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Budget 2020: what impact does it have for you and your business?

Houses of Parliament

Rishi Sunak, the new Chancellor of the Exchequer, delivered his first Budget speech on Wednesday 11th March. Dominated by the challenging impact of coronavirus, the government also sought to fulfil its election promises to substantially increase infrastructure expenditure.

In this article we explore the changes that could have an impact on your tax and financial planning strategy.

Firstly, there was good news for our higher earners with a £90,000 rise in the tapered annual allowance for pension contributions. The tapered annual allowance is designed to limit the amount of pension tax relief available to higher earners.

The annual allowance has been reduced from £40,000 to £10,000 for those with ‘threshold’ incomes of £110,000 and ‘adjusted’ annual incomes of £150,000 to £210,000. Adjusted income is your total taxable income, which includes your salary, dividends, rental income, savings interest plus any employer pension contributions. The government’s changes are designed to ease the pressure on NHS staff, particularly doctors and surgeons, who have received large tax bills as a result of their ‘adjusted’ earnings.

Those earning more than £110,000 will be assessed to determine whether they are subject to the annual allowance taper. From April 2020 both ‘threshold’ and ‘adjusted’ incomes will rise by £90,000, to £200,000 and £240,000, respectively. For those earning more than £300,000, the annual allowance will gradually fall from £10,000 to £4,000.

Continuing the pension theme, there was an increase in the new lifetime allowance to £1.073m for the 2020-21 tax year, from the previous allowance of £1.055m. The lifetime allowance is the total amount you can put into a pension throughout your lifetime before you receive a tax charge. Should you exceed your lifetime allowance you will face a 25% charge on the amount you have exceeded the limit by if it is withdrawn as an income. If you withdraw that as a cash lump sum, you face a 55% tax charge on the amount you’ve exceeded by.

Focusing on Capital Gains Tax, where there is a notional £300 increase in the Capital Gains Tax (CGT) annual exemption to £12,300. This is the amount of profit you can make from a capital disposal tax free in any tax year. However, a bigger impact will be the CGT applied to property sales, which must now be paid within 30 days of the date of sale, from the 6th April 2020.

This change will significantly reduce the amount of time you have to calculate and report your CGT tax bill. Previously there was a 9-18-month window to pay. However, from the 6th April 2020, CGT can be reported to HMRC via the Report Capital Gains Tax online service from the government.

Alternatively, there is the option to file a self-assessment tax return. If you usually fill in a tax return you must also report any capital gains, regardless of whether you’ve already used the online service. Additionally, you must demonstrate how you calculated each capital gain. Any money lost through an investment (for example selling a second home at a loss) must also be included in your tax return.

There was significant pre-Budget speculation around entrepreneurs’ relief, which grants a 10% tax rate on capital gains realised from the disposal of a qualifying interest in a qualifying business, up to a lifetime gains limit of £10m. For the 2020/21 tax year, business owners will be charged at 10% on the first £1m of gains, meaning anything above £1m will now be taxed at the usual 20%.

This applies to individuals, not businesses, meaning an individual will be personally liable for tax should they receive anything above £1m through the sale of a business.

You can claim entrepreneurs’ relief if:

  • You are sole trader or partner selling all, or part, of your business and/or its assets
  • You own 5% of a company’s net assets, of which you are selling and are entitled to 5% of its distributed profit
  • You sell assets from the above businesses within three years of closing down.

Another inflationary rise is in the National Insurance threshold, which has gone from £8,632 to £9,500. A typical employee will save an individual £104 a year, while a typical self-employed person will get a £78 boost.

To understand how these changes are likely to impact you personally, please do contact us. We would be delighted to provide more in-depth guidance and, if appropriate, review your current financial arrangements. Call 01823 218550 or email enquiry@caa-ltd.com and we will respond to you as soon as possible.

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