If you read my last post you will know that the starting limits for both tax and NI are increasing and this will impact on how much you can draw tax free but still accrue state entitlements.  These changes are as follows for 2011/12:

Lower earnings limit:      £102pw / £442pm / £5,304pa

Primary Threshold:          £139pw / £602pm / £7,228pa

Secondary threshold:      £136pw / £589pm / £7,072pa

There is a quirk however, the point at which the company starts paying NI (the secondary threshold) is now £3 less than the point at which employees start paying NI.  So if you are currently paying yourself £475pm, you should be paying £589pm from 6 April, just below the secondary threshold (employers), providing nothing changes in the budget.

These facts are based on the current HMRC NI rates.  For specific advice relating to your circumstances seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting, Gravesend – Accountants who “speak your language”

All taxpayers will benefit from an increased level of Personal Allowance (the amount you get tax free) which increases from £6475 to £7475 which immediately puts another £200pa (£1000 X 20%) in your pocket.  That is the good news, the bad news is that the amount you can earn as a basic rate taxpayer is reducing from £37,400 to £35,000 so you will pay an additional £480 tax as £2,400 goes from basic to higher rate tax bands.  The gainers are lower income taxpayers and many of the governments “middle Britain” supporters will be losers.

The impact on NI is more involved but the same principles hold: a greater allowance before NI is payable; but then paying a higher percentage.  The details depend on your employment status:

Employed

The starting point for paying NI increased from £110 to £139 per week (£5720, 7228pa) saving £165pa but the rate you then pay is increasing by 1% to 12%, so this will have been taken back if you earn more than £2k per month.  The point at which you stop paying 12% is reducing by £1400pa to £42.4k but instead of paying 1% on everything thereafter this is increasing to 2%.

Employers NI is similarly increasing by 1% from 12.8% to 13.8%, so not only do staff end up with less in their pockets but employers too.

Self employed

The weekly Class 2 “stamp” is increasing a small amount from £2.40 to £2.50 per week but of more interest is the Class 4 NI contribution on profits.  The level at which Class 4 NI starts being paid increases from £5715 to £7225 and thereafter the rate increases from 8% to 9%.  In a similar way to the employed the upper level is reduced to £42.4k but then excess profits are charged at 2% (an increase of 1%)

In summary there are small gains for low earners but almost everyone else will pay more.  For HMRC tables  click here: TAX NI.  Only the main rates and allowances affecting most taxpayers are shown here, but for specific advice relating to your circumstances seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting, Gravesend – Accountants who “speak your language”

The Chancellor George Osborne started by painting the picture of the poor state of the economy and among various political comments stated that due a cautious approach fiscal goals would be met one year earlier than expected in 2014.  The inflation target will remain at 2% which has already been exceeded, this will peak at 2.7% later in the year and then reduce.  In terms of the approach to the deficit a lower spending rather than higher tax route is being taken, supporting the stand taken by the IMF and OECD, which will be done in the ratio 80/20, clearly showing the public sector will suffer.  The relationship with Europe will continue with a commitment not to join the Euro, and the government group looking at this area will be disbanded and used for more “useful tasks.”

Turning to the actual decisions, cuts are to be made to existing budgets but there was a commitment to capital spending, particularly if there is economic benefit.  This will be greeted with some optimism by the schools and infrastructure in North Kent which was rumoured to be cut to reduce the deficit.  The Royal Family have accepted that the Civil List will be frozen , and will be subject to annual National Audit Office reviews.  There will be an overall reduction of 20% in departmental budgets but due to commitments to maintain or increase NHS funding and overseas support the actual effect on departments hit by the cuts will be that of a 25% cut.  We will not know the full impact of the cuts until the Spending Review for which the date has been released for the first time as Wednesday 20^th October.

The public sector will face the biggest cuts and the most noticeable to the man in the street is the 2 year pay freeze for staff paid over £21k.  The government wants to encourage the back to work culture and the tax credits system is being used to facilitate this.  Tax credits will be more targeted particularly at the lower paid and will reduce for families with a combined income over £40k.  Child benefit is also to be frozen, the government acknowledging a number of approaches including means testing and taxing the benefit but finally settling on a freeze.  In other areas medical tests are to be introduced for those claiming disability benefit.

For business the main corporation tax rate will reduce by 1% per annum for the next 4 years reducing from 28% to 24% over that time, which will be the lowest rate in the G20.  For small businesses the rate will reduce by 1% only to 20% from next year.  There is also to be a small reduction in the rates of capital allowances, of main interest to small businesses the Annual Investment Allowance will reduce from £50k to £25k, which will still meet the needs of many SME businesses.

