Budget 2012: Personal tax relief capped but 5p income tax fillip

TODAY’S Budget confirmed what many expected in terms of measures for personal tax, savings and wealth, and although there were a raft of measures to hit the better-off, a fillip was found by cutting the 50p income tax rate by 5p.

From April 2013 the higher rate of income tax will be reduced to 45p.

The Chancellor said Britain’s tax rate is the “highest in the G20” and added that it is widely regarded by business organisations to be harming the economy.

He said that the current 50p higher tax rate had caused “massive distortions” and that the increase in the tax rate from 40p to 50p had only raised an extra £1bn – a third of what was predicted.

He said: “No Chancellor can justify a tax rate that damages our economy and raises next to nothing.”

Measures to increase stamp duty to 7% on homes over £2m – and further to 15% on those £2m+ homes bought through a company – will go some way to plug that gap caused by taking the income tax threshold up by £1,100.

Increasing it to £9,205 in April 2013 is a move that will take 2 million people out of the tax system altogether.

The Chancellor said: “My goal is a tax system where the lowest paid are lifted out of tax altogether and where the tax revenue we get from the rich increases.”

He added: “I regard tax evasion and aggressive tax avoidance as morally repugnant.”

The Chancellor made no significant changes to pensions relief but did introduce a new cap on reliefs that are currently not capped to “make sure that those on the highest income contribute a fair share”.

From next year anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25% of their income.

He said: “We’ve capped benefits.  Now it’s right to cap tax reliefs too.”

However, opposition leader Ed Milliband responded to the measures, saying: “There was one phrase missing. One thing he didn’t say is that today marks the end of ‘we are all in it together’.

“After today’s budget, millions will be paying more while millionaires pay less.”

Martin Portnoy, tax partner at Ernst & Young in Manchester, said a major theme of the Chancellor’s Budget was a redistribution of wealth between low and high earners, who he described as an “easy target”.

“High earners were given a boost with one hand but George Osborne took away five times as much with the other,” said Mr Portnoy, referring to the cut in income tax from 50p to 45p but measures including a 7% stamp duty threshold on £2m-plus homes and 15% for those bought via companies.

He described the Chancellor’s stance on clamping down on stamp duty avoidance as “bullish” and predicted that income tax could be reduced even further next year.

“What the Chancellor is saying is that he absolutely detests tax avoidance by high earners,” he added.

Confirmation that the implementation of a General Anti Avoidance Rule (GAAR) may not come as a surprise, but how this will be achieved will continue to be a cause for concern.

Mr Portnoy said the GAAR announcement might scare wealthy entrepreneurs from UK shores.

“The General Anti-Avoidance Rule (GAAR) announced by the Chancellor in today’s Budget will increase uncertainty for individuals in managing their tax affairs and may dissuade wealthy entrepreneurs from settling in the UK.

“Uncertainty about their personal tax affairs will have a major impact on entrepreneurs seeking to re-locate here. Those coming to the UK from overseas have already been faced with changes to the tax rules for non-domiciled individuals and changes to the residence rules in recent years. This consultation sends out the message that the UK has an uncertain tax regime and as a result maybe not the best place to base oneself.”