The Budget; “painful” decisions are coming

Business owners are on tenterhooks in advance of the new Chancellor, Rachel Reeves, announcing her first Budget at the end of this month.

Despite election campaign promises that tax rises would not affect “working people”, subsequent claims of the discovery of a £22 billion black hole suggest the nation’s finances are in a dire state.

The new Labour Government are making no bones about the challenges ahead – Sir Keir Starmer has already announced that “painful” decisions are coming.

So where could that pain be felt? Clare Boden and Helen Gale, corporate and personal tax experts for Haines Watts in Bristol and Exeter, offer their views on what businesses and individuals might expect.

 

Advice for businesses

Clare says: “Over coming days and weeks we can expect to have some of the headline Budget announcements revealed in the media – it usually happens – but for now, at time of writing, businesses are largely in the dark.

“The Government has said that it won’t raise the main rate of Corporation Tax, as well as NICs, Income Tax or VAT, but that doesn’t mean the CT system won’t change at all. One measure could be to remove the small profits rate – currently 19% of profits under £50,000 – a potential challenge for the smallest businesses but potentially welcome for some, given the complexity around the associated companies rules. A general reduction of the main rate of CT would encourage growth.

“We may see further reductions in Business Asset Disposal Relief (BADR), previously known as Entrepreneur’s Relief, which currently reduces the rate of CGT from 20% to 10% on disposals of businesses or business assets. Changes could be around the limits on the lifetime gain that can benefit from the reduced CGT rate, or maybe increasing the minimum shareholding requirement from the current, low-risk level of 5%.

“I wouldn’t be surprised if changes are made to the full expensing regime introduced in last year’s Budget. Current rules allow companies to claim 100% of capital allowances on qualifying plant and machinery investments, letting them write off the costs in one go and seeing taxes cut by 25% for every pound invested.

“The scheme is very generous and should encourage investment. However given that it is currently unlimited we could well see the rules tweaked or limited.

“Another possibility is the removal or restriction of Inheritance Tax (IHT) reliefs, such as business relief which can stand at either 50% or 100% depending on the circumstances of the shareholding and asset ownership. Changes could be the introduction of a monetary limit, or the imposition of more stringent criteria.

“Higher taxes are rarely welcomed by the business community. However business owners can at least try and anticipate what’s coming down the pipe and do their best to prepare accordingly. We’re here to help if required.”

 

Advice for individuals

“We’re already learning to read the small print with this Government,” says Helen. “Promises not to raise taxes on working people appear to have been a cover for indirect taxes such as council tax rises, raids on pension funds, and so on. The fact is that the most effective way to raise large amounts of revenue is to target people by the millions, rather than the big companies and wealthy individuals. We can all expect to have to tighten our belts over coming months.

“In terms of specifics, we could see an increase in Capital Gains Tax rates to align them with either Income Tax or tax on dividends. For example, a higher rate taxpayer currently pays tax of 40% on their income or in inheritance tax but only 20% when they are selling an investment aside from residential property – shares, for example.

“We may also see changes to the current CGT reliefs, allowances and exemptions, for example the removal of relief when assets are transferred to discretionary trusts or the tax-free uplift on death.

“Company dividends are seen, rightly or wrongly, as the preserve of the wealthy. So owners of limited companies may like to consider advance payment of annual dividends, as one option for Ms Reeves could be to raise the basic rate of dividend tax – currently at 8.75% - to be closer to the main basic rate of income tax.

“Another main tactic for increasing taxation revenue is so-called stealth taxes, whereby tax thresholds are frozen despite salaries necessarily rising due to inflation. Taxpayers then climb into higher bands of taxation, or find that greater proportions of their wages are taxable. For example, by freezing the personal tax free allowance of £12,570.

“One suggestion for raising revenue could be the introduction of a flat rate of pension tax relief – perhaps at 30% – in a bid to simplify the current system. However this has recently been reported as unlikely, given the disproportionate effect it would have on public sector workers. Some are suggesting that National Insurance could be levied on employer pension contributions, or that NI savings from salary sacrifice schemes could be abolished.

“Alternatives, or additional measures, could be lowering the cap on tax-free pension lump sums, reducing the current lifetime limit of £268,275, or removing IHT exemptions for certain pensions to bring the charge into taxable estates..

“In general there’s little doubt that the Great Wealth Transfer – the inheritance of the post World War II baby boomers passed on to their children and grandchildren – is likely to be the target of this Budget. That’s why I think we can expect IHT to be affected, through the freezing of thresholds and the potential removal of the nil rate band for main residences.

“Whatever happens, we can expect the changes to be implemented soon, probably with immediate effect to minimise the opportunity of avoiding the impacts.

“I’d advise concerned individuals to take advice and take action as soon as possible.”