Latest Article :: 2012 Budget

Published: March 22, 2012
Author: Graham Dragon
Category: Tax
Permalink: 2012 Budget

Personal Taxation

As previously announced, the personal allowance will increase this year (2012/13) from £7,475 to £8,105, but at the same time the basic rate ceiling will reduce from £35,000, to £34,370. This means the total income at which the 40% marginal rate begins will remain at £42,475.

Next year (2013/14) the personal allowance will increase to £9,205, and the basic rate ceiling will reduce to £32,245. The total income at which the 40% marginal rate begins will therefore be lower, at £41,450. Whilst the reduction in the personal allowance was announced as the greatest increase in 30 years, you should note that the percentage increase is lower than that in 2011/12. Also note that only clients in the lower income bands will actually be better off as a result.

The additional rate of tax remains unchanged this year at 50%, but will be reduced from 6^th April 2013. You may wish to advise clients to defer taking some of their income until after this date in order to reduce their overall tax bill.

Child benefit will effectively be withdrawn on a tapering scale for households where one earner has more than £50,000 income. This will be done through an increase in income tax rather than by withdrawing the benefit. The taper will operate between £50,000 and £60,000. The effect of this will depend on the number of qualifying children. For example, the resulting marginal rate of tax for a client with two children and an income between £50,000 and £60,000 will be 58%. In the case of a client with four children it would be 68%.

Age allowance will be frozen this year and is gradually being phased out altogether.

Corporation Tax

The main rate of corporation tax will reduce to 24% from April 2012 rather than the originally announced 25%. The small companies rate is unchanged at 20%. This means the marginal rate for companies with taxable profits between £300,000 and £1,500,000 will be 25%.

In April 2013 the main rate will reduce again, to 23%, which means the marginal rate will be 23.75%. In April 2014 the main rate will be 22% and the marginal rate 22.5%. The intention is ultimately to have a single corporation tax rate of 20%.

As with personal income, clients may wish to consider ways to defer crystallising company profits until the rates are reduced, although this does not apply where taxable profits are expected to be below £300,000.

There were a number of other small changes to corporate taxation. Perhaps the most significant for many clients will be the additional increases in the taxation of company cars, making it even less tax efficient to use company cars for private motoring.

Tax Planning

Most of the Stamp Duty Land Tax avoidance schemes are likely to be hit by the measures announced in the budget. In particular, there will be a penalty tax on high value residential properties put into corporate vehicles. Clients buying residential properties valued over £2,000,000 will face a Stamp Duty Land Tax charge of 7%.

Many commentators expected changes to the taxation of pensions for high earners. Such changes did not materialise, so pension investments can continue to be a useful tax mitigation exercise.

There will be a 25% cap on income tax reliefs where the claimed reduction is greater than £50,000. This does not apply, however, to any incentives where there is already a cap in place. This means pension, Enterprise Investment Schemes and Venture Capital Trust investments are all safe and can continue to be used effectively for high earners.
Enterprise Investment Scheme portfolios remain a particularly good tax planning vehicle for the right type of clients, particularly as the investment limit is being raised to £1,000,000. The main victims of the new cap are likely to be those who wish to claim relief for loss making businesses. Charities could also suffer, although the Chancellor does seem anxious to insulate them from this as much as possible.

Enterprise Management Incentives have not been talked about greatly in recent years, but are still with us and can be a very tax efficient way of rewarding key staff. Subject to EU approval, the individual EMI limit is being raised from £120,000 to £250,000. There will also be legislation allowing holders of EMI shares to benefit from Entrepreneurs Relief when they eventually dispose of them, which is welcome news.

The loophole allowing the use of excluded property trusts to avoid inheritance tax is being closed.

Regular premium insurance contracts will no longer be exempt from income tax on the gains unless the premiums are £3,600 per annum or less.

For many years it has been possible to use insurance bonds to create rebates of tax which was never, in fact, paid. At one point this could be done by moving the bond from a non taxpayer to a higher rate tax payer. That loophole was closed several years ago, but it was still possible to obtain similar benefits by manipulating the bondholder’s income in different years. This will no longer be possible. The closure of this helpful loophole, together with the planned phasing out of age allowance means insurance bonds are likely to be even less popular as tax planning tools.

Finally, it has been announced that following discussions with interested parties a General Anti Abuse Rule will be introduced in 2013. It is perhaps significant that the word “Abuse” has been used here rather than “Avoidance”. We can expect to see more and more measures brought in to prevent more creative tax planning schemes, but only where these are seen as abusive rather than simply using the incentives in the way parliament intended.

Increasing your Practice Business

Any change can be viewed as positive or negative, depending on one’s state of mind. Many clients will have been led to believe this is a negative budget, but there are positive aspects here which we should emphasize to our clients. Be ready to go out there and shout about those positives. Use the budget to your advantage to show your clients and prospective clients that you have creative ideas and that they need you on their team.

If you want to find ways of increasing your practice business, taking on more clients, and presenting ideas to them in even more creative ways, why not book yourself in to one of our Business Development Workshops? These will be highly focused on practical ways you can do this, rather than background technical information. Click here for more details.

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About Graham Dragon

Note: We do not accept liability for the content of our e-mail Journal or for the consequences of any actions taken or not taken by yourself or any third party on the basis of the information provided. We are unable to advise you on tax matters. If you wish to obtain further information or help on this or on any other tax matters you should consult with a tax accountant or other suitably qualified and experienced tax professional.

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