IT Contractor Tax Limited Company Accounts Accounting

The most eagerly anticipated Budget in decades is likely to contain significant changes to most areas of business and personal taxation. Given the size of the UK's budget deficit, what can contractors expect on June 22nd?

Income Tax

The coalition has already indicated that it hopes to raise the starting rate threshold to £10,000 over the next five years. Several experts suggest an initial rise of £1,000 on June 22nd. Clearly, this will be an expensive move, so the starting rate for the 40% and 50% bands may also be reduced accordingly.

Tax advisers, PKF, suggest that the 50% top rate of income tax is "likely to remain in force for some time - at least until 2012 and possibly the whole period of the Coalition Government."

Capital Gains Tax

The most controversial of all the predicted changes is a large hike in the levels of capital gains tax payable on the disposal of non-business assets. It remains to be seen if any changes will start in April 2011, from Budget day itself, or be backdated to April 2010.

PKF points out that "retrospective tax legislation is rare and back-dating the increase would be a very controversial move but delaying the increase could be rather expensive."

The FT also notes that "there is no over-arching evidence that shows that by raising the rate of capital gains tax that it necessarily translates into higher tax revenue raised."

Although CGT is likely to rise for personal assets, it seems likely that entrepreneurs' relief will remain in place, whereby business sale proceeds are taxed at 10% up to a "lifetime allowance" of £2 million.

NICs

The previous Government's planned 1% rise in employee contributions seems likely to go ahead from next April, although the controversial 1% rise in employers' NI has been scrapped.

Inheritance Tax

The Tories' plans to increase the IHT threshold to £1m have been scrapped, and with an increase to the current £325,000 threshold unlikely, more and more estates will be subject to IHT.

Kingston Smith LLP says that the decision to freeze the threshold is "regrettable and will result in thousands of people being dragged into the IHT net - rather more than just the '3,000 richest families in the land' referred to throughout the election campaign."

Pension contributions

Following the lead from the forthcoming April 2011 changes made in the last Labour budget, the coalition may want to further remove pensions relief benefits for higher earners.

Child Trust Funds

The coalition has already announced its plans to phase out Child Trust Fund Vouchers immediately, and to stop issuing them altogether from 1st January 2011.

Tax Credits

For obvious reasons, tax credits are more likely to be focused on lower earners, and phased out (or reduced) for middle and high earners.

Corporation Tax

Both parties have pledged to reduce the main rate of Corporation Tax, from the current 28p rate to 25p. The Tories also pledged to reduce the small companies rate from 21p to 20p. Whether this is affordable or not, remains to be seen.

Kingston Smith says that "the government can't afford to lower the headline rate of corporation tax... without securing additional tax via reductions in reliefs and allowances"

IR35

The coalition has promised to review the controversial tax rules, however the legislation is more likely to be addressed during the overall review of small business taxation.

Contracting industry experts have responded with a mixture of joy and caution to the news that IR35 is to be reviewed.

VAT

A sure-fire way to boost the Treasury coffers would be via an increase in the standard rate of VAT, from 17.5% to 20%. Most EU countries have VAT rates of 20% or more, although there could be inflationary consequences of such a rise.

The FT points out that "in reality most common purchases are subject to VAT and increases do tend to hit those on lower incomes proportionately harder than the rest of the population."