Willis Insurance

Things could have been a lot worse for individuals and small businesses, in fact George Osborne may have pulled off a very good balancing act between immediate tax changes (increases) and spending cuts.

 

These notes focus on the main changes affecting individuals and small business and financial arrangements.

 

 

Remember this budget is against a backdrop of the previous Labour budget that has already proposed a rate of 50% for those earning more than £150,000 and a phasing out of the personal allowance for everyone earning in excess of £100,000.

 

Those who have a personal allowance will see this rise next year to £7,475 with the stated intention of this becoming £10,000 within the term of this parliament. However, the higher rate threshold is to be frozen at £37,400 until 2013 and there is no proposal to increase the age related allowances. As such an increasing number of people will fall into the higher rate bracket and this will affect both their income and capital gains tax status.

 

 

A new rate of 28% has been introduced for those who are higher rate tax payers in respect of their income. For everyone else the rate remains 18% and the Annual Exempt Amount of gain stays at £10,100. Trusts other than, bare trusts will have half the annual exempt rate, but they will pay the 28% rate on gains.

 

Small business owners can now benefit from £5million of gain at the reduced rate of 10% (up from £2million) when selling up and utilising Entrepreneurs Relief. A substantial and welcome increase in this relief.

 

All these CGT changes are effective midnight 22 June.

 

 

V.A.T. will increase to 20% on all fully rated goods from 4 January 2011.

 

Zero rated and 5% rated goods are unaffected.

 

From 2011/12:

 

 

The main rate paid by companies whose profits exceed £1.5million is to fall to 27% on or after 1 April 2011 and thereafter it will decrease by a further 1% each year until April 2014 when it will be 24%.

 

Companies with profits below the lower limit of £300,000 will move from paying 21% to 20% after 1 April 2011.

 

 

Annual state pension increases will now be linked to the highest of the increase in National Average Earnings, Consumer Price Index or 2.5%.

 

The government is to review the date at which state pension age will rise to 66.

 

Annuity purchase has been deferred from age 75 to age 77 and the stated intention is this will be removed altogether in 2011/12. If you die in drawdown aged 75 or over, after 22 June 2010, a 35% tax charge will be applied to the fund.

 

The full death benefit regime for pensioners will be determined before 2011/12.

 

The lifetime allowance is currently frozen at £1.8million and the government will discuss the introduction of a new annual maximum contribution allowance with figures of £30,000-45,000 being suggested as the likely range.

 

Current special annual contribution allowances applying to high earners (people with relevant income in excess of £130,000) still exist and those earning between £150-180,000 will lose all higher rate relief on a sliding scale basis.

 

Note that while it has got harder for higher earners to get funds into pensions, it looks like it will be easier for all owners of pension funds to get greater value out in retirement or on death.

 

The much trumpeted £1 million nil rate band per person has faded into the distance and we are left with the frozen nil rate band of £650,000 per married couple.

 

At least everyone facing the problem can now get on a make plans based on this limit.

 

The new £10,200 per person ISA limit will now increase every year indexed in line with the Retail Price Index starting in April 2011.

 

The core tax benefits of these schemes are left untouched but the rules about what a listed VCT can invest in have been tightened to stop some ‘soft’ risk schemes.

 

Note the core benefits of both schemes still exist as an attractive incentive for any higher earners looking for an alternative to pensions to reduce tax liabilities.

 

The rates of child benefit have been frozen for three years from April 2011 and Child Trust funds will be phased out.

 

From April 2011 the second income threshold for child tax credit will reduce from £50,000 to £40,000 while the level of in-year rises will be that will be disregarded is dropped from £25,000 to £10,000 with a further reduction to £5,000 in April 2013.

 

From January 2011 the Health and Pregnancy Grant will be abolished and the SureStart Maternity Grant will be restricted to first child born from April 2011.

 

From 2013/14 an objective medical assessment for Disability Living Allowance will be introduced.  

 

Many of the changes were unexpected or not in the form expected.

 

Many tax efficient opportunities have been left intact and pensions have gained a second wind from the relaxation of annuitisation rules.

 

The levelling of the playing field between income and capital gains tax means a balanced approach to use of investment tax wrappers, based on investor’s needs is the best way forward.

 

Things could have been worse and there may be more to come in future budgets if the proposed changes do not deliver the projected decrease in the deficit.

 

The budget has been met positively by world wide financial institutions such as the IMF and ratings agency making it more likely that ‘UK plc’ will retain its financial status and borrowings rates will remain static or even reduce.