What we think about this year's budget

Although this week's budget was really quite interesting (if you like that sort of thing), there wasn't a lot of immediate change for small and medium businesses.  Here's a quick summary of the announcements we think are most relevant.

Personal Allowance

The amount you can earn tax-free is going up to £9,205 - from April 2013.  That means that our recommendations to clients on tax-efficient salary and dividends for director-shareholders of limited companies over the next twelve months remain unchanged.

The increase is billed as helping out the lowest paid workers.  In reality, it benefits all basic rate taxpayers.  Higher rate taxpayers don't benefit, as the higher rate threshold is being shifted down and they'll pay more higher rate tax, wiping out the saving.

Granny tax?

At present, those over retirement age get an extra bit of tax-free personal allowance each year - about £3,000.    But you start to lose that extra allowance once your income hits £24,000 (this year), so retired people with high incomes don't get any extra allowance.  Anyway, that extra allowance will be disappearing in future - although people already of retirement age will retain it.  The argument is that, since the 0% allowance is going up very quickly anyway, the extra boost is no longer necessary.  On top of that, our changing economy and housing market could mean that a presumption that the old need more help than the young from the tax system may be less robust than it once was.  Admittedly, that's unlikely to wash with those who were expecting an increase in their 0% allowance on retirement and now won't be getting it.

Corporation Tax

This is coming down for large companies, but for small companies (i.e. the majority of people reading this), the rate remains 20%.  In the long run the government's target is certainly to equalise basic rate tax, small company tax and large company tax at 20%, so don't expect a change in small company corporation tax any time soon.

Child Benefit

The plan to remove this from all households with a higher-rate taxpayer has been softened.  Now it will be removed from households with someone earning over £50,000, on a gradual basis.  A knock-on effect of this is going to be more people having to submit tax returns.  At present, HMRC don't ask most higher-rate taxpayers to submit tax returns.  However, the removal of child benefit is going to be achieved via a tax return, so HMRC will be asking lots of parents earning £50,000 to £60,000 to submit tax returns from now on.

50p down to 45p next year

From April 2013 the top rate of tax will go down to 45p.  This is probably sensible - high rates of tax clearly cause behavioural changes that can lead to a reduction in tax payments.  We saw at first hand taxpayers taking completely reasonable and straightforward action to reduce their liabilities as a result of the 50p rate.  Announcing the reduction so far in advance is in itself going to cause behavioural changes - anyone who was planning to take massive dividends from their company between now and 5 April 2013 is now quite likely to wait until 6 April 2013 before doing so, to take advantage of the lower rate.  So tax will still be paid - perhaps even more than would have been paid under the 50p regime - but it may be paid a year or two later than it might have been.

Cash accounting for small businesses?

The Chancellor confirmed the aspiration for small businesses to become exempt from having to prepare accounts on a conventional basis - income earned minus costs incurred, regardless of whether they've been paid or not - and instead use "cash in minus cash out", with some modification for non-cash items.  We're sceptical about whether this will result in people paying an appropriate amount of tax (whether too little or too much), but apparently it has worked in some other jurisdictions, so we'll keep an open mind!

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