Budget brain-freeze?

What does Alistair Darling’s third Budget speech, the looming General Election and the country’s economic position mean for you?

Budget speeches tend to be fairly uninspiring affairs; however, the background documents are usually more enlightening. To save you having to trawl through hundreds of pages of government and HMRC press releases, our summary of the main changes will quickly bring you up to speed.

Budget announcements contain many fundamental taxation changes which will affect business and individuals for the years to come. We’ve summarised, in plain English, what changes are going to come about in the world of taxation.

Having acknowledged that the country is emerging from deep, global recession and needing to provide a route to long term prosperity, the Government announced a number of new measures, some of which will take effect immediately, whilst others will be enacted by a Finance Bill in the next Parliament. Therefore the timing of the changes needs to be watched carefully after Election Day on May 6th.

1. Main Budget proposals

• The Entrepreneurs’ Relief limit will be doubled to £2 million for disposals on or after 6 April 2010. Gains qualifying for the relief are charged at an effective capital gains tax rate of 10%.

• Most businesses are able to claim an Annual Investment Allowance on the first £50,000 spent on plant and machinery. This provides immediate 100% tax relief on qualifying expenditure. The allowance is to increase to £100,000 from April 2010.

• Close companies, and broadly family and owner-managed companies, will no longer be able to obtain corporation tax relief on the write off of loans to a participator (generally a shareholder).

• The Inheritance tax nil-rate band is currently £325,000 and this band will be frozen until 2014/15.

• Stamp Duty Land Tax (SDLT) relief is introduced for first time home buyers but will be paid for by increasing SDLT on homes above £1 million.

2. Personal Tax

As previously announced, the Government proposes significant changes to the system of personal allowances and tax rates for 2010/11. These mainly affect those with higher levels of income.

3. Allowances and rates

The 2010/11 personal allowance will remain at the current level of £6,475. The basic rate limit will also be maintained at £37,400. Therefore an individual will start to be taxed at higher rates when their total income exceeds £43,875.

4. Changes for 2010/11

The Government had previously announced that the personal allowance would be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of adjusted net income above this limit.

The personal allowance will therefore be reduced to nil when adjusted net income exceeds £112,950. Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.

A new rate of income tax of 50% will be introduced from 6 April 2010. This will apply to taxable income above £150,000. Dividend income is currently taxed at 10% where it falls within the basic-rate band and at 32.5% where liable at the higher-rate of tax. A new rate of 42.5% will be introduced for dividends which fall above the £150,000 threshold.

5. National Insurance Contributions

The NIC rates and limits are broadly frozen for 2010/11 at the 2009/10 figures. There are two exceptions to this in that the lower earnings limit will increase from £95 to £97 per week and there will be an increase in the NIC rate which applies to Volunteer Development Workers. All other rates will be held at the 2009/10 levels.

6. Pension Contributions

An individual with income of up to £150,000 could continue to receive 40% tax relief on pension contributions. Reducing tax relief to 20% as soon as an individual’s gross income exceeds £150,000 would create a cliff-edge effect, so a taper-rate of relief has been proposed for those with income in the £150,000 to £180,000 range.

7. Extension to UK charity tax relief

Legislation will be introduced in the Finance Bill to extend UK charitable tax relief to certain organisations which are the equivalent of UK charities and Community Amateur Sports Clubs in the EU, Norway and Iceland.

8. Trust rate

The trust rate, which mainly applies to discretionary trusts, will be increased from 40% to 50%. The trust dividend rate will be increased from 32.5% to 42.5%. These changes will take effect from 2010/11.

Discretionary trusts that invest for capital growth will have a significant advantage because capital gains are taxable at 18%. Life interest trusts continue to be taxed on their income at 10% on dividends and 20% on other income.

So there’s a bit of insight into what to expect tax-wise from this budget. If you’d like to get clued up on more details or have a look at what taxation changes will affect your business, you can view the Menzies Budget Report here: www.menzies.co.uk/en/news/2010/budget-summary-2010

In addition, if you need any guidance when navigating your way through the tax maze, contact Menzies now at tax@menzies.co.uk

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