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The Budget 2011

March 23, 2011 at 8:38 AM

 

The Budget - What it means for you...

In a Budget that focused on growth & investment, there was mainly good news for small businesses. Here's a summary of how today's Budget will affect you:

 

Summary for small businesses: A Budget for growth?

Today's Budget is one where all the little things add up to make a positive difference for small businesses and entrepreneurs across the UK. There's no headline grabbers (although tomorrow's newspapers may disagree), so business owners can take heart from being able to draw money from their businesses more tax-efficiently from 6 April and start-ups can look forward to a simpler tax system and less red tape.

Ultimately, we hope that this Budget promotes growth, as the OBR’s figures for growth have been downgraded from 2.1% to 1.7% this year. They expect this growth figure to rise to 2.5% the following year and we hope this Budget will help achieve this. Here are the headlines:

 

We'd love to hear your thoughts about how the Budget will affect your business. Let us know your comments via @thewowcompany on twitter.

 

Corporation Tax

  • The Small Profits Rate of corporation tax will reduce from 21% to 20% from April 2011 as planned. This rate applies to all businesses making less than £300k net profit.
  • The reduction in the main rate of corporation tax previously announced is to be increased from 1% to 2% (taking the rate from 28% to 26% from April 2011). Further 1% reductions in subsequent years will lower the main rate of corporation tax eventually to 23%. Good news for big business (and small business too, who will benefit from the drip-down effect of increased investment from larger companies).

 

Income Tax

  • The personal allowance will rise to £7,475 from 6 April 2011 (as planned) and a further rise to £8,105 from 6 April 2012 was also announced.

  • High earners beware: Where an individual’s “adjusted net income” exceeds £100,000, the level of the basic personal allowance will be reduced by £1 for each £2 over £100,000 until it reaches zero.

  • So, if your adjusted net income is between £100,000 and £114,950 (or just above £114,950) a part of that income will be taxed at 60%. There are ways to mitigate your tax liability, so get in touch if this applies to you.

  • George Osborne also announced that he will consult on merging income tax and national insurance in the interests of simplifying the tax system and reducing the administrative burden on business & HMRC. Watch this space!
  • Other news..... It seems that the 50% top rate of tax is viewed by the Chancellor as a temporary measure, but that “now is not the time to remove it”.

  •  

National Insurance

  • Employer National Insurance Contributions (NIC) will rise by 1% to 13.8% from 6 April 2011 (as previously announced). The rate that employees pay will also rise by 1% to 12%.
  • To lessen the blow, the government has also raised the employer NIC threshold (the point at which employers start to pay NI) to £136 per week (£7,072 per year).
  • This means that it is now cheaper to employ someone earning less than £21,000 per annum than previously – despite the 1% increase. 

Tax Tip for small businesses:  Consider salary sacrifice options for employees earning over £21,000 as a way to mitigate the increased Employers NIC rate – speak to us for more details.

Another tax planning tip: If you are planning on paying bonuses to staff, doing so before 6 April 2011 will save you the 1% increase in NIC (bonuses are treated in the same way as salaries). Every penny counts, as they say.

 

Drawing money from your business in the most tax-efficient way

  • From 6 April, you will be able to pay yourself a salary of £589/month without having to pay any income tax or National Insurance. This is an increase of 23% on the current 2010/11 level.
  • One of the most tax-efficient ways to pay yourself as a shareholder of a Limited Company is to pay this basic amount each month in salary, taking the rest in dividends. A dividend can only be paid from profits remaining after the payment of Corporation Tax, so it is important to do the sums on this one, to avoid an unlawful distribution of company funds.  
  • Assuming that you pay yourself the £589/month and don’t have any other income, you can pay yourself a net dividend of £31,866 each year before you pay additional income tax.
  • Mileage allowance has changed: You will be able to claim 45p per mile (for the first 10,000 miles) for business travel, up from the current allowance of 40p per mile (from 6 April 2011).

Tax planning tip: Setup your £589 per month salary as a regular monthly payment and then keep track of the dividends you pay yourself throughout the year. Doing a few sums prior to the end of a tax year will help you pay yourself in the most tax-efficient way. 

