Yesterday was the first opportunity for the new coalition government to outline their proposals for government spending, particularly for the current fiscal year, but also in broad principal, for the next three years.
How will these proposals effect individuals and small businesses? For individuals in the higher income bracket; no change at all. Once their total taxable income exceeds £100k in a tax year then they will begin to lose your personal allowances; when their taxable income exceeds £150k in a tax year, then they will be paying income tax at 50% on income above £150k.
For individuals who find that there income within a tax year means that they will be paying tax at basic rate, then there is better news; their personal allowances are going to be increased by £1,000 in April, worth £170 a year.
But there is a cost. VAT is going to rise to 20% in Jan next year, which means that this £170 will soon be clawed back into government coffers. Our shopping bills, private motoring costs, personal and luxury expenditure will all be more expensive by 2.5pence in every £1.
Businesses however, can look forward to more generous proposals; fuelled, no doubt, by the fear of further unemployment and also to encourage profit, which results in more tax. The corporation tax for small companies is going to be reduced from 21% to 20%; and for larger companies, which has a corporate tax rate currently at 28%, the rate is going to be reduced by 1% for each year, for 4 years, until the rate is at 24%.
For all businesses, corporate or not, if they employ people, then the threshold at which they pay employers national insurance will rise each year by the rate of inflation PLUS £21 per week.
What about those who were planning to realise capital assets? It was feared the the CGT rate would return to 40% for non business assets. However, as it turned out, for higher rate taxpayers the rate is increased only to 28% from midnight 22 June, 2010 – still an increase but nowhere near as much as was feared. Even better news though for entrepreneurs relief – the rate of 10% on the first £2m gain will be extended to the first £5m – worth popping the champagne corks for!
So, how is the government going to tackle this huge deficit that it has been telling us about? Well, no changes for the higher earners is one. In fact, with annual inflation – albeit this rate is small – one could argue they are worse off. Also there is the increase in the VAT rate.
The big hits are in public spending. Public sector workers will face a pay freeze for two years for those earning over £21,000 per annum; for those in the public sector earning less than £21k per annum, they will get a flat pay rise worth £250 for both years. In addition; education spending in England is facing up to a 25% cut. There are also hits on; child benefits, housing benefits, tax credits, other benefits effecting lone parents. The total cuts to welfare will result in an expected saving by 2015/16 amounting to £11bn.
My final thoughts? Well, we were all bracing ourselves for high increases in taxation and in the end these didn’t materialise. But beware of the effect of the cuts in public spending. When preparing for your personal and business budgets for the next two years – build in a factor for a drop in demand as a result of your customers having less disposable income.
Like me, I sure that you are glad that the budget is over – at least for the moment. Should we lose sleep? Probably not – just make sure that YOU budget and ALWAYS prepare up to date and robust plans