20 May 2013 Budget Summary – March 2013
Budget Summary 21st March 2013
Yesterday saw Chancellor George Osborne deliver his budget set against a struggling economy and the recent downgrade of the UK’s prized AAA status.
The Chancellor was determined to stick to his austerity message, particularly given the downgrade and how markets would perceive any change of course. He clearly took little heed of those urging him to borrow more in an effort to stimulate growth by cutting taxes and investing in measures to fire up the economy.
The consensus, and confirmation from London’s Evening Standard, in a since apologised for leak, was that there would be few major headlines, most of those having been provided in the Autumn Statement and little wiggle room for the Chancellor and so it proved.
However, it would appear that the Chancellor was able to find some funds by squeezing the day to day spending of government departments to pay for some credible and worthwhile personal and business tax cuts and a large multi-billion pound boost for the housing market and construction industry.
Other than the measures introduced to help the housing market, the business tax cuts and some small respite for drivers, smokers and beer drinkers, we saw little of great note and perhaps the headlines will be grabbed by Ed Milliband who responded that it was a “downgraded budget from a downgraded Chancellor”.
Please see below for a detailed breakdown of measures announced.
Economic Forecasts
George Osborne confirmed the UK economy will post growth of 0.6% this year, according to the Office for Budget Responsibility (OBR), a downward revision from its December forecast of 1.2%. The figure is much lower than consensus, which was for a 0.9% expansion.
The OBR also revised down its forecast for growth in 2014, after a poor year for the economy in 2012 when it just managed to post slight positive growth. The body expects to see 1.8% growth for 2014, down from 2% forecast in December. This compares to a consensus forecast of 1.6% growth. Osborne also said the economy is likely to avoid a second quarter of negative growth.
The Eurozone will remain in recession throughout this year, the Chancellor said, adding continued weakness in the region is likely to impact the UK, stating “Another bout of storms in the Eurozone would hit Britain’s economic fortunes hard. We are still very exposed to what happens on the continent.”
Giving his speech for a Budget designed to “help those who want to work hard and get on”; Osborne said the path to recovery is slower than the government had anticipated.
“It is taking longer than anyone had hoped but we must hold to the right track,” the Chancellor said.
The Chancellor is also readying the Bank of England for Mark Carney’s arrival by reassessing the role of the monetary policy committee, Osborne said the MPC would have to detail the trade-offs it had made in keeping inflation and growth on track.
While the inflation target will remain set at 2%, Osborne said low and stable inflation is not the key to securing the recovery, and the MPC had to be prepared to use unconventional methods and manage forward expectations for rates, like America’s Federal Reserve did when it announced rates would likely remain on hold until 2015.
CDC Comment – “You will note that last year we made some changes to our investment portfolios with a view to rebalancing the allocations towards sustainable income investments. This was very much driven by the belief in our facing a low growth environment for some time to come which the chancellor has reconfirmed in his budget.”
Tax Avoidance
As widely expected the Chancellor confirmed the government is to embark on a programme to crack down on “aggressive” tax avoidance. Anti-Tax avoidance measures could yield the public purse an extra £1bn, George Osborne said.
He also pledged to “name and shame” companies who actively promote tax avoidance schemes, whilst finalising the long-awaited anti-tax avoidance legislation due to take effect in April.
CDC Comment – “It is clear that anti avoidance will be a key theme in the future and therefore cutting edge tax planning scheme are likely to come under increasing scrutiny. It has long been our view that clients should ensure that they consider the basics of tax planning such as ISAs and pensions in the first instance i.e. make sure the foundation are in place before building the first floor and the budget has only confirmed this view.”
Personal
Income Tax
The threshold at which people begin to pay income tax will rise to £10,000 in 2014, a year earlier than planned. He had previously pledged to hit £10,000 by the end of Parliament in 2015. The move is expected to cost the Exchequer about £1.4bn.
He again confirmed that in April, income of more than £150,000 will face a 45%, rather than 50% tax rate.
Meanwhile, as present, pensioners earning less than about £24,000 a year get a more generous tax-free allowance – £10,500 for 65-74 year olds and £10,660 for those aged 75 and over. That advantage gradually tapers off as income rises to about £29,000.
