Post election

The budget made by the previous Chancellor, Alistair Darling, had the feel of a pre-election budget, but this was not because of any enormous give-aways. Sure, there were some political lollipops handed out to the faithful, but what really made it feel “pre-election” was the absence of the tax rises which have been widely expected. There was no increase in Capital Gains Tax and no increase in VAT. Only the increase in National Insurance was there to remind us of the pain which might await once the election was passed.

In the brave new world post-election, we can now start to see the tax rises which were inevitable. The National Insurance increase for employers has been squashed, and there are plans afoot to raise the personal allowances to £10,000, which will lift a large number of low earning individuals out of tax altogether.

But these are tax cuts. How are they paid for? Some of us believe increasing the top rate of income tax to 50% would only be temporary. This is I believe less likely, or, to put it another way, it may be “temporary” for a little longer than I had thought.

The inheritance tax threshold will not rise to £1,000,000 but will remain at its current level. For a husband/wife, this gives £650,000 when a transfer of allowance is considered, so this is reasonably palatable for those of high net worth as it stands. For single or unmarried individuals, it is a heavier blow.

The reduction in pension relief will raise tax as sheltering income in this way will no longer be as effective.

The Capital Gains tax rates will increase to 40% from 18%. This is a return to how it was a few years ago, before the system was “simplified”. You may remember at that stage the furore over business relief and the withdrawal of taper relief and indexation allowance. This was hastily replaced by a new Entrepreneur’s relief which, although a much blunter instrument, gave business people the ability to continue to sell their enterprises and pay a lesser capital gains rate on the proceeds. Whilst there is no mention of the continuation of this by the new coalition government, it is widely expected that some form of entrepreneur’s relief will still be retained.

And so to VAT. Most economists see a rise in VAT to 20% as being the obvious way to start to claw back the deficit. It has the attraction of not being terribly hard on any individual citizen in particular, but at the same time applying to just about everyone. It is this widespread application that makes it attractive – at a swoop, very large inroads could be made into the public finance deficit. A tax rise in this way would have a much greater impact just in terms of scale and volume than the hit on banker’s bonuses or inheritance tax, pleasing though that may feel to some sectors of the community.

The changing tax panorama will affect certain business more than others. A Capital Gains Tax rise will certainly concentrate the mind of someone planning to retire or dispose of part of a business, including restructuring, and a VAT rise will be felt quite strongly in businesses which are not VAT registered, or supplying exempt services, or retail businesses where margins are already squeezed. All decisions need to be made with an eye on the potentially changing landscape, and the pitfalls in planning ahead without full and detailed advice and consideration are huge.

, , , , , , , , , ,
Next Post
Budget Summary 2010

Related Posts