Budget Report Highlights and Analysis from Informed Choice March 2010
Informed Choice
Informed Choice Ltd Sundial House 20 High Street Cranleigh Surrey GU6 8AE Tel: 01483 274566 Fax: 01483 274640 www.icl-ifa.co.uk First edition published in Great Britain 2010. Š Informed Choice Ltd 2010
The right of Martin Bamford to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publishers. This publication is provided for general consideration only and the information contained herein is not to be acted upon without professional independent financial advice. Neither Informed Choice Ltd nor any author can accept responsibility for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or refrained from in reliance of the contents herein. Informed Choice Ltd is authorised and regulated by the Financial Services Authority.
Contents
Introduction
Income Tax
Individual Savings Accounts
Pensions
Stamp Duty and Mortgages
Capital Taxes
Businesses
Miscellaneous
About Informed Choice
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Introduction Alistair Darling, Chancellor of the Exchequer, delivered what is likely to be his final Budget at 12.30pm on Wednesday 24th March 2010. With the General Election only weeks away, it was little surprise that the Budget speech had a political focus. Apart from a few key announcements, very little of real substance was announced. There is unlikely to be sufficient time for a detailed Finance Bill to pass through Parliament in what time remains. Details of one big tax hike for wealthy individuals, a 25% increase on the stamp duty for property transactions over ÂŁ1 million, was leaked ahead of the Budget statement. The revenue from this move will be used to fund the removal of stamp duty for first time buyers on property up to ÂŁ250,000. Previously announced increases to income tax and National Insurance contributions were confirmed, setting the scene for higher personal taxes over the next couple of years to help pay down the national debt. Frozen tax thresholds and allowances will mean that individuals pay more tax in the future as the economy and markets continue to recover. Freezing the inheritance tax threshold for the next four years will result in more estates paying death duty should house prices rise during this time. As interesting as what was included within the Budget is what was missing. Capital gains tax escaped unscathed with the main rate of CGT on hold at 18%. Value Added Tax (VAT) was also left alone at 17.5%, which remains one of the lowest rates in Europe. Ahead of every Budget, the pension world is always concerned about an attack on taxfree cash, and once again this escaped the scrutiny of the Treasury. The Budget did contain announcements about how higher rate income tax relief on pension contributions would be tapered down for higher earners, along with a consultation on a number of other pension measures.
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Over the coming months we will be working with our clients to update their Financial Plans, look for any legitimate planning opportunities and ensure they understand the real implications of this Budget. Do call us on 01483 274566 or email hello@icl-ifa.co.uk if you would like to discuss your own Financial Planning.
Martin Bamford
CFP APFS
Chartered Financial Planner Managing Director
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Income Tax The new highest rate of income tax at 50% for those earning over £150,000 was confirmed for the start of the 2010/11 tax year on 6th April 2010. All other aspects of income tax, including personal allowances, rates and thresholds, have been frozen for the year ahead. •
The personal allowance for 2010/11 will remain at £6,475.
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The age-related allowance will be £9,490 for individuals aged between 65 and 74. It will be £9,640 for those aged 75 and over.
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The threshold for the 10% starting rate of income tax on savings income remains at £2,440 for 2010/11. If an individual has non-savings income in excess of this threshold, this starting rate of tax for savings income is not available.
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The higher rate income tax threshold for 2010/11 remains at £37,400.
Also confirmed in the Budget was the phased removal of the income tax personal allowance for ‘adjusted net income’ over £100,000. The personal allowance will be reduced by £1 for every £2 of income over the income limit. For dividend income, three new rates of income tax will apply in 2010/11. These will be 10% for the basic rate, 32.5% for the higher rate and 42.5% for the new highest rate of income tax. The rate applicable to trusts (RAT) in respect of trust income will be increased from 40% to 50% in 2010/11 and the trustee rate for dividend income will be increased from 32.5% to 42.5%. Informed Choice says: It would have been a miracle if the Chancellor had reversed any of his previous announcements on income tax. Higher earners will carry the burden of higher taxes to reduce the national debt, along with spending cuts and economic growth to help get the UK out of this financial hole.