From April, those allowances for anyone already aged 65 will be frozen and the extra personal allowance will be scrapped for anyone who turns 65 after 5 April. This controversial move in last year’s Budget was dubbed the “granny tax”.
CDC Comment – “It is important that you monitor your income position so that we assist you in utilising the varying tax allowances efficiently, to ensure that you receive the maximum benefit where appropriate”.
Pensions
A guarantee for the basic state pension means it will rise by 2.5% in April, taking it to £110.15 a week. As previously announced, the single flat-rate pension of £144 a week is to be brought forward a year to 2016. This will end contracting out of the State Second Pension, so that everyone will pay the same rate of national insurance contributions and build up access to the same single-tier State Pension
From a pension perspective the Chancellor did not make any further reductions to the Annual Allowance and Lifetime Allowance (LTA) announced in the Autumn Statement. The Lifetime Allowance, can penalise good investment growth. The Government has estimated that around 360,000 people may be potentially impacted by this reduction, we believe this could be vastly underestimated.
CDC Comment – “The most pressing point here is the revised £1.25m lifetime allowance that comes into effect from 6th April 2015, is a drop of over 30% from the previous £1.8m only 2 years ago, which has already been reduced in April 2012 to £1.5m. In terms of future planning it may pay to maximise payments and lock in to £1.5m.
Many may think that this change to lifetime allowance will not affect them, however care must be taken for those with a number of frozen pensions, particularly those that have had final salary benefits previously as they will count towards this lifetime allowance figure. If this applies to you, you should seek immediate advice from your CDC adviser”.
He also confirmed the changes to maximum income rates for those in Drawdown, increasing the limit from 100% of the Government Actuaries Department (GAD) rates to 120%.
Additionally he announced that the way GAD rates are calculated is also to be reviewed.
CDC Comment – “This will not apply to everyone immediately and advice will be required as to when this may impact on individual drawdown clients, so please contact your adviser if you are in Drawdown.”
Capital Gains Tax
He confirmed that the annual Capital Gains Tax tax-free allowances, known as the “Annual Exempt Amount” would remain the same at £10,600 for each individual and £5,300 for most trustees. Rates of tax on capital gains will also remain the same at 18% and 28% for individuals. For trustees or personal representatives the rate is 28%. For gains qualifying for Entrepreneurs’ Relief the rate is 10%.
Housing
The Chancellor has introduced a scheme to help kick start the housing market. The “Help to Buy” scheme improves on a previous scheme known as FirstBuy. It enables buyers to put down a 5% deposit on a newly built home and then fund up to 20% of the cost of the home through a “shared equity” loan, which will be repayable when the home is sold. That loan will be interest-free for the first five years.
Whereas the previous scheme was only open to first-time buyers, this one will be available to all buyers of newly built homes. Previously there was also an income limit of £60,000 a year, but this will no longer apply. It will cover new build homes up to the value of £600,000.
The chancellor also announced a new mortgage guarantee, which he claimed would dramatically increase the availability of loans.
“We’re going to help families who want a mortgage for any home they’re buying, old or new, but who cannot begin to afford the kind of deposits being demanded today,” he said.
It will run for three years from the start of 2014 and will be used to support £130bn of mortgages.
If a borrower defaults on a mortgage, the government will step in to compensate the lender. In theory, lenders will be happier to accept smaller deposits as security for loans.
Up to now, the best mortgage rates have only been available to those able to put down a deposit of up to 20%.
CDC Comment – “CDC welcomes this move which is likely to kick start the housing market and construction industry. It is our belief that in order to see an increase in consumer confidence the stagnation of the housing market needs to be addressed. Whilst this may not and should not mean a return to the housing market highs, it will not doubt provide some degree of a boost”.
Inheritance Tax
The IHT threshold will be frozen at £325,000 until 2018 to offset the new social care cost provisions following the Dilnot recommendations.
CDC Comment – “Whilst there was no surprise in this announcement, it is important to review your position with regards to inheritance tax and your CDC Adviser would be happy to discuss this with you”.
Duties
The planned 3p fuel duty rise for September has been scrapped.
