In George Osborne’s third budget on Wednesday he claimed he wanted to reward work. His aim for Britain is to “earn its way in the world” and he is targeting creating a million new jobs over the next five years.
The Budget was the most predictable of the past few years with the many leaks leaving the Chancellor with no rabbits to pull out of the hat. In his previous two budgets the focus had been on reducing government spending. It is now clear that the coalition has moved on to reforming the tax system, seeing that as the key to promoting growth with the underlying message that it's now up to businesses themselves to deliver the goods.
The headline grabber from the coalition Chancellor was the rise in the personal tax allowance to £9,205 from April 2013. This had been widely expected in the lead up to the Budget and is a big step towards the ultimate goal of a £10,000 tax free allowance.
The Chancellor used the personal allowance increase to neutralise any political noise from his other key decision to reduce the 50 per cent tax rate to 45 per cent from April 2013. The 50 per cent tax rate has raised only a third of the estimated revenues the previous Government had hoped for. Osborne appears to not only have won the argument in Government but also has accepted the simple truth set out by what many economist call the Laffer Curve, after the American economist Arthur Laffer, that high tax rates, particularly those beyond 45 per cent, actually bring in less money for the Treasury than lower ones. The Treasury themselves believe the new rate of tax will generate five times that of the 50 per cent rate.
The Chancellor also cut the large company corporation tax rate which was due to fall to 25 per cent from 1 April to 24 per cent. This will ultimately fall in the next two years to 22 per cent and it is now almost certain that the Chancellor would like to have a single corporation tax rate for all companies of 20 per cent which would also tie in nicely with the basic rate of income tax. The UK corporation tax rate will now be one of the most competitive amongst the G20 with the aim to encourage further investment into the UK and the move has been welcomed widely by UK business.
Many had thought that there would have been measures to amend the pension regime, however, the Chancellor did not make any further changes here which will be welcome news for the pension and investment industry given the large changes and tinkering which has been seen in recent years.
It was pensioners themselves who have felt most aggrieved as they saw their age related allowances frozen and the news they will be ultimately scrapped when they will be equalised with the main tax free allowance. Mr Osborne may regret simply referring to this in his speech as “simplification”. Despite increases to pension payments it is clear that this will be a hot topic for the coming weeks and months.
The Chancellor listened to concerns over his original plans to remove child benefit from households with one earner earning in excess of £43k and this has now been increased to £60k with a phased reduction in the benefit from £50k. Although the increase in threshold has to be welcomed, there remains anomalies around the edges which has to be expected from a tax system which is based on the income of the individual whilst benefits are based on household income.
The Chancellor was in a tough mood when it came to discussing tax avoidance and he introduced a number of measures to tackle perceived abuse of the stamp duty land tax system through the use of offshore companies, including the seldom used threat of retrospective legislation. He also introduced a new stamp duty level of seven per cent for homes worth in excess of £2m.
The Chancellor also made clear his intention to introduce a general anti-tax avoidance rule or GAAR as it is commonly known. Many feel that the GAAR is unworkable and will only result in further uncertainty in the tax system and the Government can expect stiff resistance from business and the professions on a “catch all” tax rule which he is aiming to bring through in the 2013 Finance Bill.
There was welcome news for the new Scottish enterprise zones in Dundee, Irvine and Nigg where businesses setting up can take advantage of enhanced capital allowances. There was also welcome news for the North Sea oil industry with new tax allowances for a £3bn new field allowance for large and deep fields to open up west of Shetland.
A key announcement which many felt the Chancellor under sold during his speech was the increase to the threshold for Enterprise Management Incentives from £120k to £250k. EMI schemes encourage employee share ownership in small and medium sized businesses and the significant rise in the value of share options which can be owned under this scheme will be welcomed.
The message appears to be loud and clear from the Chancellor that he is looking for the private sector to step into the shoes of the public sector as it retreats with the rallying cry at the end of his speech that “we are going to earn our way out of trouble.”
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