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The new 50% income tax rate is likely to be here to stay, as the next Government (regardless of colour) is unlikely to be able to reduce this as quickly as higher earners would like. The impact of the personal allowance being removed will be financially painful for those that fall into this earnings bracket. Pension contributions can be used to reduce net adjusted income for people on the cusp of losing their personal allowance, and the effective tax relief for doing this will look incredibly attractive. With a little time left before the start of the new tax year, business owners might consider taking a special bonus or dividend now (taxed at 40% or 32.5% respectively) rather than waiting a few weeks and paying 50% or 42.5% on the same earnings.
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Individual Savings Accounts From 6th October 2009, individuals over age 50 by the end of the tax year have seen their ISA allowance increased from ÂŁ7,200 to ÂŁ10,200. Half of this allowance can be invested in a cash ISA, with the balance of unused allowance in an investment ISA. It was confirmed in the Budget that this new higher ISA allowance will be extended to those under age 50 from 6th April 2010, as expected. It was also announced that, in future tax years, the ISA allowance will increase in line with inflation. The revised ISA limits will be based on the Retail Prices Index (RPI) measure of inflation from the previous September. They will be rounded up and easily divisible by twelve, to make calculations easier for monthly investors. If RPI inflation for the twelve months to the previous September is negative, the ISA limit will remain at the same level at the start of the new tax year. Informed Choice says: Any increase to ISA limits is a welcome announcement. Whilst linking ISA limits to RPI inflation is unlikely to result in any substantial increases, particularly in the short term with the threat of deflation looming for later this year, it does recognise the importance of this tax efficient savings and investment vehicle. In monetary terms this news is unlikely to benefit savers by more than a couple of pounds a year at current rates of interest. It does however enable savers and investors to shelter more of their assets from income and capital gains tax, and therefore simplify the administration of this money over the longer term.
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Pensions Income tax relief on pension contributions will continue to be restricted during the 2010/11 tax year as a result of the anti-forestalling measures introduced in the Budget last April. These continue to apply to those earning £130,000 in this or either of the previous two tax years. From the start of the 2011/12 tax year, higher rate income tax relief will be removed for higher earners, with a phasing out of this tax relief for those earning between £150,000 and £180,000. The lifetime allowance will be £1.8 million for 2010/11 and then remain at this level for the next five years. The annual allowance will be £255,000 from 6th April 2010 and is also frozen for five years at this level. Informed Choice says: We were hoping to see measures laid out in this Budget to simplify the complex antiforestalling rules, possibly lowering the annual allowance and using this to restrict access to income tax relief on pension contributions instead. There were no substantial pension announcements in this Budget, other than those confirming what had already been announced. Higher earners should continue to seek professional independent financial advice before making additional pension contributions which could result in an unexpected tax bill. Thankfully tax-free cash was left alone and continues to be an attractive part of the overall pension benefit at retirement.
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Stamp Duty & Mortgages First time buyers of residential property will not have to pay any stamp duty on property valued up to £250,000. This new nil rate will apply to completed sales from 25th April 2010 and apply for two years. It will only apply where the purchaser is a first time buyer and intends to occupy the residential property as their only or main residence. This concession will be funded by an increase to the stamp duty rate for property valued over £1 million, to 5%. This higher rate will be introduced from 6th April 2011. A rate of 4% currently applies to purchases over £500,000. Informed Choice says: Those currently buying property valued over £1 million will be keen to complete transactions before the end of this tax year, in order to minimise their stamp duty bill. The new 5% stamp duty rate on the most expensive property transactions will no doubt encourage exotic stamp duty avoidance schemes, something we have already seen promoted by several accountants in recent years. Anyone considering these schemes should proceed with caution. Those we have seen to date are very cagey about the actual mechanics and charge a substantial amount of the SDLT saving as a fee for the scheme.
