Will Osbourne hit you with a tax hike on Wednesday?


Chancellor George Osborne has a vital Budget to deliver this week, as he attempts to steer the economy away from a 'double dip' recession following the final quarter contraction in 2011. 

Experts believe the Chancellor will use the Budget to galvanise the corporate world into pulling the UK away from another recession.

Francesca Lagerberg, Head of Tax at Grant Thornton said Osborne is ‘Unlikely to set out bold tax rises but instead reward innovation and make it more attractive to base a company on British soil.'

'Expect a focus on further anti-avoidance measures including a clampdown on stamp duty land tax avoidance.'

But what else will the Chancellor deliver on Wednesday?  Here are some of the possible measures and likelihood of each;

Cutting or getting rid of 50p Income Tax rate

Initially it was thought unlikely that the 50 per cent rate would be taken away or reduced but now it seems Mr Osborne will signal the beginning of the end for the 50p tax rate.

He is expected to say that income over £150,000 will be taxed at 45p  per £1 from April 2013, and indicate his intention to bring the top rate back down to 40p the following year.

But as part of a deal with the Liberal Democrats, he will also dramatically accelerate moves to raise the personal income allowance to £10,000.

Government sources said Mr Osborne would also signal that he aims to lift the amount that can be earned tax-free to the £10,000 target by April 2014 - far earlier than planned.

The £10,000 allowance will apply to all 23 million basic rate taxpayers and many higher rate taxpayers.

We will get to find out how much money the top rate has added to the coffers when HMRC delivers its report into it. It's unlikely to be as much as was hoped due to the avoidance measures taken by high earners.

Mansion Tax

The proposed ‘mansion tax’ on homes worth more than £2 million is looking unlikely to be introduced. 

Due to budget cuts, Communities Secretary Eric Pickles has had to scrap the database of property details that would be used to calculate who would pay.  The Prime Minister is also thought to have strong objections.

Property loophole tightened

The chancellor has already pledge to ‘come down like a tonne of bricks’ on the wealthy who sell properties through offshore companies.

It is certain that he will take measures to close the loophole whereby people avoid stamp duty by buying property through a company.

The savings involved can be huge. Someone who purchases a £50million property though an off-shore company would avoid paying the treasury £2.5million. Rich homeowners have registered properties worth £200billion in 122 different locations around the world to avoid the taxman in Britain in the past 12 years.

Pensions

Despite lengthy debate in the media, experts are putting long odds on cutting the tax relief on the pensions of the better off.  Labour are demanding the pensions relief for higher-rate taxpayers is reduced from 50% to 26%. 

There was also speculation that the 25% of their pension fund lump sum which they get tax free would be scrapped - but this is a very long bet, as it would discourage saving. 

It is more likely that Osborne would lower the cap for how much people can pay into a pension pot tax-free each year. He cut it last year from £150,000 to £50,000 now, and it could easily go lower again - maybe down to £30,000. This would still encourage people to save.

Beer and Cigarettes

Drinkers and smokers have faced steep increases in duty in recent years after the 2010 Budget set two years of rises at inflation (the higher Retail Prices Index measure) plus 2%. So with inflation soaring, last year's rises were 4p on a pint of beer and 15p on a bottle of wine. A packet of cigarettes went up by as much as 50p.

After two years of steep rises on duty, you might think the Chancellor could afford to go easy on drinkers, but since tax on alcohol brings in £15 billion a year to the treasury and consumption has been falling for five years, the Chancellor could do with topping up this revenue. Any rises that are introduced, however, are likely to be targeted at the strongest beer or drinks linked to youth binge drinking.

The Chancellor is also under pressure from health campaigners to rise duty on cigarettes to inflation plus 5%.  He has previously pledged to continue raising duty at RPI inflation (around 4%) plus 2%.  

Corporation Tax

Corporation tax rate for the year starting on 1 April will fall to 25%, with further reductions of 1% per annum over the next two years to 23%. Some say it needs to fall lower still, and that it may be brought down to 20% but it is thought unlikely Osborne will change this now.

Additionally, regulation on businesses expected to be removed, saving £350million.

Tycoon Tax

Nick Clegg’s call for a 'tycoon tax' initially fell flat. But his idea was to force the rich to pay a minimum 20 per cent rate to tackle the problem of tax avoidance. He said he would be willing to support the scrapping of the 50p top rate of income tax – a key demand of senior Tories – as long as millionaires are 'properly' taxed. With just days to go, the Deputy PM is believed to be still using this as a bargaining chip. If the top rate of tax is cut, he will get either a tightening of tax loopholes for the rich or his tycoon tax. 

Child benefit

From April 2013 child benefit was meant to be abolished for those households with one person earning more than £42,475. However, changes are expected because of the ‘cliff edge’ problem where families with one parent in employment and earning just over the threshold would lose this benefit, while a family with two earners just under the threshold would keep the benefit. 

Public Sector National Pay deals

There is a proposal that public sector workers should be paid less if they live in areas where the cost of living is lower. This could effectively mean a pay freeze for many years in areas of the country.

A source said recently that: ‘There’s not going to be anything on regional pay in the Budget. The pay review bodies have been asked to examine the case for it, and will not even report back until July.'

Income Tax – Personal Allowance

The personal tax allowance will rise to £8,105 from April and the Government intends to increase it to £10,000 during the life of this Parliament (by 2015). Some think the rise might be brought forward, but it's probably too late to change the figure for this year. Instead there may be a larger than expected increase for 2013/14 to £9,000.

This would likely be funded by restricting the higher rate threshold at around the current £42,475 into 2013/14; because of fiscal drag (inflation), more people would have to pay 40% tax as a result.

Air Passenger Duty

APD is set to rise again next month. According to the World Travel & Tourism Council it will result in a family of four flying to southern Spain paying an extra £52 for their tickets. For the same family to fly to Florida will cost £260 more, while a family trip to Australia will cost £368 more.

VAT

Following a court ruling last week, the Government will scrap Low Value Consignment Relief, which allows firms to avoid paying VAT if they dispatch goods with a value of up to £15 from the Channel Islands. The change will take effect from next month.

There is an outside chance that a higher 25% rate of VAT could be imposed nationally for luxury items. This would raise additional revenue for the public purse on items that are not deemed 'necessities'.

Fuel Duty

There is speculation that a fuel duty escalator could be frozen for the time being as a help for motorists.

Inheritance Tax

There is one change coming in - give 10% of your estate to charity, and your tax goes down to 36% from 40%. Other than that, ministers do not seem keen on changes. The Office of Tax Simplification has recommended a review which is due to start this year, which will look at merging National Insurance and income tax in order to save money and simplify the system. No detailed announcements expected.

Other possible tax measures include:

  • £50,000 charge for non-domiciles who have lived in UK for 12 years.
  • rate relief holiday for small businesses could be extended to October 2012.
  • relief for entrepreneur tax doubled to £10million.

Tax avoidance clampdown

A ‘general anti-abuse rule’ (GAAR) is expected to avoid high publicised cases like Barclays attempting to avoid £500 million of tax. The only real question is whether this will be a targeted rule aimed at the most aggressive artificial tax planning (as recommended by the review committee) or a more wide-ranging general anti-avoidance rule (favored by HMRC).

Help for Businesses

There will be increased relief for investment in business - enterprise investment scheme's 30% tax relief on £500,000 investment is to be increased to £1million from 6 April.

In 2010 Osborne’s Emergency Budget gave notice that the Annual Investment Allowance (AIA) annual limit for businesses was to be significantly reduced from £100,000 to £25,000 from April 2012.

Currently companies can write off 100% of the cost of acquiring qualifying assets against their taxable profits, up to an annual limit of £100,000.

Assets that can be written off in this way include commercial vehicles, plant, computers and other equipment.

Research & Development tax relief is also set to increase by an extra 225% from April, encouraging the creation of intellectual property. The ‘Patent Box’ is due to be implemented in 2013 to complement the current regime – providing a 10% rate on IP profits.

 ISA Limits

Osborne could increase the current cash ISA limit from £5,340 to £10,680 to match the current equity ISA maximum.

Jobs

Two dozen new university technical colleges have been announced, along with an extra 40,000 apprenticeships for jobless young people

Housing

The Chancellor is likely to announce a major house building programme, with plans for around 500,000 new homes and a relaxation of planning laws.

Green measures

A 'green investment bank' should have £3billion to lend, and there may be some indication in this Budget of where the money will be invested.

Toll roads

Plans are due to be announced today to kickstart the economy by allowing firms and investment funds to compete to build, operate and maintain motorways and trunk roads. Options for financing models will be drawn up by HM Treasury and delivered to Downing Street in the autumn.


  • Date posted:
    19/03/2012
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