Chelsea e-Viewpoint - Budget Special
Yesterday, the Chancellor George Osborne announced his review of the state of government finances, saying that he wanted to reward work, support working families, back businesses and create a more balanced economy. He commented that while they expect the UK to stay out of recession, the situation in Europe and a possible further increase in the oil price both remain a threat to the UK economy.
This special e-Viewpoint outlines some of the points which will impact the finances of each individual as well as investments and pensions.
Personal Allowance:
Already due to increase from £7,475 to £8,105 next month, the personal allowance will rise to £9,205 in April next year. The Liberal Democrats want it to reach £10,000 by 2014. While this is good news for many people, the extra age-related personal allowances for the over-65s will be scrapped.
The higher 2012-2013 level of £10,500 for people born between 6th April 1938 and 5th April 1948, and £10,660 for those born before 6th April 1938 will be frozen until they align with personal allowances. However, anyone in their early to mid-60s who could have expected to enjoy a higher allowance at retirement after 6 April 2013 won't get it. In effect, their allowance will be reduced from £10,500 to £9,205.
Income Tax:
The top rate of income tax for incomes over £150,000 is to be reduced from 50p to 45p, from April 2013. This is good news for money in the pocket but not so good for pension contributions. Those in this 50% tax bracket wanting to make the most of the higher tax relief should invest as much as they can in their pension in the next 12 months (up to the cap of £50,000).
Unfortunately no effort was made to change the effective tax rate of 62% (including National Insurance) taken on income between £100,000 and £116,210.
The small print also revealed that the 40% higher tax rate threshold remains unchanged at £42,475 in 2012/2013 but will fall by £1,025 to £41,450 from April next year.
From 2014, income tax payers will be sent a detailed breakdown of how much income tax and national insurance they have paid and how the Government has spent it.
Pensions tax relief:
Contrary to the many rumours surrounding pensions tax relief, the Chancellor left this area well alone for once so tax relief rates and contribution limits are intact. Instead he focused on the state pension. Age-related allowances are to be simplified with a single state pension for all to be introduced at £140 per week. More details will be published later in the spring. In addition, the state pension may well be linked to longevity in the future. A report looking at an automatic review of the pension age will be published in the summer, along with a white paper on the future for social care.
Uncapped allowances:
From 6 April 2013, the Government will introduce a new cap on income tax relief from certain products to stop those on higher incomes using them excessively. For anyone seeking to claim more than £50,000 of relief, a cap will be set at 25% of income (or £50,000, whichever is greater).
The key to this change is 'unlimited relief'. Pensions, VCTs and EIS all have a cap on how much tax relief can be claimed so they will be unaffected. Schemes that have unlimited relief and therefore which will be caught by this change include Film Partnerships and Business Premises Renovation Allowance (BPRA).
VCTs and EIS:
Most of the news concerning VCTs and EIS had been announced prior to the Budget, but good news lay in the confirmation that VCTs can now invest in a broader range of companies. This will mean more support for smaller businesses currently struggling to get loans from banks and will hopefully help stimulate the British economy.
Stamp Duty:
The Chancellor has finally cracked down on stamp duty avoidance and has introduced a 15% rate to be applied to any property worth more than £2 million bought in a 'corporate envelope'. He will also consult on a large annual charge for any properties already purchased this way, as well as applying capital gains tax to residential properties in overseas envelopes.
The countries highest-priced properties will also see stamp duty increase. Houses worth more than £2m will now be subject to 7% stamp duty, a rise of 2% on the current highest rate which is 5% for properties of more than £1m.
Corporation Tax:
Corporation tax was already due to fall to 25% in April but will now reduce to 24%. It will then fall by 1% each year for the next two years. This will make the UK more competitive for businesses, with the rate 18% lower than the US and 8% lower than Germany. Ireland has low corporation tax rates and has really started to see the benefit, so we think this is good news at a time when we really need to boost the economy.
Infrastructure and rebalancing the economy:
There was advanced warning that spend on infrastructure would be increased and this was confirmed with construction firms in particular getting a boost. But there was also good news for other industry sectors as the Chancellor sought to rebalance the UK economy, which has for many years been too geared towards financial services. There is help on the way for smaller companies to increase their exports, tax allowances for oil exploration in Scotland, investment in new university research facilities, a UK centre for Aerodynamics and tax credits for video games, TV and animation companies to help make Britain Europe's centre for technology. A more diversified economy in the future will create more opportunities for UK equity managers.
100-year gilts
Confirming rumours of long-dated gilt issuance, the Chancellor announced that the Debt management Office will consult on whether or not to issue gilts of more than 50 years or even a perpetual gilt.
The general consensus is that too long-dated gilts wouldn't be a good investment as the timing is all wrong. With rates so low, it's almost certain that anyone investing will lose money as inflation will eat away at the yield. Many investors also won't live long enough to see their capital repaid! Certainly no bond fund managers we've talked to have said that they think this is an attractive investment. We still believe that corporate bonds are more attractive at the moment as they are paying better yields for only a little more risk. Businesses are simply in better health than governments right now.
If you have any questions or would like further information please call us on 020 7384 7300.
Important Notice
Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. ISAs, Bonds, Unit Trusts and VCTs should be regarded as medium to long term investments. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.
Chelsea Financial Services plc is authorised and regulated by the Financial Services Authority