Budget 2013: The Good, The Bad And The Ugly
Given up trying to work out what difference the 2013 Budget will make to you? You aren’t the only one – there’s a lot to take in.
So, following our initial thoughts last week, we thought it was about time we picked the whole announcement apart in more detail.
Read on to find out who will benefit, who will feel the squeeze and who should be getting the first one-way flight out of here. OK, take a deep breath:-
To sugar the pill we’ll start with the GOOD news:-
1. Corporation Tax: The main rate will decrease to 20% from 2015/2016 onwards. This brings it in line with the current small company rate and means the UK will now have one of the lowest rates of corporation tax among developed countries. VERDICT: GOOD FOR LARGE COMPANIES
2. Research and Development: Big companies who undertake research and development schemes will now qualify for tax breaks or simply get money back – this was previously only true for smaller companies. VERDICT: GOOD FOR LARGE COMPANIES
3. Residence / Non-Residence: The classification of ordinary residence is being removed and the guidelines defining tax residence and non-residence are being clarified and simplified by the statutory residence test. VERDICT: GOOD FOR NON-RESIDENTS
3. Employment Allowance: Arguably the talking point of the Budget, employers are now eligible for a £2,000 deduction from their National Insurance bill. For large companies this is a drop in the ocean but it could provide a real shot in the arm for small businesses. This corresponds to one new employee being paid £22,000 or four on the minimum wage. VERDICT: GOOD FOR SMALL BUSINESSES
4. Employment-related loans: An employer will now be able to loan an employee £10,000 tax free and interest free. The previous amount was £5,000. VERDICT: GOOD FOR EMPLOYERS AND EMPLOYEES
5. Childcare Scheme: The old scheme is being replaced with a new, simpler one that corresponds to 20% tax relief for childcare costs up to £6,000 per year. VERDICT: GOOD FOR PARENTS
6. Small Business Cash Basis: Another big announcement, applicable to sole traders and partnerships only. Those whose turnover does not exceed the VAT threshold are allowed to calculate their profits and tax based on their receipts and payments rather than on the accruals basis. Capital expenditure will be deducted directly, rather than through capital allowances. This aims to reduce cash-flow problems and simplify the situation for small businesses. VERDICT: GOOD FOR SMALL BUSINESSES
7. Personal Allowance (part one): The tax-free personal allowance (the amount you can earn before you start paying tax) is being increased to £10,000 from April 2014, one year earlier than anticipated. It is currently £8,105. VERDICT: GOOD FOR BASIC RATE TAXPAYERS
Sounds good so far? Maybe, but our friend George Osborne knows how to give with one hand and take with the other so brace yourself for the BAD news guys. Here it comes:–
1. Personal Allowance (part two): The higher rate band now kicks in at £41,865. Technically this is a 1% increase from the previous year. However, this increase is at a slower rate than the cost of living is increasing so in reality people in the higher bands will be paying more tax on a greater proportion of their earnings. VERDICT: BAD FOR HIGHER-RATE OR ADDITIONAL-RATE TAXPAYERS
2. Pensions: From 2014 the annual allowance will be decreased to £40,000 from £50,000 and the lifetime allowance will be reduced to £1.25m. Tax relief will still be available at the individual’s marginal rate. VERDICT: BAD FOR PENSION SAVERS
3. Property Tax: This will now be applied to high-value residential property owned by companies. VERDICT: BAD FOR COMPANIES
That just leaves us with the UGLY. Strap yourself in guys, it’s going to be a bumpy ride:-
1. Capital Gains Annual Exemption: The amount is increasing to £10,900 for 2013/14, to £11,000 to 2014/15 and to £11,100 from April 2015. This might look good but don’t be fooled – it’s a token increase that will almost certainly be lower than the rate of inflation in that time so you lose in real terms. VERDICT: GOOD FOR THE NEXT YEAR BUT UGLY IN THE LONG RUN
2. Company Car Benefit: In a change overlooked by the majority of analysts, the tax has increased that is payable by employees on any company car that is provided by their employer. The increase (from 35% to 37%) corresponds to a real increase in 8% more money to the government. The tax on company car benefits provides more income to the government than all inheritance tax combined. VERDICT: UGLY – IF YOU HAVE A COMPANY CAR
3. Inheritance Tax: The nil-rate band is unchanged at £325,000 until at least 2017/18. This has remained the case since 2009, where previously it had been increased year on year. VERDICT: UGLY
In addition to the above, several thresholds have been increased in line with previous years, such as the VAT threshold (from £77,000 to £79,000) and ISA investment limits (to £11,520).
The big themes of the budget are the Chancellor’s increased attempts to promote investment and business in the UK – with the decrease in the corporation tax main rate and the employment allowance encouraging big and small business respectively.
The results are a bit more mixed for individuals. The increased personal allowance appeals to basic rate taxpayers, however a decrease in pension allowances and the unchanged inheritance tax nil-rate band are not good news for higher earners.
There is also a trend towards the simplification of a tax system which is notoriously one of the most complicated in Europe. Bringing the main rate of corporation tax in line with the small companies’ rate, the clarification of the residency definitions, the replacement of the childcare scheme and the introduction of the cash basis for small businesses are evidence of this.
If you have any questions on the Budget and how it might affect you – whether it is covered above or not – call us for free on 020 7488 3614 or email firstname.lastname@example.org.