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Capital Taxes There was an audible sigh of relief across the business and investment community when the Chancellor announced the main rate of capital gains tax (CGT) would remain unchanged at 18%. The threshold for Entrepreneurs’ Relief, where CGT is effectively paid at 10% rather than 18%, is being doubled from £1 million to £2 million. This will apply to qualifying disposals made on or after 6th April 2010. The CGT annual exemption will remain unchanged at £10,100 for the 2010/11 tax year. For trusts, the annual exemption will remain at £5,050 in 2010/11. In addition to the Inheritance Tax (IHT) nil rate band being frozen at £325,000 for the 2010/11 tax year, it was announced in the Budget that it will stay at this level for the tax years 2011/12 through to 2014/15. It was also announced that work will take place later this year to bring IHT planning under the Disclosure for Tax Avoidance Schemes regime. Informed Choice says: Most pundits expected the main rate of CGT to increase, in order to close the gap between this and the new highest rate of income tax at 50%. Investors are now likely to take this opportunity to reposition their portfolio for capital growth rather than taxable income. Business owners will delight in a doubling of the amount eligible for entrepreneurs’ relief. Although it remains unchanged at £10,100, the CGT annual exemption is a valuable and often under utilised tax break that should form a part of every investment portfolio. Freezing the IHT nil rate band at £325,000 until 2014/15 will result in many more estates paying this tax. On the plus side, it does make IHT planning easier as the nil rate band is a known quantity for several years.
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Businesses It was confirmed that the Small Companies rate for Corporation Tax will remain at 21% for the 2010 financial year. The main rate of Corporation Tax remains at 28%. The annual investment allowance for plant and machinery is set to double from £50,000 to £100,000 in this financial year. There will also be a 100% first year allowance for business expenditure on zero emission goods vehicles. The taxpayer owned banks, RBS and Lloyds, will have to provide a total of £94 billion of new business loans over the next year. Half of this will go to small businesses. Business rates for small businesses will be cut for a year from October. The Chancellor has claimed that this will result in 345,000 businesses paying no rates at all. A new national investment company, called UK Finance For Growth, will be established and will oversee the provision of £4 billion of support for small and medium-sized enterprises. Informed Choice says: This looks like a series of good measures for British SMEs, particularly when combined with a doubling of the entrepreneurs’ relief for capital gains tax. Most business owners would have been hoping for a deferral of the National Insurance contributions hike in 2011/12, when it is still on track to go from 12.8% to 13.8%. The use of ‘salary sacrifice’ for pension contributions could help to soften this blow.
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Miscellaneous
The 3p rise on fuel duty will now be introduced in three stages rather than come all at once next month.
Duty on cider will be increased by 10% above inflation from midnight on Sunday 28th March 2010. This has angered many cider drinkers and a Facebook group established immediately after the Budget to protest against the move has already picked up several thousand members.
Duty on other alcoholic drinks will increase by 2% above inflation from midnight on Sunday 28th March. Tobacco duty will rise by 1% from midnight on Sunday and then by 2% above inflation each year until 2014.
£385 million will be allocated to repairing roads, including £100 million on local roads to repair potholes.
Every UK resident will be guaranteed access to a basic bank account, which does not provide credit.
The six month work or training guarantee for young people under age 25 has been extended until 2014.
The number of hours needed for someone age over age 60 to qualify for Working Tax Credits will be reduced from 30 to 16 hours a week.
Parents with children under the age of two will receive an additional £4 a week from the Child Tax Credit, although this will not be introduced for two years.
New information sharing agreements to prevent tax avoidance were announced with Belize, Grenada and Dominica.
A £35 million enterprise fund will be set up to assist businesses launched in universities.
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About Informed Choice Informed Choice is a leading firm of Chartered Financial Planners. Established in 1994, we work with individuals, trustees and small business owners to build, manage and protect their wealth. We are three time winners of the Gold Standard for Independent Financial Advice. This is the toughest award in retail financial services. We have been shortlisted for IFA of the Year at the Money Marketing Awards and in 2009 we were commended in the Best Investment Adviser category at the Moneyfacts Good Advice Awards. As a firm of Chartered Financial Planners we have satisfied rigorous criteria relating to professional qualifications and ethical good practice. This means you can be confident that you are dealing with one of the UK’s leading firms that is wholly committed to providing you with the best possible advice, service and support. We offer a friendly and professional advisory service. Our clients come from many different walks of life and we do not set minimum or maximum portfolio sizes. As a professional firm we charge fees for the advice, implementation and review of the services we provide. Do give us a call on 01483 274566 or email hello@icl-ifa.co.uk to arrange an initial meeting to discuss your requirements. This first meeting is at our expense and without any obligation. To find out more about Informed Choice, please visit www.icl-ifa.co.uk where you can watch our introductory video and subscribe to receive our free weekly email newsletter.
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