Was the UK budget a case of robbing Peter to pay Peter, or robbing Peter to pay Paul, or robbing Paul to pay Peter? One of the key features was
Was the UK budget a case of robbing Peter to pay Peter, or robbing Peter to pay Paul, or robbing Paul to pay Peter?
One of the key features was the reduction of the top rate of income tax from 50% to 45%, with chancellor George Osborne saying that he can raise five times as much revenue from the rich through measures like increasing stamp duty on expensive properties. However millions of retirees will also be worse off as a result. Labour leader Ed Miliband was quick to claim that ?millions will pay more while millionaires will pay less.?
Income tax
The top rate of income tax, applied on those earning over ?150,000 a year, will be reduced from 50% to 45% from 2013/14. The 50% tax raised much less than hoped and Osborne said ?no chancellor can justify a tax rate that damages our economy and raises next to nothing?. While the 50% tax had been planned to be temporary, Osborne gave no indication of when the 45% tax will be scrapped, so is it here to stay?
The personal allowance will increase from ?8,105 to ?9,205 in 2013/14.
The 40% rate threshold will however be reduced by ?1,025 to ?41,450. There is also a proposal to limit on the maximum amount of income tax reliefs that can be claimed.
The Institute of Fiscal Studies (IFS) calculates that lowering the threshold means that there will be five million higher rate taxpayers (15%) for the first time in 2014. In the 1980s only 5% were paying the higher tax. ?This is part of a long-term trend towards the encroachment of 40% income tax on to people earning above-average but relatively modest salaries?, it said as part of its response to the budget.
Retirees
Controversial, and rather unexpected, was the announcement that the age related personal allowance will be frozen from 2013/14 and then phased out.
This was quickly branded a ?granny tax? as the move will hit up to 5 million older people who will pay an extra ?3.3bn in income tax over the next four years. According to the IFS the worst hit will lose up to ?323. The economic think-tank criticised the chancellor for ?dressing up what is clearly a tax increase as merely a simplification?.
The state pension will be reformed into a single tier pension from early in the next parliament. Every pensioner will receive a flat-rate payment of about ?140 a week. Although this is higher than the current state pension, better off pensioners could lose their second state pension. Ros Altmann, director-general of Saga, said:
?This is an outrageous assault on decent middle-class pensioners. This Budget contains an enormous stealth tax for older people. There is nothing in this Budget for savers, there is nothing to improve the annuity market, nothing to appease the damage of quantitative easing and nothing to support ISA changes and shelter older people?s cash. This Budget is terrible news for pensioners.?
The pension age will in future be increased to take account of increasing longevity.
Stamp duty
Stamp duty land tax on residential properties over ?2m increased from 5% to 7% with immediate effect. Properties purchased through a company now pay a higher 15% rate.
The IFS described this as a ?poorly designed and distorting tax?, and believes the mansion tax concept favoured by the Liberal Democrats would be preferable and raise more revenue.
Businesses & investment
The main rate of corporation tax will fall by an additional 2%, from 26% to 24% in April 2012 to 22% in 2014.
This should hopefully mean that higher profits can be paid out to shareholders.
The chancellor?s aides said it sends a ?strong signal that Britain is open for business?.
From April, the new Seed Enterprise Investment Scheme (SEIS) will provide 50% income tax relief to encourage individual investments of up to ?100,000 in start-up companies. Investors will have a capital gains tax exemption on gains realised and re-invested through SEIS in 2012/13.
The individual grant limit for Enterprise Management Incentive (EMI) schemes increased from ?120,000 to ?250,000.
Inheritance tax (IHT)
Assets passing between spouses/partners are exempt from UK IHT, unless your spouse/partner is a non-UK domicile. In this case the assets only benefit from a ?55,000 tax free allowance and are then fully taxable at 40%. The good news for people in this situation is that it will now be increased to match the general nil rate band, currently ?325,000. The government will also consult on measures to allow non-domiciled individuals to elect to be taxed as a UK domicile and claim the full spouse exemption.
The IHT nil rate band will remain frozen for the lifetime of this parliament. It will then rise in line with the Consumer Price Index (CPI).
Statutory residence test
The Chancellor reaffirmed his commitment to introduce the test from April 2013. The amended (but expected to be similar) draft legislation should be published soon.
QROPS
On budget day HMRC confirmed the changes to Qualifying Recognised Overseas Pension Schemes, which had been outlined in the December 2011 consultation paper.
Economy
The economy is not getting worse ? good news for the current climate. Gross domestic product is forecast to grow by 0.8% this year, a small improvement on the previous 0.7% forecast. It is expected to grow 2% next year (revised down from 2.1%), then 2.7% in 2014 and 3% in 2015. The Eurozone however remains a major risk to the forecast.
Real household disposable income growth will remain weak this year and next.
Unemployment will peak this year at 8.7%
The UK continues to be heavily in debt. Public sector net borrowing will reach ?126bn this year, 8.3% of GDP. Public sector net debt is forecast to rise from 67.3% of GDP this year to 76.3% in 2014/15.
General Anti Avoidance Rule (GAAR)
The government wants to target artificial and abusive tax avoidance schemes. A consultation document will be issued this summer with the view to bringing forward legislation in the 2013 Finance Bill. There are concerns among some tax practitioners that it may inadvertently catch out reasonable, non-aggressive, tax planning.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