Among the miscellaneous changes, the Chancellor is introducing a levy on banks as recommended by the IMF, and this will take the form of a tax based of the size of the bank, small banks will be excluded from this arrangement.  The landline duty to fund broadband expansion is being withdrawn before even being introduced, this will be funded by links with the private sector and local initiatives.  In order to encourage business growth outside London and the South East there will be an NI exemption for new businesses being set up.

The biggest news of the budget and not entirely unexpected was the increase in VAT from 17.5% to 20% from 4 January 2011, but exempt and zero rated items such as childrens clothing and food will be unaffected.

There will be no increases in the previously announced duties for alcohol/fuel etc, but the additional cider increase has been withdrawn from the end of the month (apparently in time for the final 8 in the World Cup!)

In personal tax capital gains tax will remain at 18% for basic rate taxpayers but increase to 28% for higher rate taxpayers, the £10,100 limit will remain.  This may appear good at first sight but gains on property for example may well push basic rate taxpayers over the threshold so will pay 28% anyway.  To continue to encourage entrepreneurship the limit for lifetime gains will be increased to £5m at which an effective 10% rate applies.

Personal tax allowances will increase by £1000 to £7475 from next year, one step towards the £10k limit proposed by the Lib Dems.  The NI thresholds are to be increased and the cost to employers of employing staff paid less than £20k will not increase.  For pensioners the basic state pension will be relinked with earnings after a gap of several years, and in a further attempt to support low income families the Child element of Child tax credits will increase by £150pa.

This is by its nature a summary of the main points we consider of interest to readers, there was alot more content in the whole speech but we hope this will be more easily understood.  The main announcements are on HMRC website http://www.hmrc.gov.uk/budget2010/index.htm .  We hope this will be informative but if you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

• The Annual Investment Allowance (AIA) will be increased to £100k pa for expenditure incurred on or after 1 April 2010 (companies) and 6 April 2010 (unincorporated businesses).
• No changes have been made to the main and small companies’ rates of corporation tax which for 2010 remain at 28% and 21% respectively.
• A 100% first year allowance will be available for new zero-emission goods vehicles for a five year period from 1 April 2010 (companies) and 6 April 2010 (unincorporated businesses)..
• Business rates cut for one year from October meaning a tax reduction for more than 1/2 million small businesses in England and 345,000 will pay no business rates at all.

For individuals

• The lifetime allowance for entrepreneurs’ relief has been increased to £2m and may be claimed for disposals made on or after 6 April 2010.  Capital gains tax rate remains at 18%.
• No further changes were made to income tax or NI rates beyond those announced in the Pre-Budget Report.  A summary of tax rates and allowances can be found at www.hmrc.gov.uk/budget2010/pn02.pdf
• Relief from stamp duty land tax is available for first time buyers on residential properties up to £250k. This applies for purchases completed between 25 March 2010 and 25 March 2012.
• Stamp duty land tax will be payable at 5% on residential properties over £1m for completions on or after 6 April 2011.
• The IHT nil rate band will now be frozen at £325k for four years (until 2014/15).
• The car scale benefit rates for very low CO2 emission vehicles will be reduced to 5% for cars or vans with emissions of less than 75g per km and nil for vehicles which produce no CO2.

Other measures

• Above inflation increases in alcohol and tobacco
• A phased increase in fuel duty of 1p in April, October and January
• A £35 million university enterprise capital fund, to provide direct support for university innovation and spin-out companies.
• Additional £84 million for repair of local and regional roads damaged by recent adverse weather and £250m investment to improve the motorway network.
• From this April, a new 50 per cent rate of tax will apply to incomes above £150k and from April 2011 tax relief on pension contributions will be restricted for those incomes of £150k and over.
• Employee, employer and self-employed rates of National Insurance contributions will increase by one per cent from April 2011. However, the 15 million people on incomes below £20k will not pay any extra National Insurance contributions.
• Personalised Services for Start-ups and SMEs through Businesslink.gov.uk – By autumn 2011, a new personalised area for start ups will provide easy access to enhanced guidance and tools to help businesses find the support they need when setting up including an HMRC tax registration ‘wizard’ that enables registration for multiple taxes, online services and payment plans using a single interactive online form.
• A tax incentive for the UK video games industry, following consultation and approval from the European Commission

This budget is a short term measure in view of the forthcoming election and there are likely to be more significant measures made in the post election budget, both in tax avoidance, reduced public expenditure and increased taxes.

