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| Carl's Blog on the Emergency Budget |
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Elsby & Co support Positive Thinking so I’ll tell you about the good stuff first:
Ok, now onto the bad stuff:
Actually it’s not all that bad – there are a couple of positive announcements to tell you about:
1. Huge financial savings for NEW businesses!
Budgets are renowned for big statements which, when you analyse them, make very little difference to anyone. This one however is different. There will be a £5k exemption on Employers NIC per employee for up to 10 employees, for new businesses in certain regions, of which East Midlands is one.
That’s potentially a £50k reduction in costs if a brand new business employs at least 10 people earning a salary of £40k p/a or more. There are loads of those!
Our first thought is whether an existing business can set up a new company, for example a chain of hairdressers could set up a new salon as a separate company. We’re waiting for the detail to see if this kind of situation will qualify.
2. Personal Income Tax
The tax free amount you can earn will increase by £1000 p/a to £7475 from 6/4/11 – a saving of £200 p/a for a basic rate taxpayer. (If you’re under 65. If you’re over 65 you already get more of an Allowance.)
However they don’t want Higher Rate taxpayers to benefit so they are reducing the level at which 40% tax applies, by £2500. The astute and sceptical amongst us will work out that this measure will increase tax by £500 whereas the Personal Allowance change will save only £400. So they’ve ‘nicked’ £100 each off you without telling you. Is this Chancellor Gordon Brown in disguise?
3. Company tax rates
Small companies will be back to 20% from 21% from 1/4/11. Companies with profits above £300k will have tax rates cut by 1% p/a from 28% to 24% over a 4 year period.
Well that’s all the good news, folks. Here’s what you need to know about the rest of it.
1. Massive Public Sector spending cuts
This has got to be the single most important aspect of the Emergency Budget. The gov’t are determined to cut spending, and not by small amounts. Personally I’m glad about that – I am an accountant after all, so I’ve never supported spending beyond your means. Not since i was a student anyway. However I can see the other side of the coin – we will be taking money out of the economy and there will surely be higher unemployment?
For our clients the relevance is for people whose businesses depend on income from the public sector – consultants, trainers and all kinds of businesses supplying services to the public sector. It seems likely that these services will be very hard hit and competition will become fiercer. All I can advise is to be ahead of the game, plan accordingly and don’t wait for it to happen.
2. VAT
to rise to 20% from 4th Jan 2011. Flat Rate Scheme rates will change again.
3. Capital Gains Tax (CGT)
We all knew there would be changes and they aren’t as bad as feared. The 18% CGT rate remains – but only for basic rate taxpayers. Higher rate taxpayers will pay CGT at 28% from now.
Entrepreneurs relief remains for business owners but has been simplified to ensure a 10% tax rate applies on the sale of a business or shares in your business. The amount on which this relief is available is now £5m (previously £2m).
4. “Small Business Tax Review”
Business owners currently enjoy a very favourable tax regime but worryingly the gov’t have announced that they will review the tax system for small businesses. I can only see this being bad.
5. National Insurance
I’m sure I heard the Tories saying that they’d reverse the previous gov’ts 1% NI increase. But no, this hasn’t happened. There is a 1% increase across the board.
Employees 12% up to £44k (approx) + 2% thereafter
Employers 13.8%
Self employed 9% up to £43,875 then 2% above that
6. Allowances on capital purchases for business
You can currently spend £50k p/a on certain capital expenditure, and get 100% tax deduction. This will reduce to £25k from 1/4/12. There are small reductions in the other capital allowances available.
7. Pensions
If you earn over £180k p/a you will only get 20% tax relief of your pension contributions. If you earn between £150k and £180k your rate of relief will reduce proportionately from 40% down to 20% on a sliding scale.
Another major change is that you will no longer HAVE to convert your pension into an Annuity by age 75.
8. PAYE system
This is to be reviewed to reduce costs and to make it easier to administer. This means we can expect a period of increased costs, massive transitional problems, followed by it being much harder to administrate.
9. Wait for this one......
There is an intention to create an independent office of Tax Simplification!!!!
10. Tax Enquiry work
Apparently HMRC are intending to collect an extra £4bn through more aggressive tax investigation work. Hopefully you will have taken our Tax Compliance Service to ensure you get a free defence if they knock on your door.
Conclusion
I don’t believe that the tax changes will have too great an impact on many clients. However I do feel that there will be significant economic effects on the whole of society. The gov’t plans to cut down the cost of its Benefits payments. Spending cuts in the public sector will be significant and will filter through to the private sector. There will undoubtedly be job losses. With VAT rises as well there is going to be a big squeeze on the spending power of the community.
So, at the risk of stating the bleeding obvious, we have to expect hard times ahead – probably for 4 or 5 years. So we have to accept this, box clever and take early steps to make the finances stack up, and to eliminate the risks as much as possible.
Please keep in touch with your contacts at Elsby & Co because we’re here to help you. We have lots of ideas to help as well as our usual energy and enthusiasm.
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