The 2010 Budget Report

24 March 2010

So.  After 13 years in power, did Alistair Darling today give us the 26th and final Budget/Pre-Budget Report to be delivered by the current Labour government, or did he do enough to pave the way to securing his party a fourth term in office?  Time alone will tell of course, but for a pre-Election Budget there was remarkably little razzamatazz, and very little that could be construed as a brazen attempt to buy votes.

Of course two things militate against such theatrics: the economic situation is still too fragile to allow it; and, well, that sort of show-boating is just not Alistair Darling’s style.  For all his boss’s reputation for being ‘dour’, when it comes to delivering Budgets, Darling is much happier to play the straight-man, and much less inclined to go for headline-grabbing announcements in the way that Gordon Brown used to do during his years at Number 11.

Consequently, and despite the fact that Darling was on his feet for a whole hour, there is actually remarkably little to report on in this year’s Budget.  Nonetheless it would be unfair to say that today’s Budget was entirely devoid of content, and therefore notes on the principal measures likely to be of interest or relevance to Route Members follow:

Income Tax and National Insurance

The Chancellor contented himself with confirming that there will be no further changes to the rates and allowances for 2010/11, which themselves were laid out in last April’s Budget.  Therefore, the position for 2010/11 will be as follows:

- The Personal Allowance (for those under the age of 65) will remain frozen at its current level, i.e. £6,475

- Basic Rate Tax, at 20%, will apply on the first £37,400 of taxable earnings

- Higher Rate Tax, at 40%, will then apply on taxable earnings up to £150,000

- An Additional Rate of Tax, at 50%, will then apply on all earnings thereafter

- Higher Rate of tax on dividends will remain at 32.5%, but an equivalent Additional Rate of Tax of 42.5% will apply on dividends in the same circumstances where 50% income tax would apply

- The Personal Allowance will be clawed back at the rate of £1 for every £2 that an individual earns in excess of £100,000pa, such that the Personal Allowance will be removed completely for those earning £112,950pa or more

For now, National Insurance remains unchanged, but a previously signalled 0.5% increase for everyone earning over £20,000 from April 2011 remains on the cards.

Capital Gains

Remarkably, CGT remains unscathed for yet another year and stays at a flat-rated 18%.  Whilst this figure may look unsustainable in the face of a 50% top rate of income tax, it may be that the Chancellor has reasoned that there is not a great deal that anyone can do to engineer a gain (in the same way that it’s possible to manipulate income), and therefore he can let this one ride for now. 

There was however a welcome announcement in that the limit for Entrepreneurs’ Relief has been doubled form £1m to £2m with effect from 6 April.  The effective rate on any such eligible gains remains at a very attractive 10%.

The Annual Exempt Amount for CGT remains frozen at £10,100 for the 2010/11 tax year.

Inheritance Tax

As announced in the December Pre-Budget Report, the IHT Nil Rate Band will remain at its current level (£325,000) in the 2010/11 tax year (rather than rising to £350,000 as had previously been intended).  Newly announced today however was that the IHT Nil Rate Band will now remain frozen at this level for the next four years, i.e. until the end of the 2014/15 tax year.

Assuming moderate inflation, the effect of this freeze is to prevent the Nil Rate Band rising by perhaps some £70,000 from now to 2015, in turn denying some £28,000 of relief on estates by the end of that time.

Corporation Tax

No changes to previous announcements: the main rate will remain at 28%, whilst the smaller companies rate will remain at 21% (the planned rise to 22% now not due to take effect ‘til April 2011).

VAT and Duty

There was some bad news for fans of cider, but otherwise most alcohol and tobacco duties are set to rise broadly in line with inflation, as you would expect.

The planned 3p per litre rise in fuel duty will now be phased in: 1p in April, 1p in October, and 1p in January (by slicing-and-dicing it in this way you could almost forget that is still the equivalent of 15p per gallon between now and the end of the year!).

VAT remains unchanged.

Stamp Duty

Possibly the biggest announcement today (and the worst kept secret in the morning’s papers): First Time Buyers will benefit from a Stamp Duty exemption on properties under £250,000 for a period of two years from midnight tonight.

Arm-in-arm with this announcement, however, is the news that transactions on properties of greater than £1m in value will be subject to a new 5% rate of stamp duty from April 6th 2011.  On this point it is worth noting (although there was no further reference to it today) that the Chancellor announced that he intended to make any form of Stamp Duty avoidance on property transactions greater than £1m a disclosable (‘DOTAS’) event from April 1st this year.

Savings

As already announced, the annual investment limit for ISAs will rise to £10,200 from 6 April, of which £5,100 can be saved in cash.

However, today the Chancellor went further by also announcing that the annual limit, which for many years had been frozen, will now rise each year in line with inflation.  In practical terms the increase will be set according to the RPI figure given in for the September preceding the start of the new tax year, rounded to the nearest multiple of £120 so that it converts easily to a monthly equivalent.  The cash limit will be half the value of the overall limit.

Slight changes were also announced to VCT and EIS rules, basically increasing the percentage of a VCT which must remain in qualifying investments from 30% to 70%, whilst at the same time lowering the UK content stipulations on both schemes to make them more ‘EU Compliant’.

Pensions

No big changes to pensions (major changes to tax relief having already been put in place for 2011/12 onwards, with transitional rules applying this year and next).  The Chancellor did however take time to freeze both the Lifetime Limit and the Annual Allowance at their current level (£1.8m and £255,000 respectively) for the next five years.  Although this is unwelcome, for many high earners the attack on tax relief on pension contributions has tended to render the Annual Allowance fairly academic anyway.

Tax Avoidance

Plenty of announcements on Avoidance, but, rightly, tending in reality to focus on the Evasion end of the spectrum.  Specifically the government intends to clamp down further on what It rather quaintly deems ‘offshore non-compliance’.  Beyond that the government is to crack down on what it sees as abuses of Employee Benefit Trusts (EBTs) and Company Share Option Plans.  It also confirmed a previous announcement made last December regarding use of charities for tax avoidance purposes (past that date), as well as confirming further previously announced restrictions on sideways loss relief, and Stamp Duty Avoidance using partnerships.

Rounding out a busy set of Tax Avoidance announcements, the government also announced that it is looking at ways to bring IHT avoidance in under the DOTAS regime, and that it is hoping to bring in further far-reaching Anti-Avoidance legislation in April 2011 (assuming of course it is around and in a position to do so).

Interestingly, the Chancellor’s prediction is that, taken together, the various anti-avoidance and anti-evasion measures should yield an additional £500m a year for the Treasury, a figure put in context by the fact that the supposed tax take from Bank Payroll Tax (‘Bankers Bonus Tax’), for the six months it was in existence, was £2bn.

 

Simon Pimblett
Route – City Wealth Club

March 2010