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Autumn Statement: Pro-Business but Individuals will Suffer
05/12/2012, by Lee Sharpe, Tax News - Budgets and Autumn Statements
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Businesses

The Chancellor's Autumn Budget - sorry, "Statement" - focused on incentives to kick-start business growth in the hope of galvanising the economy, with a £7 billion capital spending package:

  • £1.3bn on Transport
  • £1,8bn on Housing and Local Infrastructure and related works
  • £0.7bn on Regional Growth and Business - predominantly Local Enterprise Partnerships and the Business Bank
  • £0.8bn on support to encourage further Exports, such as Export Finance and support for SMEs to access external markets
  • £0.9bn on Science and Innovation
  • £1.5bn on Schools, Further Education and Skills

of which £5.5 billion is "new money" - the lion's share of which (£3.5bn) is intended to come from the impending sale of 4G licences to telecoms operators. The Chancellor has (finally?) recognised that construction is pivotal to driving economic growth.

Related measures include:

  • Further 1% reduction in Main Rate of Corporation Tax to 21% from April 2014
  • A 2-year hike in the Annual Investment Allowance (AIA) for business investment in Plant and Machinery up to £250,000 from January 2013 - after having only recently reduced it from £100,000 to a mere £25,000
  • Small Business Rate Relief to be extended again, to April 2014
  • All new-build commercial property completed between 1 October 2013 and 30 September 2016 will be exempt from empty property rates for the first 18 months, up to State Aid limits.

Businesses should broadly welcome these measures. It also means that the alignment of the Small Companies' and Main Rates of Corporation Tax are all but inevitable under this Chancellor, which should in turn mean that the 'associated companies' rules will no longer be necessary.

The 3p fuel duty increase scheduled for January will be scrapped, and future rises will be postponed until September annually. This will also be welcome news for businesses and individuals who of course pay for fuel both directly and indirectly through the cost of goods transported.

Individuals

Unfortunately, the measures for individuals are less positive overall. The Chancellor has increased the Personal Allowance but has committed to raise other thresholds, allowances and benefits by no more than 1%. "Fiscal drag" will claim a further 400,000 people (into the Higher Rate Band) by 2015/16, according to p51 of the Autumn Statement.

  • Personal Allowance to be (further) increased to £9,440 from April 2013 (up by £235)
  • Basic Rate Band down by £235 - so Higher Rate Taxpayers only better off by the 20% margin.
  • Higher Rate Threshold to rise by just 1% to £41,865 in 2014/15 (from £41,450 in 2013/14) and a further 1% increase for 2014/15
  • Likewise Child Benefit and CGT Annual Exemption
  • Pensions Annual Allowance reduced to £40,000 from April 2014. (£50,000 in 2013/14)
  • Pension Lifetime Allowance reduced to £1.25 million from April 2014 (£1.5 million currently; protection will apparently be provided in a similar fashion to that which applied on the previous restriction)
  • Most working age benefits to be increased by just 1% for three years from 2013/14

The Chancellor was quite clear that 1% was under the rate of inflation so a cut in real terms and significant savings should accrue to the Treasury as a  result.

Some Observations

Capital Allowances

It is perhaps indicative of the Chancellor's sense of urgency that he felt it necessary to introduce the enhanced Annual Investment Allowance so quickly, rather than wait until April - the inference being that he does not want to risk a stagnation in business investment over the next few months. It means that the £25,000 limit he introduced in April 2012 has been revised back up again after only 9 months. If 95% of businesses need only £25,000, as he suggested in June 2010, why is such a sudden increase so vital? The clue lies in the sums he originally sought to save, and now seeks to return, to the economy: over £2.2 billion cost projected per this year's Autumn Statement. This is a very expensive measure - or a very valuable tax incentive to some businesses.

Assuming that the implementation will follow previous adjustments, businesses should take care not to assume that the full £250,000 will be due from 1 January 2013. Usually, the increased AIA is pro-rated by reference to the relevant proportion of the whole, comprised in the remainder of the business' accounting period which spans the change. (For example, a business with a 31 March year-end will be able to add just £62,500 to its AIA entitlement for the year to 31 March 2013). So some hesitation in business investment is possible - recommended, even - at least until the business has a 'free run' at the full AIA. We shall have to wait and see if the detailed guidance addresses this point.

Pensions

Many commentators had warned that there might be pressure on the Chancellor to restrict pension tax relief, given the state of public finances and with an eye to a recent Centre for Policy Studies report, Costly and Ineffective, which questioned the current regime's success in encouraging pension saving for all eligible individuals and suggested it disproportionately benefited the wealthier contributors who enjoyed Higher Rate Tax relief. Higher Rate relief has so far been retained and it will continue to be a valuable tool for those contemplating, for instance, the High(er) Income Child Benefit Charge.

Perhaps Mr. Osborne's statistics are right in terms of how few (and how wealthy) are those who will be affected by the restrictions to the Lifetime and Annual Allowances. But his assertion that "no one will pay a penny more in Income Tax" as a result of these changes doesn't quite ring true, when one considers the effects of the £10,000 reduction in Annual Allowance for those who are members of Defined Benefit pension schemes - bearing in mind that the Pension Input Amount is now affected by a factor of 16.

Given the glacial rate at which the Higher Rate Threshold is "advancing", (effectively retreating, in real terms)  one might say that the Chancellor's long term solution is that many more of us will get to enjoy Higher Rate Tax relief eventually, people should perhaps take care not to complain too much that the relief is unfair.

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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