As expected, the Budget announced by the Chancellor, George Osborne, on 21st March stirred much debate, not just in Parliament, but across the country. Arguments for and against its impact on businesses, individuals and the economy in general, have raged on for the last week and, much like every budget through history, everyone’s stance is dictated by how it affects them personally. In such circumstances it is difficult to find a view that is not tarnished by a subjective outlook, but now that the dust has settled on the budget, we will try to pick through the measures and provide an objective insight into how the different elements will affect individuals and businesses throughout the UK.
One area the government is extremely keen to tackle, especially the Liberal Democrats side of the coalition, is the easing of the tax burden on those less well off. The Chancellor accelerated the drive to get the tax free threshold to £10,000 by 2015 by raising it to £9,205 from 6th April 2013. It increases to £8,105 on 6th April 2012 from the current level of £7,475 and ultimately it means that low to medium earners will have at least £200 extra in their pockets each month – a move that will benefit almost 24 million people in the UK. Within that number the lowest earning taxpayers – approximately a quarter of a million people – will be moved outside the tax bracket completely!
The increase in the standard allowance will help everyone, but for those inhabiting the middle bracket some of that tax saving is taken back by the government with a change to the 40% threshold. The point at which taxpayers start incurring 40% on earnings will drop from £42,475 to £41,450. However, even with this lowering of the 40% bracket, middle earners will have just over £40 more in their wallets!
The country’s top earners undoubtedly received the best news in the budget with the 5% drop in the highest rate from 50% to 45%. So as well as receiving the benefit of a higher tax free allowance, they also get to keep the cream on the top of their salaries! This particular decision by the Chancellor came in for a significant amount of criticism from those who labelled it a “millionaire’s budget”. However, when the top rate was increased to 50% in 2010 it was envisaged by the Labour government of the time that it would earn the country £3 billion each year in tax. In reality it has yielded less than a third of that figure and as Mr Osborne quite rightly declared, “No Chancellor can justify a tax rate that damages our economy and raises next to nothing.”
So, to sum up, the effects of the new income tax rates and thresholds mean that the lowest earners have more money in their pockets; the middle is slightly squeezed with the drop in the 40% threshold, but even then they come out with more net income; and the highest earners have more cash as a result of the drop in the highest rate from 50% to 45%! How is all that possible? I hear you ask. Well, the truth is that the government has brought in measures elsewhere (such as stamp duty and levies on products such as cigarettes and alcohol), to cover any shortfall and that this is a deliberate strategy to encourage spending. The economy needs to see a better flow of cash and the best way to do that is to make it available to the public to spend!
There is one segment of society that is undeniably worse off as a result of the budget – pensioners. Anyone who is already over 65 by 5th April 2013 will not be affected by new legislation that will come into effect from 6th April 2013, but those who reach retirement age after that date will be. The Age-Related Allowance is being phased out in order to bring equality and a fairer approach to the system. At present, anyone over the age of 65 has an allowance of £10,500, while those over 75 qualify for an allowance of £10,660. From 6th April 2013, the allowance for everyone, regardless of age, will be £9,205 rising to £10,000 by 2015.
Inevitable as sunrise, this announcement initially caused an uproar and widespread condemnation and was labelled the “granny tax”. A week later though and the furore has died down, largely due to the realisation that it’s not actually reducing the net pay by all that much (approximately £84 per year for middle earners), coupled with the fact that pensioners in general seem to think it is fair that they have the same allowances as everyone else. After all it’s not like their other benefits, such as free travel, TV license, winter fuel allowance etc, are being taken away. As a society in general, Britain looks after its pensioners and any legislation detrimental to their well being would certainly not be tolerated. It is therefore pleasing that common sense has prevailed and that people can see this is not a bad measure.
The Chancellor also sees helping businesses as a key area for improvement in the economy. As a result he has decided to make a further cut to corporation tax, which has been falling year on year since 2010 when it was at 28%. It was due to drop from 26% to 25% from 6th April 2012, but instead it will now drop a further percentage point to 24%. At present the aim is to reduce the rate to 22% by 2014 and Mr Osborne is certainly on course to do just that.
