corporate vehicles, as well as a capital gains tax charge if a property is sold out of an overseas company by non-residents.

The chancellor stated his intention to clamp down on tax avoidance on residential property and has threatened retrospective measures and legislation will be used to tackle such avoidance. It is possible that this will undermine the attractiveness of the UK property market for overseas buyers, as many will use company structures to stay out of the inheritance tax net or to maintain privacy about their assets.

Business Tax

The main rate of corporation tax is set to fall from 26% to 24% from 1 April 2012. This is higher than the planned reduction of 1% announced in last year’s budget.

There is some good news for small businesses with a simplification of the tax system for businesses with turnover up to £77,000. Small firms will be taxed on a cash basis to reduce the administrative burden of performing calculations designed for big business.

Capital Allowances

From April 2012 the 100% first year annual investment allowance (AIA) for qualifying plant & machinery will be reduced from £100,000 to £25,000.

Also from April 2012, the writing down allowances (WDA) will be reduced from 20% to 18%.

Research & Development (R&D)

The corporation tax deduction for qualifying R&D expenditure will increase from 200% to 225% for SME’s from 1 April 2012. The R&D tax credit is designed to benefit innovative companies.

A new “patent box” will be introduced in April 2013 which will give rise to a 10% reduction in corporation tax on profits attributed to patents and other intellectual property.

Controlled Foreign Companies (CFC’s)

A new CFC regime will be put in place from 1 January 2013. The chancellor is looking to clamp down on tax avoidance through the use of overseas controlled foreign companies. Overseas group companies will be subject to a “Gateway” test which seeks to remove overseas entities with genuine economic activity from the UK CFC charge. Overseas entities which fail the test will be subject to UK corporation tax on their profits.

Other business taxes

New corporation tax reliefs will be available to the video games, animation and premium television production industries. This is an attempt to stop developers and productions moving to countries with more favourable tax policies. The relief will come into effect in April 2013 and is likely to take place in the form of a tax credit offering a 20-25% corporation tax discount, much like that in the film industry.

The government have announced plans for Online betting to be taxed according to the location of the punter. The tax will be based on the point of consumption, not supply and will provide a fairer basis of competition between UK and overseas gambling operations. The new measures are due to be implemented in 2015. A new duty has also been announced for gaming machines.

The Enterprise Management Incentives (EMI) share ownership scheme will increase from £120,000 to £250,000 in order to benefit start ups that use stock options to reward staff.

The Seed Enterprise Investment Scheme will come into effect on 6 April 2012. Seed investors will receive 50% income tax relief on investments of up to £100,000 in small companies as well as a capital gains tax holiday for one year. The scheme is available to investors who control less than 30% of the company. The scheme was set up in order to help new businesses to raise finance by making these investments attractive to business angels and entrepreneurs.

The government have announced that funding will be provided for faster broadband in the UK.

Inheritance Tax (IHT)

The IHT threshold is frozen at £325,000 to April 2015.

New anti avoidance measures have been introduced for properties purchased through offshore trusts.

Value Added Tax (VAT)

The standard rate of VAT will remain at 20%.

From 1 October 2012, the sale of hot food will be treated as standard rated for VAT.  In addition, the definition of “premises’ has been extended to cover all food that is sold on premises with shared seating facilities such as in food courts or shopping centres. The new policy will have a significant impact on bakers such as Greggs who’s goods have not been subject to VAT prior to this announcement.

Other trades that will become subject to standard rate VAT include hairdressers’ chair rental, self storage and holiday caravans.

Pensions

There were no planned restrictions to pension contributions for high earners as initially proposed.

Individuals are able to carry forward unused £50,000 allowances from the past 3 years thereby making it possible to pay up to £200,000 tax free into your pension fund before 6 April.

Other Taxes & Reliefs

The annual tax charge for non-doms will increase from £30,000 to £50,000 effective 6 April 2012. The charge applies to UK resident, non domiciled individuals who have been resident for at least 12 out of the last 14 years.

There has been no change to the government’s plans for fuel duty which is scheduled to rise by 3 pence in August 2012.

The price of tobacco will increase 5% above inflation. This is equivalent to 37p per pack of cigarettes.

Alcohol duty will rise 2% above RPI. This will add 3p to a pint of beer.

From 6 April 2012, the annual ISA tax free allowance will increase from £10,680 to £11,280 of which up to £5,640 can be invested in a cash ISA.

The Bank levy will be increased from 0.088% to 0.105% of balance sheets from January 2013.

Further announcements

From 2014/15 the government will introduce a new Personal Tax Statement provided to taxpayers detailing the income tax and National Insurance contributions they have paid and will outline how these taxes have been spent. The amounts will show a breakdown of spend allocated to healthcare, education, welfare etc.

The government will consider the implementation of a general anti avoidance rule in time for next year’s Budget.

UK economic growth forecast at 0.8% for 2012.

There will be a temporary relaxation of Sunday trading laws enabling stores to be open all night during the 8 weeks of the Olympics.

State backed credit easing has been announced to provide cheaper loans to small businesses.

Young entrepreneurs will be offered taxpayer funded enterprise loans to start up their own business. The loans will be provided on similar terms to student loans with low interest rates and a long repayment period. This new policy is designed to tackle youth unemployment and boost the economy.

The government will assume the assets and liabilities of the Royal Mail’s pension scheme. The cost of the Royal Mail pension scheme is effectively being subsidised by the UK taxpayer and paves the way for the Royal Mail to be privatised next year.

The Chancellor also announced that the government is exploring the possibility of leasing the roads.

Conclusion

Despite the political motivations behind the various micro schemes announced, there have not been any significant changes posed by the budget. The Personal Allowance has increased and will benefit low earners; pensioners have had their allowances frozen; and the middle has been “squeezed” as is common under any party. The main winners from this Budget are basic rate taxpayers earning between £9,000 and £40,000.

The budget does not seem to discriminate between any particular demographic with increased taxes levied on virtually every class. Smokers, drinkers and drivers are likely to be worse off as is usually the case. Pensioners and savers are also being squeezed.

George Osborne described the budget as one that unashamedly rewards work and backs business and aspiration. The budget is clearly designed to help business which is seen as a key driver to economic recovery. The UK has the lowest rate of corporation tax of the top 20 economies in the world and this could increase Britain’s international competitiveness. The 50p tax rate introduced by Labour was also seen as a barrier to foreign entrepreneurs and business and will now be reduced. It is believed that these measures will help to stimulate economic growth which will be followed by an increase in jobs and prosperity. 

However, the cuts in spending combined with increased taxation will continue to stifle the economic recovery in what is seen as a regressive policy. We have not seen any significant measures in the Budget that will address rising unemployment and stimulate the faltering growth in the UK. More needs to be done to aid small businesses and generate business growth and exports rather than placing too much reliance on overseas investment. We would like to have seen more emphasis on directing tax incentives to encourage big businesses to invest in the UK as this would promote inward investment and provide a catalyst for growth.

On the other hand, the increase in the personal allowance threshold and the reduction in the 50p top rate of tax may well provide the boost to consumer spending for millions of British families and promote the feel good factor that will stimulate the economy. Ministers hope that the injection of higher spending power will give rise to a fall in inflation and unemployment, perhaps as early as 2013. George Osborne’s policy relies on economic growth in the UK. The success of this budget will depend entirely on whether this is achieved.