Hornbeam's Budget View
George Osborne has brought in a budget full of pleasant surprises for Hornbeam clients in spite
of running one of the worst budget deficits ever both in absolute terms and in percentage of GDP.
The increase in the personal allowance to £10,000 from 6 April 2014 was well flagged
and the further increase to £10,500 for 2015/16 will be welcomed by virtually everyone.
Past practice has been for the point at which the 40% band starts to be reduced to ensure that
higher rate tax payers get little benefit. However from 6 April 2014 the basic rate band only
falls from £32,011 to £31,865, this £144 fall is a lot less than the £560 rise in the personal
allowance so middle income earners get most of the benefit at 40%. In 2015/16 the fall in the
basic rate band has been restricted to £100 whilst the personal allowance goes up by £500
so again most of the benefit for middle income earners is at 40% (saving for basic rate taxpayers
is £100, higher rate taxpayers is £180).
The partners at Hornbeam particularly welcome this change in tack.
We had been led to believe that the Annual Investment Allowance (100% tax relief for
capital investment) was to be reduced from £250,000 to £25,000 this April and whilst
this has little impact on most of our clients for a few it is a very bitter pill indeed.
Instead the AIA is to be raised to £500,000 for one year and then revert to £250,000
which is a very welcome change for at least one of our clients. However the transitional
rules are extremely complex each time there is a change, and a period of stability would be
nearly as much use as the increased allowance. Stability was an issue that the Office of
Tax Simplification raised, but has not met with much sympathy from the Treasury.
As 99% of businesses were already getting 100% of their capital investment relieved and for
big manufacturers £500,000 is a drop in the ocean, I surmise that this much trumpeted
allowance will have material benefit to only a very few real businesses, and relatively
small cost to the treasury.
The change in Pension scheme rules for people who have unclaimed defined contribution
schemes (such as the Hornbeam staff and partners) was, at first, of great interest to me.
Basically the change is that in future pensioners will have complete freedom to draw down as
much of the scheme fund as they wish, the first 25% being tax free and the balance being
s highest marginal rate of tax. Whilst this massive improvement in flexibility is extremely
welcome, it is unlikely that many people will take much advantage of
this for the following reasons.
Imagine a retiree with a fund of £200,000 and other income of £25,000. As before the usual
advice will be to take the £50,000 tax free lump sum and perhaps to draw down a further
£15,000 taking the pensioner up to the basic rate band (so the £15,000 is taxed at 20%).
But if the remaining fund of £135,000 is drawn, this will be taxed at 40% and 45% and the
personal allowances will be lost.
It will be relatively rare that this will be an attractive option for most pensioners.
Still a pension contribution of £10,000 by a trading company for a director will save £2,000
corporation tax; 7,500 can now be accessed more flexibly. We have always been quite
enthusiastic about pension saving at Hornbeam and this increased flexibility can only
increase that enthusiasm. As I personally wrote to Gordon Brown recommending a scheme
very much like the current R and D tax credits scheme, a couple of years before the actual
scheme was introduced, I feel a very strong attachment to the scheme, even though my
contribution is entirely unacknowledged. I have found the ability of specialist consultants
to get R and D claims agreed by HMRC even when I can see no evidence of R and D, as a
pretty appalling abuse of a great idea. I therefore expected the scheme to
be quietly discontinued and am frankly amazed that in fact the relief has been improved.