The Chancellor of the Exchequer: George Osborne, is an ambitious man; he wants to simplify the UK tax system as well as make it fairer, predictable and supportive of work. Some of those aims are contradictory. Simplification does not necessarily produce a fair position for everyone, and the blocking of tax loopholes must be done with little notice, so ‘predictability’ must be sacrificed.
George has had a go at each of his aims for the tax system in this Budget, although many of the proposals will not become law until at least 2013, after consultation. There was an increase in stamp duties on high-value homes, and the phasing-out of age-related personal allowances from 2013, when they will be replaced by a higher standard personal allowance.
The withdrawal of child benefit had been flagged up over a year ago, and now George has worked-out how to make that less painful for many middle-income families. The 50% tax rate stays for now, but it will be reduced to 45% from 6 April 2013.
This newsletter is based on the documents released on 21 March 2012. It is possible that a different position will be shown by the draft legislation due to be published on 29 March 2012. We will keep you informed of any significant developments.
In this analysis we have concentrated on those measures that will directly affect individuals, employers and small businesses.
The big news for individuals is that the personal allowance will increase to £9,205 from 6 April 2013, so you have to wait another year for that extra tax-free income. The personal allowance has already been increased by £630 from 6 April 2012 to £8,105, and the other allowances are increased as indicated below.
A source of complexity for older taxpayers is the application and withdrawal of age-related allowances, which are currently given when the taxpayer reaches age 65. These age-related allowances are withdrawn when the taxpayer’s total income exceeds £25,400 (for 2012/13).
From 6 April 2013 those who reach age 65 on or after that date will not receive an age-related allowance, but will instead be entitled to the standard personal allowance of £9,205. This allowance is expected to rise to £10,000 in April 2014 or 2015. The existing age allowances given to people born before 6 April 1948 will be frozen at current rates as shown below.
Personal allowances for 2012/13…
Under 65 (standard allowance): £8,105 (2013/14 – £9,205)
65-74: £10,500 (2013/14 – £10,500)
75 and over: £10,660 (2013/14 – £10,660)
Minimum married couples allowance*: £2,960 (2013/14 – TBA)
Maximum married couples allowance*: £7,705 (2013/14 – TBA)
Blind person’s allowance: £2,100 (2013/14 – TBA)
Income limit for allowances for age related allowances: £25,400 (2013/14 – TBA)
Income limit for standard allowances: £100,000 (2013/14 – £100,000)
* tax relief given at 10% where one partner was born before 6/4/1935.
Income Tax Rates
The tax rates for 2012/13 have not been changed from those applicable in 2011/12 (see below), but the threshold at which the 40% tax rate is applied is reduced to £34,370.
The reduction in the 40% threshold is balanced by the increase in personal allowance by £630. This means that in 2011/12 you start to pay 40% tax when your total income before allowances exceeds £42,475. In 2012/13 the 40% tax threshold is set at exactly the same amount: £42,475, before deduction of personal allowances. You can increase your own personal 40% threshold, by making donations under Gift Aid or paying personal pension contributions in the tax year.
Rates for 2012/13
Savings rate* (10%) – 0 to £2,710
Basic rate (20%) – 0 to £34,370
Higher rate (40%) – £34,371 to £150,000
Additional rate (50%) – over £150,000
* Only applies if non savings income is below this amount.
The rate on dividends remains at 10% for basic rate taxpayers, 32.5% for higher rate and 42.5% for additional rate. All come with a 10% tax credit.
Rates for 2013/14
There was much speculation before the Budget about the removal of the 50% rate that applies to taxable income above £150,000. This 50% additional rate remains in place for 2012/13, but will be reduced to 45% from 6 April 2013. The Government has also published most of the other tax rates and thresholds for 2013/14 as follows:
Savings rate* (10%) – 0 to £2,770 (estimate)
Basic rate (20%) – 0 to £32,245
Higher rate (40%) – £32,246 to £150,000
Additional rate (45%) – over £150,000
* Only applies if non savings income is below this amount
The rate on dividends will be 10% for basic rate taxpayers, 32.5% for higher rate and 37.5% for additional rate. All come with a 10% tax credit.
Another area of speculation was the withdrawal of child benefit from families where at least one parent pays tax at 40% or higher.
The Chancellor listened to reason and has decided to taper the withdrawal of child benefit where the higher earner’s net income (after losses but before allowances), exceeds £50,000. For every £100 of income over £50,000, a tax charge will apply equivalent to 1% of the child benefit received by the family. This will lead to the complete withdrawal of child benefit at £60,000 of net income. This tax charge is to apply from 1 January 2013, and will be collected through PAYE and self-assessment from the higher earning partner in the family.
If you, or your partner, are currently in receipt of child benefit you don’t have to do anything now. HMRC will be writing to all those affected by this change later in 2012. However, please discuss with us how you could re-arrange the distribution of income within your family, to reduce the affect of the withdrawal of child benefit. Any action in this area should be taken as soon as possible to ensure the new arrangements are in place for the full tax year 2012/13.
