Philip Hammond gave his budget talk on 29th October 2018. There was good news for…
Rishi Sunak’s Budget on 11 March 2020 came less than a month after he was appointed Chancellor of the Exchequer. His first budget and tax was barely mentioned until the end of his speech. But we have delved into the notes accompanying the detail online and Ben Gander summarises our findings below…
The annual allowance for pension contributions
Whilst an individual can contribute as much as they wish to a pension, tax relief is limited to the annual allowance, plus any unused annual allowance from the three previous tax years. For a number of years, the annual allowance has been £40,000. With effect from 6th April 2016, the Government introduced the tapered annual allowance: if the threshold income (i.e. total income before pension contributions) and the adjusted income (i.e. total including pension contributions) are exceeded, the annual allowance for that year is reduced by £1 for every £2 in excess.
From 6th April 2020, the threshold income limit will increase from £110,000 to £200,000 whilst the adjusted income limit will increase from £150,000 to £240,000. In other words, the annual allowance will not be tapered unless both your income net of pension contributions is over £200,000 and your income including contributions is over £240,000.
In addition, the minimum annual allowance (i.e. the amount that it can be reduced to as a result of tapering) will decrease from £10,000 to £4,000.
The Government have stated that this continues their policy of a ‘fair, affordable and sustainable’ approach to pensions. It is also influenced by the unforeseen impact of the tapering rules for those working in the NHS.
The lifetime allowance for pensions
The lifetime allowance will increase from £1,055,000 to £1,073,100 from April 2020.
Top slicing relief (TSR)
Where an individual invests in certain types of bond (typically attached to a life assurance), subject to certain specific rules, the income arising each year is not subject to income tax; instead, it is taxed when the bond, or certain policies within it, are brought to an end. This usually has the impact of significantly increasing the taxable income of the investor for that tax year, potentially pushing them into a higher tax bracket. The purpose of TSR is to treat the gain as taxable at the rate that would have applied if the income had been taxed over a number of years.
However, where an individual’s personal allowance has been reduced as a result of their income rising above £100,000, the TSR did not take this into account and the personal allowance would remain at the reduced level.
The Government have now rectified this by allowing for the TSR to take into account the impact on the personal allowance.
This is seen as a fair result and follows the policy of the TSR.
Other annual rates and allowances
The personal allowance and bands for income tax will stay the same for 2020/21.
The amount that can be contributed to an ISA remains at £20,000. However, contributions to JISAs will increase from £4,368 to £9,000 from April 2020.
For 2020/21, the CGT annual exemption will increase from £12,000 for individuals and £6,000 for trusts to £12,300 and £6,150 respectively. This is in line with the RPI.
The inheritance nil rate band will remain at £325,000; the residence nil rate band will increase to £175,000 from April 2020.
Entrepreneurs’ Relief (ER)
There were plenty of rumours going round that ER was to be amended and potentially scrapped in the March 2020 Budget. This was always going to be unlikely: it has been the theme of all governments in the 21st Century to encourage entrepreneurialism through providing tax relief, with entrepreneurs and small and medium sized owner managed businesses considered key to the UK economy; in addition, the CGT cost to the Government in providing ER is relatively small. In other words, the impact of removing ER would do more damage to the Government than leaving it in place. That said, there was a feeling that it was too generous and that there were individuals benefiting whose contribution to the economy did not justify obtaining the relief.
The Government’s solution is to reduce the lifetime allowance from £10m to £1m. Simply put, each individual can obtain ER on gains during their lifetime up to a certain limit. This has increased over the years from £1m to £10m. It is now being reduced back to £1m. The Government believe that this will only impact around 9,000 people, representing 17% of those who benefit from ER and, crucially, 58% of the gains. In other words, the majority of people benefiting are the minority of those who are acting in an entrepreneurial manner. However, it could be said that they are also contributing 58% of the funds that are being used for these activities. The Government clearly think that this policy will not have an overall detrimental impact and state that their aim is to continue to encourage genuine entrepreneurs and risk takers.
Some advisors had wisely acted upon the rumoured changes and arranged for disposals to be made before the Budget. Anticipating this, the Government may apply the £1m lifetime allowance to these ‘forestalling arrangements’ where disposals are made before 11th March 2020. The key points are:
- The taxpayer will need to demonstrate that the parties did not enter into a contract for timing reasons, i.e. to trigger the date of disposal for CGT purposes so that it occurred specifically before 11th March 2020; and, if connected, that the contract was carried out for commercial purposes.
- For share for share exchanges occurring between 6th April 2019 and 11th March 2020, where over 50% of each company is in the same ownership, and the individual elects for ER to apply (i.e. instead of the share for share relief applying and therefore no gain arising, the individual chooses to pay ER to ‘bank’ the relief), it is the date that the election is made that is important for ER purposes. So, regardless of when the disposal takes place, if the election is made after 10th March 2020, the £1m lifetime allowance will apply.
Structures and Buildings Allowance (SBA)
The SBA was introduced with effect from 29th October 2018 and allows businesses to deduct 2% of costs on construction, renovation or conversions for new non-residential structures and buildings.
From 11th March 2020, the SBA will be 3%. The purpose of this is to increase the competitiveness of the UK’s capital allowances system internationally.
Cars and emissions
At present, there is a first year allowance (FYA) for certain qualifying vehicles; this was due to finish in April 2021. The Government have extended this to April 2025 and reduced the CO2 emission thresholds used to determine the rate of capital allowances for business cars and the lease rental restriction.
The policy here is to reduce the impact of climate change and, specifically, to reduce the UK’s greenhouse gas emissions to net zero by 2050. As part of this, the Government is consulting on bringing forward the end of sales of new petrol, diesel and hybrid cars and vans from 2040 to 2035.
The Research and Development Expenditure Credit (RDEC)
For qualifying expenditure incurred on or after 1st April 2020, the rate of RDEC for large companies will increase from 12% to 13%.
This continues the Government’s policy of increasing R&D activity.
The rate of corporation tax
The Government has tried to encourage businesses to base themselves in the UK by having a relatively low level of corporation tax. This is currently at 19% and was due to decrease to 17% from 1st April 2020.
As a result of Brexit, many companies will leave the UK, so the Government needs to find methods of encouraging them to stay. However, the Government also requires further funding. The solution with regard to corporation tax has therefore been to leave it as it is, i.e. at a relatively attractive rate of 19%. This rate will also apply for the financial year 2021/22.
The Employment Allowance
The Employment Allowance has the effect of reducing secondary Class 1 NI (i.e. the National Insurance that employers pay). It is due to be increased from £3,000 to £4,000 from 6th April 2020.
Where a business paid £100,000 or more in employer’s NI in the previous year, the allowance will not be available.
Stamp duty land tax (SDLT)
From April 2021, purchases of residential property in England and Northern Ireland by non-UK residents will incur a further 2% surcharge, i.e. a total 5% surcharge in addition to the standard residential rates.
This continues the policy of trying to free up UK homes for the benefit of those wanting to buy and live in their own home.
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