On Wednesday, George Osborne will deliver his ‘Summer Budget’. We look at how small business owners in particular may be affected.
In his post-election Budget, the Chancellor will want to implement many of the pledges made in the Conservatives’ General Election manifesto, and also implement around £12bn in spending cuts.
Having also promised not to touch the prevailing VAT, National Insurance and income tax rates during the lifetime of this Parliament, what options are open to the Chancellor without having to go back on his election promises?
Annual Investment Allowance
During the last 2015 Budget, the Chancellor made no mention of an extension to the AIA (which provides tax relief of £500,000 per year on qualifying plant and machinery expenditure).
In December 2012, the Allowance was increased ten-fold to £250,000, before doubling in April 2014, where it has stayed ever since.
Businesses will be hoping that this tax relief will be extended further, beyond the current end-date of December 2015.
The Conservatives have promised to raise the personal allowance from £10,600 to £12,500, and increase the higher rate income tax threshold to £50,000.
Of course, the Chancellor has five years to implement these increases, so don’t expect anything radical right away, especially following such a recent increase to the current personal allowance limit.
Before the election, the Conservatives pledged to “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million.”
This means that each spouse or partner can pass on an additional £175,000 to future generations, with this additional amount applying to the value of a main home when it is passed on.
One way the Chancellor can raise significant funds, without have to renege on his pledge to leave the main personal tax rates unchanged, is to reduce the tax relief available on pension contributions.
You can currently invest £1.25m over a lifetime without paying tax on pension contributions, however in the last Budget, the Chancellor hinted that this limit is likely to be cut to £1m from 2016.
The Annual Limit is currently £40,000, however this threshold may be cut further, or linked to income, so that those earning £150,000 or more per year (paying the 45% additional tax rate) may be targeted.
Capital Gains / Entrepreneurs’ Relief
Given his pledge not to touch the main rates of personal tax, the Chancellor may turn to Capital Gains Tax as a source of additional funds.
Capital gains are currently taxed at 18% and 28% (standard, and higher rates), whereas income is taxed at 20%, 40% and 45%. This Budget may present an opportunity to raise CGT rates, or even align them with income tax rates.
Earlier this year, the Government announced a clampdown on ‘tax planning’ abuses of the Entrepreneurs’ Relief rules. The Chancellor may take this opportunity to add further qualifications for individuals taking advantage of preferential CGT rates.
The Government says that it expects to raise an extra £5bn from tax anti-avoidance measures. Such measures may include new powers to extract tax debts from personal bank accounts, new penalties for failing to declare offshore gains, and action against persistent tax avoiders.
Summer Budget Summary – 8th July
Catch us on Wednesday for a summary of the Budget once it has been delivered. You can access the official site here.