The Fizz! Blog

Watch out for changes to Child Benefit

At present, Child Benefit is not means tested.  From January, that's going to change.  Where one partner or the other has income over £50,000, parents will gradually start to lose their entitlement, and one of them earns £60,000 it will be withdrawn entirely.

That sounds quite simple in principle but in practical terms it could be difficult.  For a start, the higher earner may well not be receiving the child benefit to begin with, so one person could be receiving the benefit and another having to repay it (repayment will be via the higher earner's tax return, although you will be able to choose not to receive the payments to begin with if you know they'll just have to be repaid.  And, in any case, it's not always the case that one partner knows how much the other earns - independent taxation is a fundamental part of the UK tax system.  But apparently you'll be able to get just a "Yes" or "No" answer on that subject from HMRC (which to me is a massive invasion of privacy but there you go).  Perhaps most absurdly, because self-employed tax bills are largely based on your accounting year, not necessarily the tax year, it's possible for someone to have a good year and consequently have to repay the child benefit of a partner they hadn't actually met until after that good year.

It remains to be seen how exactly things will work in practice but, in the meantime, just be aware of the effect it could have on your household budget.  And if you don't have a household budget, consider drawing one up!

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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!

www.fizzhq.com

Some tax simplification it would be great to see in the Budget

Most people think the highest rate of tax in the UK is 50%.  It isn't.  It's 60% (*).  When someone's income exceeds £100,000, they lose £1 of their tax-free personal allowance for every £2 they earn.  The practical effect is that for every £1 they earn, they get to keep 40p (38p if you take NI into account as well).  That rate persists until their income reaches £114,950, at which point it reverts to 40% again, until the £150,000 mark is reached.

It's a completely ludicrous situation, to the point that people often don't believe you when you tell them about it.  Income tax is 0%, then 20%, then 40%, then 60%, then back down to 40% for a bit, then back up to 50%.  Why on earth would you have that pattern?  Essentially it's because the last Chancellor correctly judged that gradual withdrawal of the personal allowance was a good way of collecting some extra tax without people really understanding what was going on.

It would be really, really sensible to ditch this loss of the personal allowance.  It would make things so much easier for the affected taxpayers (admittedly a very small minority) to understand, it would be a significant effort to make the tax system more straightforward and easy to understand, and it would just be nice if something so perverse could be ditched.  Will it happen?  I hope it might.  Cutting the 50% tax rate would be politically explosive and easy for the opposition to attack.  Reversing the loss of the personal allowance was deliberately introduced by the last government to be obscure and difficult to understand, and consequently is much harder for them to attack now, remaining similarly obscure and difficult to understand.  On the other hand, its obscurity means that there may be no plaudits for ditching it, so perhaps the loss of revenue won't be judged worth the upheavel.  We will see.

www.fizzhq.com

* Actually, marginal rates can be higher when someone is earning more but losing tax credits as a consequence, but that's a subject for a different blog...