We hope you find the contents of this blog useful, you should of course always seek professional advice for your specific needs.  Alastair Wood, AW Accounting  – Accountants who “speak your language”

1. For the wife to be paid a small amount, she was involved in a number of administrative roles within the business.  This has to be restricted to £95 per week otherwise the Carer Allowance would be restricted.  A matter of note is that if you are in receipt of Carer Allowance, all of your basic NI contributions are covered.
2. As the client made large contributions under Gift Aid his basic rate tax band was already in excess of £37400 limit.  His income could therefore go up to this greater limit without paying tax at the higher rate.  Clearly if he wished to and had the finances he could increase the amount given under gift aid to increase this further.
3. He wished to make a pension contribution and having planned in advance of the end of the tax year, I was able to advise him of how much he could pay to avoid having to pay higher rate tax by extending his basic rate band further.
4. He did not necessarily want to make too large a pension contribution as he is approaching retirement age so he now has the choice to make a smaller pension contribution and potentially fully utilise his ISA allowance of £10,200 for 2009/10.
5. He had not been advised on what expenses he could claim on his company and I was able to assist him in this area, covering items such as use of home as office, and claiming the mileage rate.  He had also just gone over the VAT limit, a fact he could easily have missed as he had excluded part of his income.
6. He has now secured a full time PAYE position so the company may or not be retained but the moral of the story is to get advice early to make sure you:
   1. do not miss out on opportunities and
   2. also avoid the pitfalls.

We hope you find the contents of this blog useful, you should of course always seek professional advice for your specific needs.  Alastair Wood, AW Accounting  – Accountants who “speak your language”

Sole trader

This is the simplest way to work for yourself and there has been much discussion in recent months about people reverting back to sole trader status, or setting up as a sole trader in preference due to increasing company tax rates of which more later.  As a sole trader you pay tax on all of the profits you make in the business and for most small owner managed businesses there is tax of 20% and NI of 8% once a profit threshold of £6.5k and £5.7k respectively has been reached.  However once profits exceed £43k you become subject to higher rate tax at 40% on the excess although NI is then only 1%.  The NI rate is increasing by 0.5% in 2010/11 and a further 0.5% in the following year.  In addition to this you also have to pay an NI “stamp” of £2.40 per week.  This type of business is relatively simple to administer and a tax return is completed as a part of an individuals annual self assessment return.  The business is linked to the individual and they are personally responsible for any debts of the business.

Limited company

To take yourself one step away from this liability a limited company is an entity in its own right and any contracts are with the company not the owners (shareholders) or managers (directors), although they do have other responsibilities in statute.  A company is registered with Companies House and must send in accounts every year and also complete a tax return annually for submission to HMRC.  The company is taxed at 21% on all of its profits and this rate will not increase as expected next tax year (2010/11), and it is for this reason and the NI increases that I consider the pendulum is not swinging back to sole trader status as much as expected.  The people who work for the business are employees and are paid a salary, the shareholders however can be paid by way of salary and also dividend.  As the name implies shareholders hold shares and the percentage of ownership is then fixed, it is this percentage that defines the proportion of a dividend that they receive.  A dividend is paid to the shareholders as a payment for their investment in the business and this area should be considered carefully before setting up.

Partnerships

A simple partnership if effectively two or more sole traders working together sharing the profits of the business, however each one is liable for all of the business debts.  In recent years Limited liability partnerships have become available which are separate entities from the partners (called members) and allow limited liability similarly to limited companies.  For both types of partnership, the profits of the business are shared in line with a partnership agreement which should be written but may just be verbal.  This allows more flexibility than a company where the dividend is fixed by the number of shares held.  In a partnership the agreement can use different criteria (such as sales made) to split the profits between partners.  This is therefore a more flexible option.

This is only a brief summary of some of the differences between the options available which may help you to decide which is the best option for you, or indeed a pointer to ask more questions before setting up.  You should seek professional advice before proceeding but whatever you decide to do I hope you business is a great success.

For businesses

• Small company corporation tax held at 21% for another year
• Extra 0.5% increase in NI from 2011 on top of  an increase of 0.5% in 2010 – this will raise £6bn in 2012
• Corporation tax rate on income from patents 10% to encourage innovation
• Empty property rate relief extended

For people

• Higher rate tax band to be frozen at £43k from April 2012
• Inheritance tax threshold held at £325k, not increased to £350k as forecast in April
• Over half additional revenue raised in PBR will from top 2% of earners
• State pension increase by 2.5%, this equates to 4% effective rate as inflation figure was  negative at review time
• Child and disability benefits increase by 1.5%
• £200 incentive to replace old/inefficient boilers
• Extension of free school meals
• Under 24s eligible for training after 6 months of unemployment
• Over 50s to receive more help to keep out of unemployment

The public sector

• Public sector pay increases limited to 1% from2011/12

Other headlines

• 50% levy on bank bonuses over £25k to discourage discretionary bonuses
• 50p per month tax on landlines to fund faster broadband
• Electric cars exempt from car tax
• Continued investment in creative technologies. Pharma and biotech will benefit most

Summary

It is a mixed budget with some across the board increases in NI, while trying not to stifle the economic recovery.  Big savings are being made in the public sector while trying to encourage green issues and innovation.  Many of the changes are post election and some a number of years away as the Government tries to get the country out of recession and at the same time repay the deficit.