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Alistair Darling’s second Budget was without doubt a difficult one. With the need to steer us out of the most severe recession in recent times, his task is unenviable. The key matters that are worthy of your attention are:
Incorporation - A Question Of Tax
The proposed 45% income tax rate that was to be introduced in April 2011 is to be increased to 50% (currently 40%) and introduced a year early, in April 2010.
The new higher rate is to apply to individuals with taxable income greater than £150,000. In addition, the personal allowance for those with taxable income over £100,000 is to be reduced on a sliding scale such that those earning over approximately £113,000 will receive no personal allowances at all. The effective rate of income tax in this small band is actually 60%.
For those care operators trading as sole traders or in unlimited or limited liability partnerships, this makes the case for incorporation more attractive than ever before, where profits are of a sufficient level and there is no need to withdraw all of those from the business.
By incorporating, cash can be withdrawn by way of dividend which attracts income tax at a lower effective rate than that of salary. However, it is useful to note a change to the rate at which certain dividends are taxed from April 2010:
- For basic rate tax payers: effective rate of nil% (currently nil%);
- For higher rate tax payers: effective rate of 25% (currently 25%);
- For those earning over £100,000: effective rate of 36.1% (currently 25%).
The tax rate on dividends for the highest earners is still below that applied to salary, although the gap has narrowed marginally.
For most owner-managed businesses, the flexibility upon incorporating of being able to vote dividends (subject to sufficient profits) and save the cost of national insurance by remuneration to director shareholders being largely in the form of dividend as opposed to salary, is still attractive.
Personal Pensions - Changes Afoot
With effect from April 2011, tax relief on pension contributions for individuals with total income over £150,000 is to be restricted, so that those earning in excess of £180,000 will receive tax relief at the basic rate only. However, immediate antiforestalling measures have been introduced to prevent those affected from
making excessive contributions before 2011.
The restriction applies to all contributions, whether paid by individuals or their employers and will be applied as a tax charge on the individual of up to 20%, payable through self assessment.
The restriction will apply to contributions in excess of £20,000 unless the payments are a "normal regular pattern" (those paid quarterly or more frequently) that was in place prior to 22 April 2009. For example, an individual already contributing £1,000
per month may add a further £8,000 without exceeding the £20,000 limit.
Further advice is expected from the government on this issue of pensions relief. We would encourage any care operator making significant pension contributions to consider these against the backdrop of the recent announcement. For unincorporated undertakings where there are by definition no employer contributions and the contributions are made by the individual in their entirety, this is particularly important.
We would be very pleased to discuss this matter with you.
Planning spending on fixtures, fittings and equipment?
The budget saw the introduction of a new temporary 40% first year allowance once the Annual Investment Allowance (AIA) is exceeded. The writing down allowance of 20% remains unchanged. Capital allowances provide tax relief on qualifying capital expenditure. The AIA is available to all businesses irrespective of size or form and provide 100% tax relief on the first £50,000 of qualifying capital expenditure in each accounting year.
By carefully planning expenditure around the tax year end dates, it is possible to maximise the benefit available from the Annual
Investment Allowance. For example, if you are considering qualifying capital expenditure of £140,000 in the next year, if £90,000 was incurred before 1 April 2010 (6 April 2010 for unincorporated businesses) and the balance of £50,000 just after
that date, £100,000 of the expenditure (ie equal to 2 Annual Investment Allowances) would receive tax relief at 100% and £40,000 at 40% (total relief £116,000). This compares more favourably than if all of the expenditure was incurred prior to 1 April 2010 (6 April 2010 for unincorporated businesses), as only £50,000 (ie equal to 1 Annual Investment Allowance) of the expenditure would receive tax relief at 100% (total relief £86,000).
For operators planning significant expenditure on fixtures, fittings and equipment used in the business, it should also be considered that the new temporary 40% first year allowance rate may not be extended.
Given the above changes, it is paramount that your capital expenditure is planned as sensible timing of purchases can maximise tax relief.
Purchasing freehold property? Significant tax can still be saved
Whilst Stamp Duty Land Tax (SDLT) featured in the Budget with the extension of the exemption on any acquisition of residential property of not more than £175,000 until 31 December 2009, other changes to SDLT are notable by their absence. Significant SDLT savings can still be made by ensuring that where residential property is being purchased for amounts in excess of £500,000 or non-residential property over £1.2m the transaction is appropriately structured. For any care operators considering the purchase of any property, we would highly recommend talking to us before proceeding.
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