Budget 2011 – A summary for Small Businesses

Here is a quick summary of the key changes from yesterdays Budget that we think will affect our clients;

  • Small companies rate of Corporation Tax cut by 1% to 20% from 1st of April
  • Main rate of Corporation Tax cut by 2% to 26% from 1st April
  • Personal Tax free allowance increased to £7,475 from 6th April 2011 and £8,105 from 6th April 2012
  • National Insurance rates increase by 1% for both employees and employers from 6th April 2011
  • Approved mileage rates increased to 45p per mile from 40p, the first increase since 2002
  • R&D tax credits increased to 200% of qualifying expenditure from 174%
  • VAT Registration limit increased to £73,000 from £70,00
  • Some tax reliefs for business have been withdrawn – including late night staff taxis and free meals provided for staff who cycle to work.

Read on if you would like a little more detail on the key changes…

Corporation Tax

The small profits rate of corporation tax will be cut from 21% to 20% from 1 April 2011, and is expected to remain at that rate for the next four years, but this has not been confirmed. The small profits rate applies to profits of up to £300,000 where the company has no associated companies which are trading.

The main rate of corporation tax was due to be cut from 28% to 27% from April 2011, but that rate will now be 26%, reducing by 1% per year thereafter until the rate reaches 23%.

Personal Allowances

These allowances represent the amount of an individual’s income in the tax year that is not subject to income tax. Some people are eligible for several allowances such as the personal allowance, and married couples allowance. The married couples allowance is available to married persons and civil partners, but only where at least one person of the couple was born before 6 April 1935.

The personal allowance for 2011/12 will increase by £1,000 to £7,475, but the 40% tax threshold will reduce to £35,000 (see below). This ensures that higher and additional rate taxpayers do not benefit from the increased personal allowance in this year. From 6 April 2012 the personal allowance will be increased again by £630 to £8,105, and in that year the 40% threshold will be reduced further to £34,370.

Personal allowances are withdrawn at certain income thresholds, indicated below, and cannot be claimed by non-domiciled individuals who elect to have their foreign income and gains taxed on the remittance basis for the tax year.

The 2011/12 personal allowances are…
Under 65 – £7,475
65-74 – £9,940
75 and over – £10,090
Minimum married couples allowance* – £2,800
Maximum married couples allowance* – £7,295
Blind person’s allowance – £1,980
Income limit for allowances for those aged 65 or more – £24,000
Income limit for allowances for those aged under 65 – £100,000

* given where one partner was born before 6/4/1935, and only as 10% reduction in tax.

National Insurance

When business owners and accountants are asked what single action could simplify the tax system, most suggest merging income tax and NI. This message has finally been heard by the Government, who will start consulting on how the operation of the NI and income tax could be combined.

This does not mean these two taxes will be merged. The Government has stated that NI will not be applied to savings, dividends or pensions. The likely changes will involve aligning the rules and mechanics of collecting the two taxes. However, don’t expect big changes any time soon!

From 6 April 2011 the rates and thresholds for the main NI contributions were already known with most increasing by 1%. The main figures for 2011/12 are:

Lower Earnings Limit (LEL) for Class 1 NICs – £102/week
Employer’s class 1 above £136/week not contracted out – 13.8%
Employee’s class 1 not contracted out from £139 to £817/week – 12%
Employee’s additional class 1 above £817/week – 2%
Self-employed class 4 from £7,225 to £42,475 per annum – 9%
Self-employed class 4 additional rate above £42,475 per annum – 2%
Self-employed class 2 – £2.50 per week
Voluntary contributions class 3 – £12.60 per week

Approved Mileage Rates

Where an employee uses his or her own car for business journeys their employer can pay them an approved mileage allowance payment (AMAP), free of tax and NIC.

This AMAP rate has been stuck at 40p per mile since about 2002, and at current petrol prices many employees who need to use their car for business cannot afford to do so. The AMAP will increase to 45p per mile from 6 April 2011 for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile. If the employer does not pay the full AMAP rate the employee can claim the additional amount in tax relief from HMRC.

The tax free AMAP can also be paid by charities to volunteers. The self-employed, who have turnover below the VAT registration threshold (£73,000 from 1 April 2011), may also use the AMAP rate as a substitute for motor expenses claimed in their accounts.

Where an employee carries a fellow employee as a passenger on a business journey, an additional 5p per mile tax free can be paid. The rate will also now apply to volunteer drivers who take other volunteers on business/ charity related journeys.

Research and Development Tax Credits

Small and medium sized companies could previously claim tax relief of 175% for qualifying revenue expenditure incurred on research and development (R&D) projects. This tax relief will increase to 200% for R&D expenditure incurred after 31 March 2011. A further increase in this tax relief to 225% is planned for qualifying R&D expenditure incurred after 31 March 2012.

The rules that govern what type of expenditure qualifies for this relief will also be revised with effect from 2012 to make it easier for small companies to claim this relief.

VAT Rates and Thresholds

There were few changes announced for VAT. The rates and thresholds are as follows from 1 April 2011:

Lower rate – 0%
Reduced rate – 5%
Standard rate – 20%
Registration turnover – £73,000 (up from £70,000)
Deregistration turnover – £71,000 (up from £68,000)

Tax Reliefs to Go

The Office for Tax Simplification has suggested a list of more than 40 tax reliefs that could be abolished because they are rarely used, or are in fact obsolete. Most of these reliefs will be abolished after consultation. Reliefs on this list which may be of interest to small businesses include:

  • Tax free meals for employees who cycle to work
  • Tax free late night taxis for employees
  • Additional tax relief for companies that clean up contaminated land or buildings (land remediation relief)
  • Relief from CGT for grants for giving up agricultural land

If you have any questions or would like some more information please do not hesitate to contact us.

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