The Chancellor has significantly exceeded market expectations in his response to the coronavirus epidemic. Higher earners and business owners could be affected by changes to personal taxation.
The UK government used its first Budget to announce a stimulus package in response to the unfolding economic impact of coronavirus. Chancellor Rishi Sunak set out a range of measures designed to help businesses, services and individuals cope with the epidemic.
The Budget speech came hours after a 0.5 percentage point rate cut by the Bank of England.
“The co-ordinated nature of the stimulus sends a strong signal that the authorities are doing whatever it takes to support the economy through a difficult period” said Global Economist Janet Mui.
She believes government and corporate efforts to contain the spread of the virus will result in a sharp hit to UK growth in the second quarter of this year. Activity should gradually recover in the second half, she predicts.
"We expect full year growth to slow from 1.4% in 2019 to just 1% in 2020, the weakest since the financial crisis."
Measures in the Chancellor’s £30 billion package include the following:
Chancellor Rishi Sunak said he and the Governor of the Bank of England "were in close contact with counterparts around the world". The spread of the virus "will have a significant effect but it will be temporary," he said.
Janet Mui is hopeful that this morning's rate reduction and targeted action by the Bank of England will support business and consumer confidence. "If the situation gets worse, we expect the Bank to cut rates to zero and embark on further quantitative easing measures," she said.
Keith Wade, Chief Economist, Schroders, said: "The Budget featured plenty of near-term support for the economy, but also went beyond market expectations in terms of stimulus. Alongside the Bank of England’s cut in interest rates earlier today, the UK has just received a tremendous shot in the arm which should inoculate the economy against the virus and beyond."
The budget also included a number of measures relating to personal taxation – summarised below.
In a measure aimed at ensuring NHS consultants and doctors were not penalised by the pension system, the Chancellor altered the rules relating to annual pension contributions. The changes are helpful to higher earners but the rules remain highly complex.
Currently, pension contributions of up to £40,000 are available for those earning up to £150,000 and attract tax relief at the saver’s highest marginal rate. Above the £150,000 threshold, the £40,000 annual allowance tapers down to £10,000 once total earnings reach £210,000.
Today’s budget will raise the taper threshold by £90,000 in the 2020-21 tax year. This means that the initial income assessment for tapering does not start until total income is above £200,000 and that actual tapering only occurs for those with "adjusted income" in excess of £240,000.
This will allow many who have previously reduced their contributions to increase them again.
However, the minimum contribution under the tapering system has been reduced further to £4,000 for those with adjusted incomes in excess of £300,000. This reduces further still the amount of pension contributions that the highest earners can make.
The lifetime pension limit receives a statutory increase to £1,073,100 from April 2020.
Entrepreneurs’ relief applies a discounted rate of capital gains tax on gains made when selling a business. Where a business sale qualifies for the relief, a reduced capital gains tax rate of 10% rather than the standard 20% applies to taxable gains.
Previously, up to £10 million gains made during a business owner’s lifetime could benefit from the 10% discounted rate. This has now been reduced to £1m, which was the level it was originally introduced at in 2008.
The Chancellor said he expects 80% of business owners to be unaffected by this reduction. James Gladstone, Cazenove Capital's Head of Wealth Planning, said that while some entrepreneurs would face higher tax liabilities as a result of this move, CGT rates remain at historic lows, even at 20%.
Until the 2016-17 tax year, higher-rate taxpayers had paid a capital gains tax rate of 28%. Under previous regimes it had been as high as 40%, depending on the circumstances of the sale.
"The timing of successful business sales is generally not tax-driven," James Gladstone said.
"Our experience working with business-owners suggests the ultimate financial outcome of a sale is determined by other factors far more important than tax. Market conditions, business performance and the support of key stakeholders inside and outside the business are just some of the factors likely to influence value achieved and some of the other, more supportive measures announced in today’s budget may prove beneficial in this context."
He also pointed out that significant planning opportunities remain. "Provided action is taken at the appropriate stages, business owners continue to have a number of options to manage the sale with a view towards meeting their own financial objectives for the longer term."
The Junior ISA (JISA) allowance has been more than doubled to £9,000. This is a big increase. JISAs are long-term, tax-free savings accounts for children which can be accessed only at age 18.
The Budget introduced a stamp duty surcharge of 2% for non-resident purchasers of UK residential property.
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