BUDGET 2014 – the aftermath with our thoughts in blue
Last Wednesday, Chancellor George Osborne unveiled Budget 2014. We thought we’d wait a few days for the hysteria to simmer down before giving our tuppence worth. Aside from the populist changes we have come to expect (1p off a pint, the fuel duty increase being frozen for the fourth year in a row), and the usual changes in the tax bands, there were a few surprises.
So what does it mean for you? We’ve covered the salient points, and have our thoughts in blue below:
Personal Tax-Free Allowance is to be increased to £10,500 from April 2015 (2014 -£10,000), and the 40% band threshold will be increased to £42,285 (2014 -£41,865)
Widely expected. It means that those earning below £42,285 will be £100 better off in tax terms. However, the changes will mean that an estimated 400,000 workers will be dragged into the 40% band.
Verdict – Good for most people, those earning over £100k will lose out.
Tax-Free Childcare threshold increased from £6,000 to £10,000
We will go into this in detail next week
Increase in the married couples allowance, and linking it to the personal allowance (10%)
The married couples allowance (worth up to £200 per year from April 2015 onwards) allows married people with income below their personal allowance limit to transfer up to £1050 of their tax-free personal allowance to their spouse or civil partner if they are a basic rate taxpayer
Verdict – Good for married basic rate taxpayers, doesn’t go far enough.
Cash and Shares ISAs to be merged into ‘New ISA’ – limit increased to £15,000 total from July 2014.
Great news for savers. Currently, you were restricted to saving half your ISA threshold (£11,520 for 2013-14) as cash, with the remainder in a stocks & shares ISA. These limits have been removed, allowing the full amount to be saved in cash.
Verdict – Great for everyone
10% rate on savings scrapped, 0% rate band increased to £5000.
Again, good news for low-earning savers – if you only have savings income, then the first £15,500 of this is tax free (from April 2015 onwards) – £10,500 from your personal allowance, and another £5000 from the nil rate band on savings
Verdict – Good for savers, not much use to anybody else
Pensions – The big one
Tax restrictions on pension drawdowns are to be removed, and there is no requirement to buy an annuity.
Drawdown amounts in excess of the tax-free lump sum will be taxed at the taxpayers marginal rate.
Small pot threshold increased to £30,000 (currently £18,000)
This is a big change, and very welcome. The current pension system allows eligible taxpayers to withdraw 25% of their pension pot tax-free on retirement. They are then required to buy an annuity (paying a fixed amount each year) with the remaining pension. Any withdrawal in excess of the 25% is taxed at a punitive 55%. Before it was difficult for pensioners. They would have to choose an annuity (complex) and pay the associated fees (unfair in our opinion).
The changes announced would see that excess drawdown be taxed at the persons marginal rate – 20%, 40% or 45% depending on their income. These changes apply from April 2015.
Currently, if your pension pot is below £18,000, you can take this all out in a lump sum tax-free. This threshold is increasing to £30,000 from April 2014.
Verdict – Great news for everybody, especially people reaching pensionable age soon.
The Annual Investment Allowance is doubled to £500,000 per year from 1 April 2014 until 31 December 2015.
This is a huge boost to small businesses. This allows them to reap the tax benefits of investing in equipment sooner, rather than over a long period. The allowance has a potential tax saving of around £100,000 for businesses, and is a far cry from the allowance limit in 2012 (£25,000). We do wonder why the government keeps changing its mind every year on this though.
Verdict – Great for expanding businesses
Main rate of Corporation Tax to fall to 21%
It was expected to fall to 22%, and then 20% from April 2016 – to align it with the small companies rate, and simplify the tax code. However we would argue that SME’s are at a comparative disadvantage and are surprised that more has not been made of it.
Verdict – Good for big companies, bad for small ones (possibly)
HMRCs powers of tax collection are planned to be extended to directly access taxpayers bank accounts.
Those owing over £1000, who have the means to pay, and have been contacted multiple times by HMRC may find the funds taken from their bank accounts. HMRC will leave a minimum of £5000 in the combined accounts of the taxpayer.
The ‘pay-up first’ proposals will go ahead. Tax amounts in dispute with HMRC – in relation to HMRC inquiries into tax avoidance cases (DOTAs & GAAR) – will be demanded up front, and then repaid to the taxpayer if they win the case.
Both of these powers will draw a lot comments from both sides. It is important that HMRC have the powers to do their job properly, however the ambiguously defined ‘means to pay’ and the promise to leave funds in the taxpayers bank accounts raise concerns as to how this will be implemented fairly, and whether it is in violation of EU regulations.
Additionally, the ‘pay-up first’ proposals suggest a worrying approach by HMRC towards taxpayers – that they are guilty until proven innocent. No doubt if they lose cases, the funds they hold will be kept until the full appeals process has been undergone, and even if they eventually do lose the case, they will drag out the repayment process for a long time, as any accountant will tell you that they have experienced – particularly with repayments of PAYE due or VAT repayments.
Verdict – Bad news for everybody (except HMRC).