Published:
11
Mar
2020
Updated:
03
May
2020
Written by Ray Coman
With a new government, now comfortable in its majority, new Chancellor, an outgoing Bank of England governor and its first since leaving the EU, the 2020 Budget was bound for the limelight. Rishi Sunak, boasted the largest fiscal boost for 30 years with substantial allocations for infrastructure, roads, housing and education. It was billed as a plan for prosperity.
Pension allowance threshold increase
Entrepreneur's relief
Lower tax for certain gains on life insurance products
Structures and buildings allowance to increase
National insurance threshold to rise
Employment allowance up by £1,000
Notable exceptions
Research and development credit rises
Non-resident companies owning property
Corporation tax unchanged
Capital gains tax
Restriction on use of carry forward losses for large companies
Other measures
Summary
Pension allowance threshold increase
The pension allowance is the annual amount that a taxpayer can invest in a pension and obtain tax relief. It is currently £40,000. However once net adjusted income exceeds a threshold, the allowance reduces from £40,000 to a minimum amount. The amount of the reduction is £1 for every £2 that income exceeds the annual allowance. The threshold is currently £150,000 for net adjusted income. Net adjusted income is income plus employers’ pension contribution. The threshold for income (i.e. after deduction of employer’s pension contribution) is currently £100,000. More information can be found in the guidance on pension allowance.
Both thresholds are due to increase by £90,000. The adjusted income threshold will increase to £240,000 from 6 April 2020. The floor has been lowered from £10,000 to £4,000. The amount below which the allowance cannot be tapered has reduced to £4,000. The difference between the £40,000 maximum and £4,000 minimum is £36,000. Applying the £2 for every £1 formula, tapering will stop at £240,000 plus (£36,000 x 2) or £312,000.
The allowance effects 2020-21 and future years only. Tapering of allowance in previous years will be subject to the old rates for pension allowance of £150,000 adjusted income and £10,000 minimum threshold. In his speech, the chancellor spoke about the increase in the allowance as a measure that would help health professionals. He explained that 98% or consultants and 96% of GPs would no longer have pension allowance tapered. On account of above average income, the measure will help medical professionals, but the reform is applicable to all higher income taxpayers.
Entrepreneur’s relief
This concession applies to gains made by business owners and more detail can be found in the rates table for capital gains. Broadly, the relief allows business owners to dispose of their interests and suffer tax on any gain at a flat rate of 10%. The rate otherwise applicable to gains is 20% to the extent that an individual is a higher rate taxpayer. The rate is even higher for gains on disposal of residential property that is not the owner’s home. The more generous rate applies only to gain made below an annual lifetime limit. This limit was previously set at £10 million. From 2020-21 the lifetime limit is reduced to £1 million.
The limit was £1million when entrepreneur’s relief was first introduced. The lifetime limit is therefore returning to its 2008-09 threshold when the relief was brought in (to replaced business asset taper relief.) It is not expected to impact many individuals. An owner must have at least a 5% stake in the investment and the average shareholder will remain unaffected by the cut. Most proprietary businesses will not be disposed of for over £1 million.
The lifetime limit also applies to shares in Enterprise Management Incentives. The new measure takes effect from today, 11 March 2020. Gains above the threshold will be subject to the higher rate capital gains tax that applies to disposals of shares and business assets of 20%.
Lower tax for certain gains on life insurance products
Gains made on certain life insurance products are subject to income tax. The way that tax is calculated on these gains is referred to as top-slicing. The calculation of top slicing relief has changed so that personal allowance is reinstated in the calculation. Personal allowance is abated for individuals earning over £100,000 and foregone by non-domiciled individuals claiming the remittance basis. The new calculation applies to any gains made with effect from today, i.e., 11 March.
Structures and buildings allowance to increase
Construction work on buildings that are used for trading or investment purposes (but not for residential or furnished holiday let purposes) are eligible for a capital allowance. The building cannot have been a dwelling the first time it was used or during the period the allowance is claimed. The capital allowance is a ‘straight line’ calculation. This means that the percentage that can be deducted from profits is a fixed percentage of the original construction cost. The percentage was 2% from the time the allowance was introduced on 29 October 2018. However, following the announcement from today, it will increase to 3% from the start of the next financial year, on 1 April 2020.
Investment in “Enterprise Zones”, which are specific locations in the UK will continue to enjoy Enhanced Capital Allowances until March 2021.
