In the end this was a typical mid-term budget with most of the content hidden away in press releases rather than the speech itself. It was introduced as a budget for those who work hard and want to get on, those seeking employment, to support business, and to make tax fairer. Many of the measures were already known from previous budgets and autumn financial statements. It remains to be seen whether these achieve what the Government desires.
There were a couple of surprises on personal tax allowances and national insurance relief for employers, although to the amusement of the opposition benches the content of the budget was released by the London Evening Standard before Mr Osborne even began his speech!
The following notes highlight the main issues which will apply to our private clients.
As will be apparent from this short report, there are a number of areas where further detail is awaited and we will advise on any developments as they arise.
The personal tax allowances for the coming year were announced last year however, the promise to raise the personal tax allowance to £10,000 before the end of the current Parliament is to be introduced one year early in April 2014. In keeping with recent years it is only basic rate taxpayers who will benefit from this increase as the higher rate tax threshold will be reduced accordingly.
For individuals with income in excess of £100,000 their allowance will continue to be restricted by £1 for every £2 of income above the threshold.
Despite public pressure, the Government will press on with what has become known as the ‘granny tax’. From 6 April 2013 the additional personal allowance, for those aged over 65, is frozen until such time as the basic personal allowance reaches these amounts. Individuals born after 5 April 1948 will not be entitled to claim the additional allowance.
From 6 April 2013 the top rate of income tax will fall from 50% to 45%; this was also announced last year.
Individuals within PAYE, subject to certain limits, may request that underpayments of tax be collected via PAYE. Later this year the Government will consult on ways of extending this to allow for increased amounts to be recovered via PAYE for those with higher incomes. We await details on this.
Inheritance Tax (IHT)
The nil rate band will remain at £325,000 until 2018. The rate of IHT remains at 40% or 36% where 10% or more of an estate is left to charity.
Following a period of consultation, the rules regarding couples where one spouse or civil partner is non-UK domiciled will change. Generally transfers between spouses and civil partners are exempt from IHT, however, where one spouse or partner is non-domiciled exempt transfers are limited to £55,000. It is proposed that this will increase to the level of the prevailing nil rate band.
In addition, the non-domiciled spouse will be able to make an election to be treated as UK domiciled for IHT purposes. This will exempt all spousal transfers but as a result their worldwide estate will become taxable in the UK. Elections will be irrevocable and careful thought will need to be given as to whether it is appropriate to make such an election or not. Again, if you are affected by this please contact us as we would be happy to advise you.
Normally debts of an estate are allowable as a deduction when calculating the IHT liability. Under new legislation certain debts will be disallowed, in particular where a debt is incurred as part of an arrangement to obtain a tax advantage or where an individual acquires an exempt asset with a loan. The rules will also apply to trustees. This will be of particular concern to entrepreneurs who set up new businesses and borrow to fund start up.
The income tax rate for discretionary trusts is aligned with the highest rate of tax for individuals. Therefore, from April 2013 trustees will be subject to 45% income tax on income and 37% on dividends.
Capital Gains Tax
From 6 April 2013 the annual exemption increases to £10,900 for individuals and £5,450 for most trusts. The rates of tax are unchanged at 18% for basic rate taxpayers and 28% for higher rate payers and trusts. Clearly, given the current income tax rates, it is preferable to realise capital gains rather than income.
Entrepreneurs’ lifetime allowance is unchanged at £10 million.
A new relief is to be introduced on the sale of a controlling interest in a business to an employee ownership structure. Details have yet to be provided however, we will continue to monitor the situation and provide updates.
From April 2014 both the lifetime and annual allowances are to fall to £1.25million and £40,000 respectively. These rates will be effective until at least 2015 and it may be that the limits will then fall further. It is possible to make an election to protect from any future reductions. We would be pleased to assist with pension planning. If you would like to discuss this please get in touch with your usual S+ W contact or the Shepherd and Wedderburn Financial team led by John Mortimer whose contact details are given on Page 4.
The flat rate retirement pension is to be introduced a year earlier than anticipated, in April 2016.
Individual Savings Accounts (ISAs)
As previously legislated, the annual limits will increase in line with the Consumer Price Index. For the tax year commencing 6 April 2013 a total of £11,280 may be invested of which a maximum of £5,640 can be cash. For the tax year commencing 6 April 2014 these limits will increase to £11,520 and £5,760 respectively.
For small businesses with turnover under the registration threshold for VAT, it will be possible to prepare business accounts on a cash basis rather than under normal accounting rules. In addition, it will be possible to claim flat rate expenses on certain items rather than keeping records. These relate to vehicle and premises costs. Care will need to be taken as the flat rate may not fairly reflect the actual costs incurred.
Following a consultation, legislation is to be introduced on a general anti-avoidance rule. Again the Government has chosen to legislate despite pressure from professional bodies. Current UK tax legislation contains substantial anti-avoidance provisions and many feel that a general rule is nothing more than an attempt by the Government to ‘hedge their bets’. It will add to the uncertainty of normal business transactions, as “good tax planning” to one person can be viewed as “avoidance” by another.
There is to be a review of the taxation of partnerships and ways of simplifying that. In conjunction with this review, a consultation is to take place on the tax status of limited liability partners and the use of companies or similar vehicles within partnerships.
National Insurance (NIC)
Employers are to be given a one-off employment allowance of £2,000 to assist with the cost of their national insurance.
Currently self-employed individuals pay Class 2 and Class 4 NIC. The former is paid by direct debit to the contributions agency and the latter via self-assessment to HMRC. It is proposed that the two be paid by way of self-assessment.
Assistance is to be given to individuals who purchased a with profits annuity before 1992. Ex-gratia payments of £5,000 are to be made with an additional £5,000 available to those on low incomes and in receipt of pension tax credit.
The government will bring forward legislation in the Finance Bill 2014 taking effect from April 2014, that abolishes stamp duty and Stamp Duty Reserve Tax on share transactions in UK companies quoted on Small Company Growth Markets, such as the Alternative Investment Market (AIM).
Legislation will also be introduced in 2014 to abolish the stamp duty reserve tax charge on unit trusts and open-ended investment companies.
A new childcare scheme will be introduced to assist working families with childcare costs.
For childcare costs of up to £6,000 per year per child, support of 20% will be available worth up to £1,200. From the first year of operation, in the autumn of 2015, all children under 5 will be eligible and the scheme will build up over time to include children under 12.
The scheme applies only to families where both parents are in work and not receiving support through the Childcare Element of Working Tax Credits/Universal Credit, or where one has an income over £150,000.
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