For people with defined contribution pension plans, the Budget ushers in the biggest changes seen in the last 25 years. From 2015/16 pensioners are to be given greater control of their pension pots. Rather than being discouraged from withdrawing money early with a punitive tax charge of 55%, they will be encouraged to do so while paying their personal tax rate.
“Trust the people,” says the chancellor, and it’s clear he does as the increase in the tax yield from people taking their savings early in is projected to be £3bn over the next four years.
It’s disappointing that the changes to the tax status of partners in LLP is going ahead as planned despite the concerns raised by the House of Lords
The pressure to raise revenue from tax avoiders also increases. Accelerated payments will be demanded from disputed tax cases covered not just by the disclosure of aggressive tax schemes rules but the catch-all general anti-abuse rule (GAAR) — raising £4bn from 63,000 cases over five years. And new rules will allow unpaid tax to be taken directly from the taxpayer’s bank account.
That’s not to say there wasn’t much to welcome in the Budget, from an increased Annual Investment and R&D allowances to the Employment Allowance and National Insurance breaks for under-21 employees. Tax breaks for childcare will also benefit many families, but they will need to look carefully at the details as earlier schemes are phased out.
But it’s disappointing that the changes to the tax status of partners in LLP is going ahead as planned despite the concerns raised by the House of Lords.
The other big announcement is that basic tax allowance has raised again to a higher-than-expected £10,500, and for the first time this was extended to middle-income taxpayers with an increase in the higher rate threshold. But this comes after three years of reductions in the threshold to compensate for earlier increases. Personal tax rates for higher earners remain high with no changes in the upper rate threshold or the withdrawal of allowances.
So the question arises: even as corporation tax rates fall to 20% are we creating a paradoxical economy which is attractive to business —but much less so for business owners and entrepreneurs themselves?
Companies took a back seat in this Budget, compared to private individuals. Clearly the chancellor has an eye to 2015 and the election!
There were nonetheless a few helpful changes- the level of capital expenditure for which companies get 100% tax allowances in the year of expenditure was doubled to £500,000.
The corporation tax rate is going down as expected to 21% from April 2014 and 20% from April 2015, and although it was not pre-announced, we were not surprised that the R&D cash tax credit for loss making small companies was increased, from 11% currently to 14.5% in April 2014.
Finally, we are disappointed that HMRC has ignored the direction from the House of Lords to delay implementation of certain aspects of the stringent new tax rules affecting LLPs.
For the individual taxpayer, this was a budget aimed at pensioners and savers, who are often part of the same group.
Pensioners will have the ability to draw down on their pension funds at a much quicker rate and many will appreciate the quicker access to their savings. However, such a dramatic change to the pension system could leave those who are not well informed without sufficient funds in very elderly years, or with no provision for a surviving spouse.
For those who are able to save, there are many new and attractive incentives, such as the New Individual Savings Account (NISA) which provides a more flexible savings opportunity, which could also be a strong competitor to pensions savings, the new premium bond limits, increase in personal allowances and the new nil rate savings band. The reductions in tax on savers will leave more money in the pocket and will benefit those who have endured low interest rates for many years.
There was little giveaway for those with higher incomes with only a small, but nevertheless, welcome increase in the threshold at which higher rate tax is paid. This, combined with the increases in personal allowances for this year will provide some small advantages for those with incomes up to £100,000.
Parents have been given a new incentive for childcare which will benefit groups such as the self-employed for the first time.
More residential properties owned via corporates will be subject to the higher Stamp Duty Land Tax and, in due course, the Annual Tax on Enveloped Dwellings as the threshold for property values is being reduced to £500,000 from the current £2 million.
Overall, a safe budget with some big giveaways for pensioners and those able to save, some help for parents and a further crackdown on avoiders.
George Bull is senior tax partner at Baker Tilly