National insurance threshold to rise
The national insurance threshold will increase in 2020-21 to £9,500. The new limit will reduce tax for sole traders and employees. In recent years, the threshold for employers and employees has been the same. However, the national insurance limit for employers is only increasing to £8,788. The upper threshold will remain at £50,000. The most tax efficient salary paid from a contractor company in 2020-21 will be £732.
Employment allowance up by £1,000
This tax relief exempts employers’, or secondary, national insurance. It is not available to companies with only one director. From 6 April 2020, the allowance will increase from £3,000 to £4,000. There is a further national insurance concession for employers hiring army veterans.
Notable exceptions
- The personal allowance and higher rate tax threshold have not been changed from their 2019-20 levels of £12,500 and £50,000 respectively.
- The process by which the value of a tax threshold is eroded by inflation is referred to a fiscal drag.
- It has been highlighted as an issue for nil rate band for inheritance tax which has been fixed at £325,000 since 6 April 2009.
- The additional tax rate of 45% still begins at £150,000.
- The personal allowance abatement threshold is also unchanged at £100,000.
Research and development credit rises
For qualifying expenditure on research, a company can claim an enhanced deduction from profits chargeable to corporation tax. As an alternative to the enhanced deduction, the company can claim a credit. The credit is a government payment equal to a percentage of the amount spent on R&D. During the initial, loss making phase, the credit offers a more attractive cash flow alternative to enhanced expenditure. The rate will increase from 12% to 13% on 1 April 2020. A hike in the credit is aimed at promoting innovation and growth within the UK.
Non-resident companies owning property
Previously, a non-resident landlord company was subject to income tax. However, from 6 April 2020 an overseas entity owning UK property will be subject to the same rules as a UK company. In practice, the ruling removes overseas investors from the requirement to join the non-resident landlord scheme. This scheme requires letting agents to withhold basic rate tax at source, unless HMRC approves an application to join the NRL scheme. There is no tax incentive for new landlords to operate via a non-resident company. Any foreign tax has been suffered on income will be available as a credit to reduce UK tax on the equivalent income.
Corporation tax unchanged
Corporation tax had previously been scheduled to reduce to 17% on 1 April 2020. This was announced in the 2016 Budget. However, as confirmed by the Budget today, the rate will remain at 19% for 2020-21. The rate applied to Financial Year 2021, i.e. starting 1 April 2021, will also be 19%.
Capital gains tax rate
The capital gains tax allowance will increase from £12,000 to £12,300 from 6 April 2020. The rate is set to increase by the Consumer Price Index (CPI) rounded up to the nearest £100. The rate applicable to trustees is half, i.e. £6,150.
Restriction on use of carry forward losses for large companies
Where a company makes a loss on an asset, this loss can be carried forward and set against future capital gains. Announced in today’s Budget was a restriction which will allow only 50% of the allowable loss to be set against future gains of a company. The new restriction applies to gains made on or after 1 April 2020. The loss only applies to profits over £5 million. It will not impact the small business sector directly. Losses suffered by individuals are not affected by the proposal.
Other measures
- Introduction of a stamp duty surcharge from April 2021, of 2% to non-residents.
- Abolition of VAT on digital publication and sanitary products.
- No planned increase in alcohol duty.
- Cut interest rates on social housing by 1%.
- A 100% discount on business rates for a wide range of retailers and entertainment venues.
- Statutory sick pay is available for all self-isolated patients from day one, even if not displaying symptoms of coronavirus.
Summary
In response to the economic impact of coronavirus and a rate cut of 50 basis points in the morning, the Budget was aimed at reassuring markets with a package of fiscal stimuluses. Policy was aimed as a reward to voters in the North and much called upon relief to the struggling high-street. The UK still carries the highest tax rates of personal tax in the world. It remains to be seen whether the spending plan can be sustainable in the context of an increasing mobile population.
An announcement made today on 26th March aims to bring the support available to the self-employed in line with that already available to employees via the Coronavirus job retention scheme.
The coronavirus is spreading in the UK and across the globe, causing illness and death. Yesterday, and for an unspecified amount of time, schools, universities, restaurants and other public meeting venues closed. To encourage business owners to stick to the official guidelines and to mitigate the economic impact, a raft of emergency measures were announced on 20th March 2020.
As the end of the tax year approaches, the following calculations explain the optimal salary payments for companies with a sole director.
Philip Hammond spoke for over an hour earlier this afternoon delivering his last Budget before the UK exits the EU. The UK is set to officially leave the EU on the Brexit Day of 29 March 2019.