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Pre-Budget Report – The Possibilities

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” The Rt. Hon. Sir Winston Churchill K.G.
So, if Sir Winston Churchill was correct, and given the current economic situation, will the Chancellor continue along a path of austerity? Or will he review the current system in an attempt to stimulate growth? If the latter what can we expect on 21st March 2012.
In such a fragile economy it is highly unlikely that there will many major announcements or that this will be a give-away budget, certainly not without balancing the books elsewhere, but here are some possibilities:
Income Tax
The Chancellor has previously stated that the 50% rate band should be a temporary measure and retaining this permanently could damage the economy. Whilst it is highly unlikely that he will remove this he may decide a reduction is possible. After all, the highest paid 1% of the population contribute almost 30% of tax collected, and continued high rates of taxation may eventually lead to a reduction in tax collected as they look at ways of reducing their burden. This could be part funded by the removal of tax relief at higher rates on pensions or by reducing the annual contribution limit. Looking at maximising pension contributions, and utilising any carry forward relief available, may be an option worth considering.
The personal tax allowance rises to £8,105 from April 2012 with the intention being for it to reach £10,000 during this parliament, so we may see an announcement of a fairly substantial increase from 2013, or perhaps a slightly larger increase from April 2012, to say £8,500.
Capital Taxes
The success of ISA’s may have a detrimental effect on the Capital Gains Tax return, so could we see the introduction of a lifetime allowance for such tax free savings schemes?
The highest rate currently charged is 28%, whilst the highest rate of income tax is 50%. Individuals who can arrange their affairs for capital growth rather than income can therefore save considerable amounts of tax. It may be that an attempt is made to align the Capital Gains Tax rates with Income Tax rates.
A mansion tax has previously been mentioned but would appear unlikely at this stage. However, this may be something that is considered as part of the inheritance tax review planned for sometime in 2012.
Further increases to the Inheritance Tax nil rate band are unlikely
A reduction in corporation tax rate from 26% to 25% is already planned for April 2012 but, as he did in a previous budget, the Chancellor may decide to bring forward the further planned reduction for April 2013 reducing the rate to 24% from April 2012.
Whilst some are calling for a reduction in the level of National Insurance, this is unlikely. Far more likely that he will extend or modify the current “NIC holiday” scheme for start up companies.
Whilst a banker bonus tax would no doubt prove to be a very popular move with the general public, it would not be with the City and is therefore unlikely at this stage. One possibility could be to restrict the corporation tax relief on “large” remuneration packages which would increase the tax take without restricting the City’s ability to pay what it considers necessary to retain staff.
Less regulation for small business would be welcomed, although it is unlikely that any changes will be made in this Budget as the Office of Tax Simplification have recently carried out a review. Far more likely that any changes will be implemented in future Budgets.
For further information on the budget and tax, please contact Jim McMahon.
The above is reflective of the opinion of Balfour + Manson LLP correct to date of 7th March 2012. This document is speculative and no content within this article should be used by any party or relied on by any party or treated by any party as a substitute for specific advice of any nature relevant to particular circumstances. Balfour + Manson LLP explicitly excludes any liability for any loss (of whatever nature) which may arise from any reliance by any party on any content, information, materials or opinions published within this article.