These measures will obviously help existing businesses in the UK, but also serve as an invitation for foreign investment in Britain, which will of course have the positive knock on effect of creating jobs. As the Chancellor stated, this unashamedly backs business, but it also helps the general public and will lower unemployment.
Indeed, the Office for Budget Responsibility has revised its unemployment peak forecast down to 1.67 million this year from 1.8 million and the measures announced in the budget are predicted to create one million jobs over the next five years.
If there is a downside to this development in corporation tax it is that it only directly helps larger corporations (i.e. companies with profits of more than £300,000 in the year). The corporation tax rate for small businesses remains unchanged at 20% and there are some who feel it is small businesses that need more help right now. The Chancellor though would argue that attracting large companies to invest in Britain will help smaller businesses by generating new opportunities for them.
The thing about budgets though is that the public sector still needs to be paid for and any cuts inevitably eat into the funding for essential services. It may sound a little like robbing Peter to pay Paul, but obviously these funds need to be found elsewhere. And the Chancellor has done his homework in this regard and tried to find loopholes to plug in order to raise the extra revenue.
Some examples of the gaps being plugged are in VAT. Exemptions are being removed on a large number of items including sports nutrition drinks and hot takeaway products in supermarkets, as well as self-storage, static caravans and hairdressers’ chairs! The so-called pasty tax has deflected attention away from potentially a much more lucrative VAT revenue stream – listed buildings! From October 1st 2012 all renovations and improvements on listed buildings throughout the UK will be charged at standard rate 20%. There are currently 400,000 listed buildings throughout the UK and in order to prevent them falling into disrepair it is necessary to conduct substantial repairs and maintenance from time to time. It will be interesting to see if there is increased activity on listed buildings in the next six months in an effort to avoid paying VAT thereafter!
The VAT registration and deregistration thresholds have also been changed with both of them rising by £4,000. From 1st April 2012 the VAT registration threshold rises to £77,000 from £73,000 and the deregistration threshold rises from £71,000 to £75,000. This means that a business that earns £77,000 or more consistently in a twelve month period must register for VAT. If a business exceeds the £77,000 limit temporarily it may be able to apply for a temporary exemption. However, if it is likely to exceed the threshold consistently then it must be registered for VAT. Similar rules apply for deregistering and companies must prove that the income is consistently less than £75,000 in a twelve month period.
Another area the government is clamping down and attempting to generate extra revenue is with life policies, annuities and capital redemption policies. Up until 21st March 2012 so-called “cluster” life policies could avoid tax in a number of ways such as gains being attributable to a person who was not a UK resident or by redeeming a number of segments, which meant that not all segments had taxable gains applied to them. The new treatment means that gains made earlier in the policy’s life will now attract tax retrospectively.
The Chancellor also imposed further restrictions on company cars by dropping the qualifying level of emissions from 160g/km to 130g/km for the current 18% capital allowance. Above this limit the allowance is only 8% meaning it will take far longer for the cars above 130g/km to gain relief. Another restriction has been squeezed in the low emission 100% capital allowance and now qualifying cars need to emit 95g/km instead of the previous level of 110g/km. However, the upside for this level is that it has been extended to April 2015 from April 2013. The government is certainly continuing its policy of discouraging the use of company vehicles, however, and further taxes are also being imposed on employees. From April 2014 a taxable car benefit of 5% will be implemented for cars with emissions of between 1 to 75 g/km. Further to that the tax on cars emitting more than 75g/km will increase from 34% to 35% at the same date, while it will increase a further 2% to 37% from April 2015. Two final points as far as company cars are concerned are that the fuel benefit scale charge from April 2012 will be based on £20,200 from the current level of £18,800; and, the 3% diesel supplement is being removed from April 2016.
Overall then, the budget has put extra cash into most people’s pockets and is aiming to attract investment to the country. The Chancellor has delivered a message to the people of Britain – I’m giving you extra cash, please get spending!
To find out how the Chancellor’s budget may affect you and your business, please contact our Business Consultancy team at Law Firm Ltd on 020 7907 1460 or via email on firstname.lastname@example.org.