Last Tuesday Chancellor George Osborne announced his emergency budget. Here's our brief summary of the pertinent points:
IR35 abolishment closer than ever
In a post-budget interview with The Telegraph, small business minister Mark Prisk indicated the government's intention to "undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant." An overhaul of taxation for small businesses is long overdue and Prisk’s review is to be announced this summer. With the government’s commitment to stimulating business in the UK we expect this to be broadly positive.
VAT rate increase
The standard rate of VAT will increase from 17.5% to 20% from 4 January 2011, as will the rates applied under the flat rate VAT scheme. The impact on most contractors will be negligible.
Corporation tax falls
Corporation tax for companies with less than £300,000 profit will be cut from 21% to 20% from 1 April 2011 – it was previously expected to increase to 22%. For contractors this means that for every £1,000 profit an additional £10 will be available for dividend payments (as these are paid from post-tax profits). There's also good news for your clients too – corporation tax for large companies will reduce from 28% to 24% over the next four years.
Income tax allowance increase
The personal allowance for those under 65 will rise by £1,000 to £7,475 for 2011/12. However, this generous increase in tax free income will be limited to those who pay income tax at 20%, as the threshold at which 40% tax starts will be reduced to take into account the increased allowance. The full details of income tax changes will be confirmed in the Autumn Budget.
National Insurance impact still uncertain
A rise in NI has already been announced, however the thresholds for 2011/12 are not due until October, which limits our ability to forecast the impact of the changes. The government have also partly delivered their pledge to offer a NI holiday to new businesses: from September 2010 new companies in the North of the UK will be exempt from paying employer's NICs for the first 12 months, for up to 10 employees. This change excludes IR35 businesses – full details are expected to be announced shortly.
Pension contributions limited
In addition to changes to the state pension, tax relief for pension contributions is expected to be limited to around £35,000 per year per person from April 2011. This cap will replace the complex tapering of tax relief that was due to apply to individuals with total income of £180,000 or more. If you're planning on making pension contributions over £35,000 please contact us for further advice.
Capital Gains Tax increases below forecast
As expected Capital Gains Tax has increased: from 18% to 28% for higher rate tax payers – the hike isn't as large as forecast, however the change is immediate. The annual exemption remains at £10,100 for individuals and £5,050 for most trusts.
We'll update you over the next few months as the details of these changes are announced. As always, if you need any tax planning assistance or advice, please don't hesitate to get in touch.
For further information, please click on the link below to view the ICAEW Tax Faculty’s summary of the Budget Report: