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Budget 2012

Kevin McDaid, ATT, CTA, Ex HMRC, 30 years + tax experience

120 Reevy Road, Wibsey, Bradford, BD6 3QE

kevmcd@cta.org.ukTel 01274 214979, Mob 07939 222437

Key Points

·         Standard Personal allowances up to £9,205 from 06/04/13.

·         Age related allowances frozen for those currently receiving them; scrapped for everybody else.

·         Child Benefit scrapped for those earning >£60k and a claw back for those earning >£50k.

·         Tax credits – significant changes from April 2012.

·         Company cars and fuel to cost more year on year.

·         Small businesses – proposal to adopt a simplified accounting method from April 2013.    


With the 2012 Finance Bill being published on 29 March 2012, the 2012 Budget passed into law. The aim of these notes is to bring your attention to points raised in the Budget that may impact on you as an individual or as a small business owner.


There are also a number of significant tax changes that will apply from the beginning of the 2012/13 tax year (1 April 2012 for companies and 6 April 2012 for individuals) that were announced in the last budget. Similarly, in this budget The Chancellor announced a number of changes that will not apply until 2013/14.

In this particular fact sheet I concentrate on how the changes will impact on the individual.

Table 1: rates and limits for tax 12/13

2011/12

2012/13

2013/14

Personal allowance*

7,475

8,105

9,205

Basic rate band (20%)

35,000

34,370

32,245

Income level above which 40% tax paid**

42,475

42,475

41,450

Age related allowance : 65 - 74

9,940

10,500

10,500***

Age related allowance : 75 and over  

10,090

10,660

10,660****

Income limit for full age related allowances

24,000

25,400

25,400

*Allowance reduced by £1 for every £2 above £100,000. Once reach £116,210 no personal allowance. 

**These thresholds also apply for those between 65-74 & 75 and over

***Frozen from April 2013, and only available to those born before 6 April 1948

****Frozen from April 2013, and only available to those born before 6 April 1938

 

For those lucky enough to be earning over £150,000 P/A the 50% tax rate reduces to 45% but not until 2013/14.

 

In 2010/11 the basic rate band was £37,400, i.e. it will have gone down by over £5,000 in 3 years by 2013/14.

 

So what does it all mean?

Let us compare the tax position (NIC not considered here) for an individual earning £10,000 and another earning £42,000. The latter is significant because this individual becomes a higher rate taxpayer in 2013/14 where as prior to this he/she would only have been subject to 20% tax.

 

£10,000

Table 2

2011/12

2012/13

2013/14

Personal allowance

£7,475

£8,105

£9,205

Taxable

£2,525

£1,895

£795

Tax due

20%

£505

£379

£159

Tax saving

£126

£346

£42,000

2011/12

2012/13

2013/14

Personal allowance

£7,475

£8,105

£9,205

Taxable

£34,525

£33,895

£32,795

Tax due

20%

£6,905

£6,779

£6,449

Tax due

40%

£220

Tax saving

£126

£236

 

It is the Government’s intention that basic personal allowances will increase to £10,000, probably by 2014/15. This is great news for those earning £10k or more but for those earning less than this it is meaningless. 


Even though both the £10k earner and the £42k earner will be better off due to the increase in the personal allowances (the £10k earner will be paying less than a third in tax in 2013/14 compared to 2011/12), the tax saving in 2013/14 for the £42k earner is only £236 compared to £346 for the £10,000 earner. This is because the higher earner is now subject to 40% tax on £550 of his/her earnings whereas in previous years 20% would have been the highest rate of tax paid. HMRC predict that 330,000 individuals will be brought into the 40% tax bracket as a result of these changes.


As suggested in my 2012 end of year tax planning letter: http://www.crowntaxaffairs.co.uk/news/end-of-year-tax-planning-2012-13 this could also have an adverse impact in that it could result in the requirement to complete a tax return on an annual basis where previously there would have been no such requirement. The criteria for tax return completion can be viewed at:  http://www.hmrc.gov.uk/sa/need-tax-return.htm


The ability to raise the standard personal allowance has been funded partly by the reduction in the 20% basic rate band (meaning more people pay 40% tax on lower incomes than before) but also by the abolition or freezing of the increased personal allowances for those over 65. Dubbed the ‘granny tax’, these measures are causing some furore in the media.

 

As can be seen from table 1 the age related allowances have not increased from the 2011/12 level and will remain frozen for those who currently receive them until such time as the basic personal allowance catches up, so that, at some future date, all taxpayers will have the same personal allowance. For those not yet entitled to the age related allowances you will not be entitled to them at any point in the future regardless of your age/income level.

 

If your income from all sources (including state pension) exceeds £25,400 and you are receiving increased age related allowances these will be reduced by £1 for every £2 your income exceeds £25,400. However, you will still be entitled to the basic personal allowance unless your income exceeds £100,000. If you receive age related allowances and your total taxable income is between £25,400 and £30,190 it is likely that you will have to complete an annual tax return so that HMRC can calculate the exact amount of age related allowances you will be entitled to. Once the age related allowances cease this will no longer be an issue.

 

Child Benefit   

 

Whilst HMRC have attempted to reduce the complexity around how much age related allowance an individual will receive (by wiping it out!) they have transferred this complexity to the ability to claim child benefit if income is between £50,000 and £60,000.

 

Initially, the plan was that if an individual had income exceeding £40,000 then no child benefit would be due. However, as pointed out in my 2012 end of year tax planning letter: http://www.crowntaxaffairs.co.uk/news/end-of-year-tax-planning-2012-13 there is an issue where you could get a couple earning £45,000 per annum in total (one earning 100% and the other earning 0% due to looking after children) being entitled to nil child benefit but another couple earning £80,000 P/A (50% each) being entitled to full child benefit.

 

The revised position partially gets around this but it is complicated. There’s a surprise!

 

For those with income of between £50,000 and £60,000 where either they (or their partners) are in receipt of child benefit they will continue to receive the child benefit in full but they will then be required to repay a % of this in the following tax year once their exact income becomes known. If the individual is an employee it is likely to be via a restriction in the PAYE code but if self employed it is likely to be payable along with the Self Assessment tax liability. If both partners have income above £50,000, only the higher earner will suffer the special charge, expressed to be 1% of the Child Benefit Award for each £100 of income between £50,000 and £60,000.

 

HMRC have provided the following example in their Budget guidance: For example, Child Benefit for two children is £1,752. For a taxpayer whose income is £54,000, the charge will be £700.80 – i.e. £17.52 for every £100 earned above £50,000.

 

I think it is clearer to say £54,000 is > £50,000 by £4,000. How many £100’s in £4,000 = 40; 40% of £1,752 is £700.80. 

 

There is no entitlement to Child Benefit once income exceeds £60,000 for either within the relationship. In these circumstances, if benefit is paid out in one year it will be repayable in full in the following year.

 

Child benefit claimants will be able to decide not to receive the benefit if they or their partner do not wish to pay the new charge.

 

This measure comes into effect on 7 January 2013. For the tax year 2012/13, the first year of the charge, the amount of income taken into account will be the full amount of income for 2012/13 and the amount of child benefit will be that paid in the period from 7 January 2013 to the end of the tax year.

 

HMRC anticipate that 70% of households will lose all of their Child Benefit as a result of these measures. They also anticipate that up to 0.5 million new Self Assessment tax return cases will be created for those with income between £50k and £60k as HMRC will need to know the exact amount of total income that individual has.

 

Is there anything that can be done?

 

The tapering of the disallowance means the position is not as drastic as it was prior to the revisions. However, the making of additional pension contributions or gift aid payments should seriously be considered by anybody likely to be earning between £50k and £60k.

 

Tax Credits

 

There were no announcements on these in the Budget. However, there are significant changes taking place from 6 April 2012 and these can be viewed at: http://www.crowntaxaffairs.co.uk/news/end-of-year-tax-planning-2012-13 

 

The above represents the main issues that I believe may impact on you. However, the following may also be relevant and so I have given a brief commentary. Should you require further details please do not hesitate to contact me.

 

Company car benefits

 

From 6 April 2012 the taxable percentage of the car’s list price will increase by 1% per annum up to a maximum of 35% in 2014/15.

 

Example

 

·         Car list price £20,000.

·         CO2 emission 156 petrol, 21% in 2011/12; taxable benefit = £20,000 * 21% = £4,200. 

·         £4,200 for 20% taxpayer = £840 tax charge.

·         £4,200 for 40% taxpayer = £1,680 tax charge.

·         Same car in 2012/13 with 22% charge; taxable benefit = £20,000 * 22% = £4,400. 

·         £4,400 for 20% taxpayer = £880 tax charge (£40 increase).

·         £4,400 for 40% taxpayer = £1,760 tax charge (£80 increase).

 

In 2015/16 and 2016/17 the annual increase will be 2%, with the maximum charge rising to 37% of list price. But some good news - from April 2016 the 3% diesel supplement will be removed, so that diesel cars will be subject to the same level of tax as petrol cars.

 

From 6 April 2012, the tax on fuel for company cars will increase as fuel multiplier increases from £18,800 to£20,200. The fuel multiplier will increase by 2% above the RPI in 2013/14.

 

Example

 

·         Same car as above, fuel charge in 2011/12 = £18,800 * 21% = £3,948.

·         £3,948 for 20% taxpayer = £788 tax charge.

·         £3,948 for 40% taxpayer = £1,576 tax charge.

·         Fuel charge in 2012/13 = £20,200 * 22% = £4,444. 

·         £4,444 for 20% taxpayer = £889 tax charge (£101 increase).

·         £4,444 for 40% taxpayer = £1,778 tax charge (£202 increase).

 

The same company car with fuel will cost a 40% taxpayer almost £300 more in 2012/13 than it did in 2011/12.

 

THINK AHEAD: Take care in choosing your next company car. With company car and fuel tax rates being increased upwards each year for the next four years you could find yourself paying over £1,000 more in tax in 2015/16 than you are paying now on the same car. If you are swapping your car, make sure you know what tax you will pay now and in the future.

 

Company Vans

 

From 6 April 2012, the van fuel charge will be frozen at £550, but will increase by the RPI in 2013/14. The van benefit charge will be frozen at £3,000 in 2012/13.

Cap on unlimited tax reliefs

From 6 April 2013, anyone seeking to claim more than £25,000 in tax relief will be capped at of 25% of income or £50,000, whichever is greater. Draft legislation will be published for consultation later this year.

Statutory residence test

From 6 April 2013, the implementation of a statutory residence test (SRT) has been delayed.

The remittance basis

From 6 April 2012, the Remittance basis charge increases from £30,000 to £50,000 for those who have been resident in the UK in 12 out of the previous 14 tax years if they wish to claim the benefit of the remittance basis of taxation.

Tax relief will be available on income and gains brought in to the UK for investment purposes, provided certain criteria are met.

Small business tax reporting

From April 2013 sole traders and partnership with a turnover below the VAT registration threshold (£77,000 p.a. from 1 April 2012) will be allowed to calculate business profits using a simplified cash accounting system by reference to business receipts and payments. There will no longer be a need to distinguish between capital and revenue expenses.

 

I welcome this move as I do not believe that small businesses should have to prepare accounts unless there is a specific reason to do so. Companies have to prepare accounts as it is a Companies House obligation. Unfortunately, many accountants prepare accounts for small businesses just as they would for large companies. There will be no reason to do this from April 2013. Further details of this will be included in the Budget 2012 Business Analysis.

 

Next action

 

Please do not hesitate to contact me should you have any queries regarding any items in these notes.

 

Kind Regards

 

KEVIN McDaid

 

This communication is for general guidance only, and professional advice should be sought before any decision is made. Individual circumstances can vary and therefore no responsibility can be accepted by Kevin McDaid/Crown Tax Affairs, for any action taken, or any decision made to refrain from action, by any readers of this communication. All rights reserved. No part of this communication may be reproduced or transmitted in any form or by any means without prior agreement. To the fullest extent permitted by law, Kevin McDaid/Crown Tax Affairs do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from use of this communication. Crown Tax Affairs can be contacted in writing at 120 Reevy Road, Bradford, BD6 3QE; via email – kevmcd@cta.org.uk or telephone on 01274 407004. If you do not wish to receive further emails from us please reply to this email indicating ‘UNSUBSCRIBE’.

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