On Wednesday 11th March 2020 we saw the first budget for some time.
You will note from the title of this article I have included the month. March 2020. This is because the government have announced a further Budget in the autumn.
With the Coronavirus having a profound impact on the economy, this Budget was all about measures to help protect it. There was little announced that changes things from a financial planning point of view, although there were still a few interesting things to pick through.
What was announced in the Budget – March 2020
Corporation Tax
The main rate of Corporation Tax will remain at 19%. It was supposed to be reducing to 17% from the 2020/21 tax year but will now stay at 19% for the next two tax years.
This will increase the benefit of making company pension contributions as company owners will get full tax relief on 19% rather than 17%.
National Insurance
For small businesses (those with an employer’s N.I. bill of less than £100,000) the Employment Allowance will be increasing from £3,000 to £4,000 from the 2020/21 tax year.
This allowance can be claimed as a credit towards Employer N.I.
The primary threshold (the amount at which employee’s N.I. starts to kick in) will increase from £8,632 to £9,500 from the 2020/21 tax year, saving employees £104 – every little helps!
The secondary threshold (the amount at which employer’s N.I. starts to kick in) will increase from £8,632 to £8,788 from the 2020/21 tax year.
The lower earnings level (the minimum amount an employee must earn to qualify for state benefits including the State Pension) is increasing from £6,136 to £6,240 from the 2020/21 tax year.
There were no changes to Income Tax on salary or dividends.
For the majority of business owners it is likely that it will still be more tax efficient to pay a combination of salary and dividends.
Capital Gains Tax
The Capital Gains Tax allowance (the amount you can gain before paying CGT) will increase from £12,000 to £12,300 from the 2020/21 tax year. For Trusts it will be £6,150.
Remember a married couple can still split an asset and use 2 x CGT allowances.
Entrepreneurs Relief
This was one of the most significant announcements in the Budget.
When selling a qualifying business you can claim Entrepreneurs Relief to limit the Capital Gains Tax you pay on the sale to 10%.
Up until 11th March 2020 the lifetime limit for claiming Entrepreneurs Relief was £10 million.
For any business sold after 11th March 2020 the lifetime limit will be £1 million.
If your past Entrepreneurs Relief claims are already more than £1 million then you have nothing left for the future.
It now makes more sense than ever to make pension contributions whilst you still own the business as a way to get money out of the business tax efficiently.
You can also split shares in the company before sale and pass to partner and children who will then all be able to claim £1 million Entrepreneurs Relief.
Pensions and Investments
The pension Lifetime Allowance will increase to £1,073,100 from the 2020/21 tax year.
There was a big pension change for high earners who are still accumulating pension savings.
In recent years the government has bought in a complex tapering system which basically reduces the amount of tax relievable pension contributions you can make the more you earn.
Now the government has announced increases to these limits.
The limit for threshold income will increase from £110,000 to £200,000 and the limit for adjusted income (including employer pension contributions) will increase from £150,000 to £240,000 from the 2020/21 tax year.
This is great news for NHS staff who were struggling with large tax bills as a result of over contributing to their pension through no fault of their own.
There is still a great deal of complexity with how these calculations should be carried out and if you plan to use unused allowances from previous years you will need to know the relevant rules of each individual year!
So the advice is very much……. get advice!
The limits for normal cash ISAs and stocks and shares ISAs stayed the same at £20,000 but there was a big jump announced for the Junior ISA. The amount you can pay into a child’s ISA will increase from £4,368 to £9,000 from the 2020/21 tax year.
Budget – March 2020 – planning ahead
The planned autumn Budget may be the time the government decide to make much more fundamental changes to the tax system. It will all depend on what has happened with the Coronavirus by then.
The Office of Tax Simplification have recently carried out a review of Inheritance Tax and have recommended a raft of changes. Could we see some big announcements here?
If you would like to get on top of your financial planning in light of changes announced in the latest Budget or would like to plan ahead for the upcoming Budget, then why not take advantage of our free 15-minute call.
This will be particularly useful to business owners and NHS staff who face the most complexity when trying to save their money tax efficiently.
You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