The following summarises the rates and thresholds that will be cut or frozen in 2012/13 compared to 2011/12.
Child Tax Credit
Family element – £545 (2011/12 – £545)
First income threshold – £15,860 (2011/12 – £15,860)
Second income threshold – withdrawn (2011/12 – £40,000)
Working Tax Credit
Basic element – £1,920 (2011/12 – £1,920)
Couple and lone parent £1,950 (2011/12 – £1,950)
30 hour element – £790 (2011/12 – £790)
Maximum costs for one child – £175 per week (2011/12 – £175 per week)
Maximum cost for all children – £300 per week (2011/12 – £300 per week)
Percentage of costs covered – 70% (2011/12 – 70%)
First income threshold – £6,420 (2011/12 – £6,420)
Withdrawal rate – 41% (2011/12 – 41%)
Income rise disregard – £10,000 (2011/12 – £10,000)
Income fall disregard – £2,500 (2011/12 – N/A)
The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. This affects families with fluctuating incomes, such as the self-employed. If you are in this position you need to finalise your profit figures as close to the tax year end as possible and provide those figures to the Tax Credits office without delay.
There are also changes to the tax credit rules from April 2012, which affect the number of hours the adults in the family must work to qualify for working tax credits. Lone parents are not affected by these changes.
Cap on Tax Reliefs
The Chancellor wants to deal with wealthy individuals who take advantage of tax reliefs that have no annual limits, such as relief for trading losses, charitable donations, and capital allowances. He is proposing that from April 2013 all such tax reliefs will be capped at the greater of £50,000 per year or 25% of the taxpayer’s gross income. If this idea becomes law it could significantly affect loss-making businesses that are not conducted through a company.
Savings and Investments
Enterprise Investment Schemes
From 6 April 2012 there are two schemes which you can use to achieve tax relief for investing in small unquoted companies: the seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS). The tax relief given under each scheme is shown below for 2012/13:
Rate of income tax relief: SEIS – 50%, EIS – 30%
Annual maximum investment qualifying for income tax relief: SEIS – £100,000, EIS – £1,000,000
Capital gains tax relief on investment: SEIS – 18% or 28%, EIS – deferred relief
Both the company and the investor have to qualify in order to receive tax relief under SEIS or EIS. The rules for both schemes are very complicated, so please talk to us before deciding to use either scheme.
In spite of much speculation about a reduction in tax relief for contributions to registered pension schemes, there has been no change in the tax relief rates or annual allowance for 2012/13. The annual allowance is the limit on pension contributions that attract tax relief, whether those contributions are paid by the individual, his employer, or calculated as a deemed rise in the value of a final salary scheme.
Each individual has a personal annual allowance of £50,000, plus unused annual allowance brought forward from the previous three tax years. If the value of the contributions made to the pension scheme exceed the taxpayer’s annual allowance, an annual allowance tax charge applies on the excess contributions, set at the taxpayer’s highest rate of income tax.
Annual allowance: 2012/13 – £50,000 (2011/12 – £50,000)
Lifetime Allowance: 2012/13 – £1,500,000 (2011/12 – £1,800,000)
Independent Savings Accounts (ISAs)
The ISA savings limits applicable in 2012/13 for those over 18 are:
Overall limit – £11,280
Cash up to – £5,640
Balance in stocks and shares up to – £11,280
For those aged 16 & 17:
Overall limit – £5,640
Cash up to – £5,640
Balance in stocks and shares up to – nil
For Junior ISA:
Overall limit – £3,600
Cash up to – £3,600
Balance in stocks and shares up to – £3,600
There has been no change in the rates or thresholds for capital gains tax (CGT):
The rates for 2012/13 are…
Annual exemption – £10,600
Annual exemption for most trustees – £5,300
Rate for gains in basic rate band – 18%
Rate for gains above basic rate band – 28%
Rate for gains subject to entrepreneurs’ relief – 10%
Lifetime limit for entrepreneurs’ relief – £10,000,000
Currently only UK resident individuals pay CGT on gains, even when the property is located in the UK. The Government is considering how CGT can be applied to gains made on residential property in the UK, when the owner is resident in another country. Any changes will apply from April 2013 at the earliest.
If you acquire shares through an approved share option scheme run by your employer, you must pay CGT on gains made when you sell those shares, after deduction of your annual exemption. The CGT will be charged at 18% or 28%, as the conditions for the entrepreneurs’ relief rate of 10% are unlikely to be met. The Government is considering changing the rules for approved share option schemes so the 10% rate can apply to shares acquired by employees. Any changes will apply from 6 April 2013 or later.
The inheritance tax (IHT) nil rate band remains frozen until 2014/15. This is the amount of a person’s estate that is free of inheritance tax. However, for deaths occurring on and after 6 April 2012, when at least 10% of their estate has been left to charity, a reduced rate of IHT applies to the chargeable estate. Gifts made to charities are exempt from IHT.
