Budget 2012 – making tax simpler to understand?

Following George Osbourne’s Budget yesterday, there has been much talk on the headline changes proposed by the Government on reductions to the 50p tax rate, or the higher than expected increases to the personal allowance tax rate from 2013.

Overall, however, it appears small to medium-sized businesses will be the main benefactors following this years budget…..

Main rate corporation tax reductions

Not to be confused with the Small Profit Tax Rate of 20% that is levied on businesses with profits under £300,000, this tax rate relates to businesses with profits above this.

  • Main rate corporation tax will be reduced to 24% commencing 1 April 2012.
  • Main rate corporation tax will be reduced to 23% commencing 1 April 2013.
  • It is expected that a further 1% reduction will come into effect commencing 1 April 2014.
  • Main corporation tax rate will reduce further to 20% in time.

However, there are no planned reductions to the small profit tax rate, currently at 20%.  This rate is paid by many limited companies currently.

Income tax allowances

  • Personal tax allowance will increase by £630 to £8,105 from 1 April 2012.
  • However, there is a corresponding reduction of £630 in the basic rate limit (the point at which you start paying 40% tax) to £34,730.
  • Reduction in the 50% tax rate to 45% from 6 April 2012.
  • Personal tax allowance will increase to £9,205 from 6 April 2013.

Please note that only the tax allowance has increased and the National Insurance thresholds remain unchanged.  This means that National Insurance will start to be charged earlier than tax.
As many directors pay a salary equal to the maximum amount they can earn before PAYE is charged they have to be careful not to pay too much and consequently be charged National Insurance.

From 6 April 2012, the maximum amount of salary that can be drawn without being charged PAYE would be £624 per month.

Tax simplification

Still under consultation with the Government following a review by the Office of Tax Simplification, the proposed changes could certainly reduce the amount of paperwork and red tape within small businesses.

  • Small unincorporated businesses (sole traders, partnerships) generating income below the VAT threshold will be able to prepare accounts and tax returns on a cash only basis.  This is compared with the more complex accrual based calculations where figures must be adjusted to reflect accrued income or expenditure not received or spent during that specific financial year.
  • An easier expense system for business use of cars, motorcycles and home.

Anti avoidance

The Chancellor confirmed the government had increased both resources and the number of staff working on evasion and avoidance at HMRC.  The main aim is to increase tax revenues over the next five years by around £1bn (and protect a further £10bn that could be lost) by schemes that evade or avoid tax.

However, for the typical small business much of the new anti avoidance measures will not be relevant.

Other Changes

  • The turnover threshold at which you must register for VAT will increase from £73,000 to £77,000 from 1 April 2012.  Conversely, the threshold which determines whether a business may apply for de registration will be increase from £71,000 to £75,000.

Posted by Chris Mollan