 

Pensions

  • The State Pension Age is rising to 66 from 2020 anyway, but we are set for further increases as regular & automated reviews, linked to longevity, were announced.
  • The State Pension itself is to be simplified, with moves towards a single-tier flat-rate pension of £140 per week being discussed. However, this will not apply for existing pensioners.
  • With effect from the 2011/12 tax year the annual allowance is reduced from £255,000 to £50,000 (announced previously). Anyone exceeding the annual allowance will be liable for a tax charge on the excess. There are ways around this, so get in touch if this applies to you.

Wow’s Tip:  Unless you want to be working for an undefined period, ensure you are saving enough to pay for your own retirement. Speak to one of our Financial Planners who will be happy to discuss your retirement plans with you.

 

Tax breaks for entrepreneurs

  • From April this year the small companies Research and Development Tax Credit will rise to 200% - and from next year it will rise again to 225%.
  • Entrepreneurs Relief has been increased again by doubling the threshold to £10m from the previous level of £5m.
  • Enterprise Investment Schemes have become more attractive with Income Tax relief increasing from 20% to 30%.
  • In addition, from 2012, the individual limit for investment into an EIS will be increased to £1m per tax year and the qualifying criteria for companies will also be extended.

Wow’s Tax Tip:  This is good news for entrepreneurs and the extension of EIS could present an opportunity for those affected by the 50% tax rate to get 30% relief back through investing in a qualifying EIS.  Get in touch for more details.

R&D Tax Credits: Does your company qualify for these? Check out HMRC's guide here or get in touch with us for more information.

 

Fuel

  • The planned fuel duty increase this year has been scrapped and, in addition, there is to be a 1p per litre reduction in fuel duty from 6pm tonight.
  • A Fair Fuel Stabiliser will be introduced, meaning North Sea Oil companies will pay increased taxes when the oil price is high, as opposed to the public having to pay higher fuel duty.

 

Tax avoidance & evasion

  • There is likely to be a big clampdown on tax avoidance with the Chancellor aiming to raise £1bn this year.
  • “Disguised remuneration” schemes such as EBT’s and EFRBS are likely to be first in the firing line and we would advise clients not to enter any new arrangements with immediate effect.
  • The Chancellor also suggested that Stamp Duty Land Tax schemes will also be examined.

Wow’s Tip:  The overall message is that tax investigations will be on the rise. If you want to find out if you would be covered in the event of a HMRC investigation, click here.

 

Inheritance Tax (IHT)

  • To encourage a more charitable society, the IHT rate payable on an individual’s estate will be reduced by 10% if they leave 10% of their estate value to charity.
  • This should not affect the residual amount left to beneficiaries – it is just intended to encourage more charitable giving. There are no details yet on this initiative, so please seek advice before taking any action. Based on the information we have, this is our understanding of the sums:
  • If you have a £1m taxable estate, you'd currently pay £400k IHT, leaving you £600k. Under this scheme, if you give £100k to charity, you'd pay 30% IHT (£300k), also leaving you £600k.

Wow’s Tax Tip:  This is not a relaxation of Inheritance Tax Rules. IHT is still an issue and will be an increasing problem for many people as the nil rate band remains frozen until 2015 and asset values are increasing, meaning more & more people become affected.  If you are concerned about IHT, please get in touch.

 

Other headlines for small businesses

  • Business Rate Relief holiday extended for a further 12 months for small businesses.
  • Capital Gains Tax: Annual exempt amount has been increased to £10,600.
  • £350m of business regulation to be scrapped to help encourage growth, entrepreneurialism & investment.
  • 15% increase in the availability of credit to small businesses has supposedly been agreed with the banks. We'll wait and see on that one!
  • The VAT registration threshold has been increased to £73,000 with effect from 1st April 2011. The de-registration threshold also increases to £71,000 at the same time.

 

We'd love to hear your thoughts about how the Budget will affect your business. Let us know your comments via @thewowcompany on twitter.



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