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UK Budget Delivers Tax Cuts

by Robert Lee, Tax-news.com, London

23 March 2012


George Osborne has delivered a Budget that ‘unashamedly backs business’, slashing the top rate of personal income tax and accelerating corporate tax cuts.

After months of speculation and rumours of coalition rifts, the Chancellor has signalled the end of the controversial top rate of income tax. Currently charged at 50% on all income over GBP150,000, from April, 2013, the rate will drop to 45%. In his Budget speech, Osborne slammed the rate as the highest in the G20, stressing that he had always seen it as a temporary measure, and one that can only be justified if it raises “significant” revenue.

Turning to the publication of HM Revenue and Customs’s (HMRC) report on the top rate, Osborne said that it reveals that the tax has “caused massive distortions”. He explained that "an astonishing GBP16bn of income was deliberately shifted into the previous tax year - at a cost to the taxpayer of GBP1bn, something that the previous government's figures made no allowance for. Self-assessment receipts this year are below forecast by some GBP3.6bn, while other tax receipts have held up. The increase from 40p to 50p raised just a third of the GBP3bn we were told it would raise.” Ultimately, Osborne insisted, “no Chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that.”

Osborne’s coalition partners, the Liberal Democrats, had been pushing for the introduction of a 'mansion tax' in return for a lower top income tax rate. In particular, Business Secretary Vince Cable had advocated an annual levy of 1% on the value of properties worth over GBP2m. Instead, the Budget provided for the introduction of a new Stamp Duty Land Tax rate of 7% for residential properties over GBP2m.

Osborne also announced a heavy crackdown on stamp duty avoidance, stating: “Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament. I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found.” Therefore, the Stamp Duty Land Tax on residential properties over GBP2m bought through a company structure will be raised to 15%. The government is to consult on the introduction of an annual levy on those GBP2m residential properties already purchased in such a way.

When it entered into government, the coalition committed itself to raising the personal tax free allowance to GBP10,000 by 2015. Osborne has already introduced increases in previous Budgets, with the threshold scheduled to rise to GBP8,105 when the new tax year begins in April. In this Budget, he announced the largest ever increase in the allowance, upping the threshold by GBP1,100 to GBP9,205 from April, 2013. Osborne said: “Millions of working people will be GBP220 better off every year. That's GBP170 better off after inflation.”

The cash value of the tax free allowance provided to pensioners will, however, be frozen until it comes into line with the standard allowance. Osborne says that removing the separate allowances for those aged 65 on or after April 6, 2013 will help the government simplify the tax system for pensioners. According to Osborne, pensioners will not lose out in cash terms, but will in fact see their existing level of allowance protected, and benefit from an easier to use system.

Along with demonstrating the simplification of the country’s tax system, Osborne intended to offer another major signal to businesses that the UK offers a competitive tax system through a reduction in the corporate tax rate. The government had originally intended to reduce the headline rate to 23% by 2014, but Osborne will now accelerate the process, and deepen the cut. At present, the rate stands at 26%, following a surprise 2% cut in last year’s Budget. Osborne has now repeated the 2% reduction, taking the rate to 24% instead of the 25% planned for April. Two further cuts are planned over the next two years, with the end result being a 22% corporate tax rate by 2014. Osborne said: “The biggest sustained reduction in business tax rates for a generation. A headline rate that is not just lower than our competitors, but dramatically lower.”

This was a Budget focussed heavily on tax changes. Also announced by Osborne were:

  • An increase in the bank levy to 0.105% from January 2013. This increase will help raise GBP2.5bn a year.
  • The introduction of a limit on all uncapped income tax reliefs. For anyone seeking to claim more than GBP50,000 of relief, a cap will be set at 25% of income (or GBP50,000, whichever is greater).
  • Changes to the value-added-tax (VAT) system designed to address its loopholes and anomalies.
  • The introduction of Personal Tax Statements. The 20m taxpayers HMRC contacts each year will receive these Statements, offering a breakdown of how much income tax and national insurance they have paid, average tax rates, and how this contributes to public spending.
  • The introduction of an 'above the line' research and development (R&D) tax credit.
  • The doubling of the Enterprise Management Incentive Scheme grant limit to GBP250,000.
  • Duty on tobacco products will rise by 5% above inflation, taking it to GBP0.37 per packet of cigarettes.
  • The introduction of schemes similar to the film tax credit for the video games, animation and high-end television production industries.
  • The introduction of a new Machine Games Duty, with a standard rate of 20% and a lower rate for low stakes and prize machines of 5% of net takings. A double tax relief for remote gambling will be introduced.
  • The confirmation of the 'fair fuel stabilizer', which will mean above inflation increases in fuel duty will only occur if oil prices fall below GBP45 per barrel on a sustained basis. The 100% first year capital allowance for low emission business cars will be extended, while the carbon threshold for the main capital allowance rates will be reduced, and the percentage list price of company cars subject to tax will be increased.
  • The government will consult on the introduction of a general anti-avoidance rule (GAAR), and legislate for it in next year’s Finance Bill.

Concluding his Statement, Osborne stressed that the government “has not settled for a ‘do nothing Budget’". He said: “We have not ducked the difficult choices - we've taken them head on. A competitive top rate of tax. More revenues from those best able to pay. Fewer reliefs. A tax cut for working people. Support for families. Low income earners taken out of tax altogether. Alongside it, one of the lowest rates of business tax in the world. A simpler tax code. And a country where its citizens know the tax they are paying - and what they are paying it for. We have achieved all this - and kept to our deficit plan.”

TAGS: compliance | tax | investment | business | pensions | real-estate investment | value added tax (VAT) | tax compliance | property tax | tax avoidance | fiscal policy | gambling tax | real-estate | budget | corporation tax | United Kingdom | tax thresholds | tax credits | gambling | tax rates | stamp duty | tax breaks | revenue statistics | individual income tax | research and development

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