Everyone had been warned that the Budget would be painful, and so it was, even if it rather failed to live up to its dire “emergency” billing.
The whole package of measures for business was fairly balanced and will be phased in, although veterinary practices operating through companies fared better than sole traders and partnerships.
The personal allowance increase to £7,475 from 2011-12 (for individuals aged under 65) is unlikely to benefit many vets as the basic rate band for 2011-12 is to be reduced to effectively remove the benefit for higher and additional rate taxpayers: the 50% additional rate band is unlikely to be removed in the next few years.
In fact, the reduction in the basic rate band suggested would more than compensate for the allowance increase and make higher rate taxpayers £100 worse off overall.
As expected, employers’ national insurance contributions (NIC) will increase to 13.8% from 2011-12. The cost of this increase to employers will be reduced by raising the threshold at which they start to pay NIC on each employee’s salary.
The proposed £21 per week increase in the threshold (above the normal inflation uprating) means that employers will save up to £150 per employee compared to the full 1% increase.
This does not mean an employer’s total NIC bill will go down. For example, assuming a threshold increase for inflation of 5%, the adjustments would still mean that an employer would pay more NIC for any employee on an annual salary of more than £24,860 for 2011-12.
However, vets thinking of setting up a new practice outside London, the south-east and the eastern region may benefit from the new scheme to start in September 2010 that will exempt a new employer from paying the first £5,000 of Class 1 employer’s NIC due in the first 12 months of employment, for each of the first 10 employees hired in the first year of business.
This relief will also be available to new practices starting up from 23rd June 2010 if they meet the qualifying conditions.
Practices that will need substantial amounts of new equipment over the next five years should consider if they should make the investment now. The annual investment allowance which provides 100% relief against profit on most plant and machinery (but not cars) will be reduced from £100,000 to £25,000 a year from April 2012. Practices trading as companies will also benefit by reducing their profits taxed now at 21% or 28% (20% or 27% for 2011-12) rather than at lower rates of corporation tax in the future: the main corporation tax rate reduces to 24% by 2014-15.
The introduction of a new 28% rate of capital gains tax (CGT) was not as bad as many had feared but the Chancellor has left his options open for 2011-12 and later tax years – so the rate could increase further.
The new rules hark back to the pre2008 CGT regime with gains being added to the individual’s annual income to decide which tax rate is to be applied. Gains falling within the basic rate band will be taxed at 18%; gains falling in higher bands will suffer CGT at 28%.
For example, an investor with income of £25,000 in the current year who realises a gain of £30,000 on selling shares (after using capital losses and his or her annual exemption) will pay some CGT at 18% and some at 28% unless entrepreneurs’ relief applies.
The change to entrepreneurs’ relief is great news: the lifetime limit for gains on business assets eligible for entrepreneurs’ relief is increased to £5 million for qualifying business disposals occurring on or after 23rd June 2010. The effect is to reduce the tax charge on qualifying gains to 10% so it is now worth up to £900,000 in total: increasing the benefit of holding the practice premises within the business until retirement.
More good news on retirement came with the change to pension annuities. The requirement to either purchase an annuity or enter an alternatively secured pension (ASP) from age 75 has been changed to age 77 with immediate effect for those who had not attained age 75 by 22nd June 2010.
This means that those currently taking unsecured income (income drawdown) will no longer be subject to the more restrictive post-75 minimum and maximum income limits until age 77.
Perhaps as importantly, the penal charges (up to 82% of the fund) on any lump sum death benefits, previously applicable from age 75, will now not apply until age 77. Instead, any individual who has not yet bought an annuity will have a 35% charge levied on any lump sum death benefits left to nominated beneficiaries.
It is important to note that the requirement to take a tax-free cash lump sum at age 75 appears to still apply, and it will be necessary to enter unsecured income if the individual does not want to purchase an annuity.
These rules are interim measures to allow individuals reaching age 75 after 22nd June 2010 to defer making a decision prior to the introduction of
further reforms, due to take effect in 2011-12.
On the negative side, the Government intends to repeal the complex new rules on pension tax relief that were to have taken effect from 2011-12. One option is to reduce the annual limit for qualifying contributions made by individuals and companies from the current £255,000 to somewhere between £30,000 and £45,000 – limiting the scope for vets to make large contributions when approaching retirement. The Government also intends to increase the state pension age to 66 from 2016.
Clearly, there are many new tax issues for vets to consider but, overall, the changes further emphasise the attractions for vets operating as sole traders or in partnership to incorporate their businesses.
- Please note that this advice is for guidance only and individuals should take their own professional advice before making any decisions based thereon.