2012 Budget
Written by Ray Coman
The 2012 budget has introduced tax measures and outlined proposals to advantage small and medium sized businesses, increase the taxation for the wealthiest homebuyers and reduce tax for people on the lowest incomes.
The decrease in the 50% rate to 45% on incomes over £150,000 will take effect after the 6 April 2013. There is a corresponding decrease in the top rate for dividends to 37.5%. Due to the tax credit, the effective rate of tax on dividends which take income over 150,000 will reduce from 36.5% to 31.25%.
For top earners the announcement presents an opportunity to defer income to April 2013 through planning, say, on pension contributions, extraction of business profits, remuneration and investment in income producing assets.
The personal allowance will increase from £7,475 to £8,105 on 6 April 2012 and to £9,205 on 6 April 2013. There will be a corresponding decrease in the basic rate band from £35,000 to £34,370 on 6 April 2012. However, the basic rate band will decrease to £32,245 from 6 April 2013. The outcome will be a reduction in the level of income before reaching higher rate tax for 2013/14. Currently, incomes are not taxed at the higher rate until they reach £42,475, however this will fall to £41,450 from 6 April 2013.
The raise in the personal allowance also lifts the income level at which it is withdrawn. The personal allowance reduces by £1 for every £2 of income over £100,000, so that the allowance would not be fully abated until income reaches £116,210 for 2012/3 and £118,410 for 2013/14.
The age related allowances will also be fixed at their current levels until they eventually align with the increasing personal allowance. Currently, people above 70 with higher incomes do not benefit from the extra allowance which is withdrawn by £1 for every £2 that the allowance exceeds £24,000. The new measures will therefore affect the lower income by freezing the allowance against inflation.
With effect from 22 March, the government has lifted the stamp duty land tax (SDLT) from 5% to 7% on properties with a value over £2 million. A SDLT rate of 15% will be applied to these expensive properties acquired through companies, including overseas companies, trusts and other structures. This is a method previously used by wealthy individuals to avoid stamp duty. The government also proposes to introduce an annual charge to existing structures used to purchase properties valued over £2 million.
The chancellor also intends to make non-UK companies subject to capital gains tax on the sale of UK residential properties.
The registration limit for VAT will be increased from £73,000 to £77,000 of turnover from 1 April 2012. The limit for simplified reporting of profits on Tax Returns, also known as three line accounts, will be aligned with the new VAT limits. Businesses which are not established in the UK currently trading below the registration limit may be required to register, as the turnover test for these businesses will be eliminated from 1 December 2012.
The government has opened a consultation on a cash basis for calculating tax which is expected to apply to unincorporated business with turnover below the VAT threshold. A similar scheme of cash accounting is already available to VAT registered businesses with a turnover under £1.6 million. Through the scheme businesses account for VAT based on cash paid and received rather than when income is accrued. The scheme prevents small businesses from being out of pocket to HMRC and gives immediate relief from bad debt. A similar measure for calculating other tax applicable to small businesses could offer similar benefits. The scheme also has the potential to significantly reduce the accounting burden for business owners.
The value of shares that can be granted under the Enterprise Management Incentive Scheme is set to increase to £250,000, up from £120,000. The measure, which allows employees to exercise shares in their company without any charge to income tax, will improve the incentive available to key staff in small and medium sized businesses. The government also intends to extend entrepreneur’s relief to gains on shares acquired through the Enterprise Management Incentive scheme. Both the above announcements aim to benefit unquoted companies that meet the requirements.
The full rate of corporation tax will fall from 1 April 2012 to 24%. This is 1% lower than previously announced. The small companies’ rate remains at 20%.
Coman & Co. Ltd. are chartered tax advisers and specialist accountants for individuals and business owners. Please contact us if you have any further enquiries.
Self-assessment tax and Class 4 national insurance is due by 31 January after the end of the tax year. However, payments towards the following year's tax liability can also be payable on 31 January in the tax year and 31 July after the end of the tax year. These are payments on account towards next year's tax liability. Payments on account are half of the previous year's liability. When your actual tax has been calculated, any balancing payment is due by the following 31 January, or a repayment is issued if the payments on account are more than the tax owed.
The time limit for notifying HMRC of your chargeability to tax is 31 January after the end of the tax year. If HMRC have to prompt you to notify them to complete a tax return after the deadline, the penalty can be as high as 100% of the tax owed. On the other hand, there may be no penalty for notifying HMRC after the deadline if you do so voluntarily.