The limits and rates for 2012/13 are…
Nil rate band: £325,000 (2011/12 – £325,000)
Rate payable on death: 40% (2011/12 – 40%)
Rate payable when 10% of estate left to charity: 36% (2011/12 – 40%)
Rate payable on lifetime gifts to certain trusts: 20% (2011/12 – 20%)
You pay stamp duty land tax (SDLT) when you purchase a property in the UK. There has been a lot of talk about how some people have avoided paying SDLT on high value homes. The tax avoidance scheme usually involves an off-shore company.
To deal with such schemes the Government has introduced new rates of SDLT on purchases of residential property valued at over £2 million:
- 7% charge on purchases by individuals from 22 March 2012; and
- 15% charge on purchases made on or after 21 March 2012, by companies, collective investment schemes, or partnerships where a member is a company or a collective investment scheme
An annual tax charge may also be applied to the value of residential property held by certain companies, where each property is worth over £2 million. Any such charge will apply from April 2013.
The Government wants to simplify the accounts small businesses (partnerships and sole-traders) have to prepare for tax purposes. It is consulting on whether preparing accounts on a cash basis would be easier, and standard allowances could be used for the business use of vehicles and the proprietor’s home. Any changes are likely to apply from April 2013 or later.
The small profits corporation tax rate remains the same at 20% for the year from 1 April 2012.
However the main rate for large companies is reducing from 26% to 24% and will be 22% by the year from 1 April 2014.
The rates and thresholds of the main capital allowances will apply as follows for 2012/13…
Main pool: writing down allowance: 18% (2011/12 – 20%)
Special rate pool: writing down allowance: 8% (2011/12 – 10%)
Annual Investment Allowance (AIA) cap: £25,000 (2011/12 – £100,000)
For 2012/13 the main rates and thresholds for NI contributions are:
Lower Earnings Limit (LEL) for Class 1 NICs – £107/week
Employer’s class 1 above £144/week not contracted out – 13.8%
Employee’s class 1 not contracted out from £146 to £817/week – 12%
Employee’s additional class 1 above £817/week – 2%
Self-employed class 4 from £7,605 to £42,475 per annum – 9%
Self-employed class 4 additional rate above £42,475 per annum – 2%
Self-employed class 2 – £2.65 per week
Voluntary contributions class 3 – £13.25 per week
The Government is consulting on how to integrate the administration of income tax and NI for employers and the self-employed. Any changes are unlikely to take effect until 2014 or later.
The Government wants to encourage more employees to acquire shares in the companies that employ them. Small and medium sized companies can use the Enterprise Management Incentive share option scheme (EMI) to grant share options to employees, but there is a £120,000 cap on the value of share options each employee can acquire. The Government plans to raise this cap to £250,000 as soon as possible.
Cars and Car Fuel
The tax charge for the private use of a company car is based on a percentage of the list price of that car when new, the percentage being based on the vehicle’s CO2 emissions.
From 6 April 2012 cars with CO2 emissions in the band 76-99g/km will be taxed at 10% of list price. Those with CO2 emissions of 100g/km will be taxed at 11% of list price, with the percentage increasing in 1% steps for each additional 5g/km. From 6 April 2013 the 10% list price band will reduce again to 76-94g/km. A car with CO2 emissions of just 115g/km will then be taxed at 15% of list price.
From 6 April 2014 the 11% of list price will apply to cars with CO2 emissions in the band 76-94g/km, with a 1% step up for every addition 5g/km of CO2. From 6 April 2015 the minimum percentage of list price will be 13%, and from 2016 the minimum percentage of list price increases to 15%.
Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to a set value, currently £18,800. This will rise to £20,200 from 6 April 2012. The maximum taxable benefit of receiving free road fuel for private use will increase from £6,580 (for 2011/12) to £7,070.
The taxable benefit when fuel is provided for private use in a company van is frozen at £550 for 2012/13.
The VAT rates remain unchanged at…
Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%
The registration and deregistration limits from 1 April 2012 are…
Registration turnover: £77,000 (1 April 2011 – £73,000)
Deregistration turnover: £75,000 (1 April 2011 – £71,000)
Changes from 2013
The following changes to the VAT rules will be made in 2013…
- The standard rate of VAT will apply to the supply and installation of energy saving materials in non-residential buildings used for non-business purposes by charities. Currently the lower rate of VAT applies
- The invoicing rules will be simplified
- Exemptions will be introduced for commercial Universities
- Cable-car rides will attract the reduced rate of VAT, where each cable car holds fewer than 10 passengers.
The Government is consulting on the existing VAT law in the following areas, so expect changes in the future…
- Hot take-away food
- Sports nutrition drinks
- Self storage
- Hair-dressers’ chair-rental and
- Alterations to listed buildings.