The planned 3p rise in beer duty in April has also been scrapped. Instead, beer duty is to be cut by 1p. Ongoing Annual inflation of 2% in beer duty is to be ended but “duty escalator” is to remain in place for wine, cider and spirits.
Cigarette duties remain unchanged continuing to rise by inflation +5%.
Other Proposals
The much discussed cap on social care costs was confirmed at £72,000.
The government has also pledged to make £5,000 ex-gratia payments to Equitable Life policyholders who were too old to be eligible for compensation payouts. The government is not obliged to do it, Osborne pointedly said, but it is “the right thing to do”.
20% tax relief on childcare up to £6,000 per child from 2015
The government confirmed it will consult on options for transferring savings held in child trust funds (CTFs) into Junior ISAs. Junior ISAs were introduced in November 2011 as an attempt to encourage saving for children, following on from the abolition of CTFs at the beginning of that year.
Business
Corporation Tax
Chancellor George Osborne has announced that corporation tax will be cut to 20% in April 2015. He said this will make the UK’s corporation tax the lowest of any major economy in the world and that this move demonstrates that “the UK is open for business”
This reduction is an extension of the announcement made in Budget 2012 when Osborne announced he would reduce corporation tax to 22% by April 2014.
He reduced this further in the Autumn Statement when the main rate of corporation tax was reduced from 22% to 21%, to take effect in April 2014.
The current rate of corporation tax is 24% and will reduce to 23% next month.
CDC Comment – “CDC Welcomes the cuts to corporation tax which will help smaller firms, however we firmly believe that further incentives will be required in order to convince large international firms of the attractiveness of investing in the UK”
National Insurance
CDC Comment – “The Chancellor also unveiled a £2,000 cut on national insurance for all businesses. Of course this is likely to be useful for those very small businesses but provides little for larger businesses. Many of the smaller businesses benefitting from this will be the same firms that are caught by pension’s auto-enrolment, therefore it may be that this is an allowance to offset some of the costs associated with the new pension obligations”.
In his Budget speech, the chancellor described the tax cut as the “largest tax cut in this budget”, arguing that the cost of employing people has been a burden for small firms.
Employee CGT
The Chancellor announced that the government will give capital gains tax (CGT) relief on sales of businesses to their employees.
AIM Listed shares
The government is to abolish stamp duty on purchases of Alternative Investment Market (AIM) stocks from next year in a move to ease the cost of funding to smaller businesses.
“While other countries are launching transaction taxes, we are abolishing one,” said Osborne, shortly after hailing Britain’s ‘world class’ asset management industry, and pledging to support it.
The aim of the move is to speed up the movement of capital into smaller company equities
CDC Comment – “It is pleasing to see a cut in stamp duty, which is a major cost of dealing in shares. The AIM market holds over 1,100 shares and therefore this move will reduce costs in trading this market and potentially open a further avenue for investment portfolios”
Seed Enterprise Investment Scheme (SEIS) – CGT re-investment relief
It has been proposed to extend the present Capital Gains Tax (CGT) relief for reinvesting gains in SEIS shares to 2013-14. The extension of the relief is for half the qualifying reinvested amount. This measure will apply to reinvested gains accruing to individuals in 2013-14 that are reinvested in 2013-14 or 2014-15.
Tax exempt limit raised for employment related loans
Presently, businesses are required to disclose the benefit to employees who take out cheap loans with their employer in excess of £5,000. Usually this is done at the end of the fiscal year when forms P11D are submitted.
To reduce this administrative burden and to ease the tax charge to employees this ceiling of £5,000 is to be raised to £10,000 from 6 April 2014. To qualify, the total amount outstanding on all such loans must not exceed the threshold at any time during a tax year.
Company car tax rates
In order to promote the manufacture and purchase of low-emission cars the Budget includes a number of changes to company car tax rates. These include, for the tax year 2015-16, the introduction of two new appropriate percentage bands for company cars emitting 0-50g of carbon dioxide (CO2) per km (5%) and 51-75g CO2 per km (9%). In addition, as announced at Budget 2012, the remaining appropriate percentages are increased by two percentage points for cars emitting more than 75g CO2 per km, to a new maximum of 37%, again from 2015-16.