Despite the Budget giveaways, 80% fear they will be worse off – how to minimise the impact

Businesses and individuals who attended our Budget question time webinar last week fear they will be worse off as a result of the government’s Budget on 3 March, according to our poll of attendees.

The poll found that 80% of the attendees believe that the Budget will leave them financially worse off, with 64% also fearing they will fall into the inheritance tax net following the government freezing the IHT threshold for 17 years.

Attendees were also positive for the future

The poll, however, suggests that they are also positive for the future, with 25% expecting to see the economy pick up by September, 23% by the end of this year and a further 23% expecting to see recovery in the first half of 2022.

This was meant to be a Budget where the government would set out its vision for the UK’s position on the world stage. Instead, it was one delivered through the lens of the continuing COVID pandemic.

It was a Budget to provide a COVID-weary nation with a ‘financial breather’ but with announcements of significant increases in tax rates for companies and more subtle increases in tax for individuals in the not-too-distant future.

It is not surprising, therefore, to see 80% of businesses and individuals saying they expect to be worse off as a result. But there are measures that can be adopted to minimise the impact of the Budget.

Minimising the impact of the Budget

We recommend businesses and individuals:

• Explore opportunities to accelerate the timing of any capital expenditure programmes to benefit from the 130% Super Deduction tax relief.
• Look to obtain a cash flow advantage now by carrying back losses up to three years. However, this needs to be weighed against offsetting these against future profits that might be taxed at the higher rate of corporation tax from 2023.
• Explore the opportunities and tax incentives presented by the creation of Freeports in the South East over the next five years.
• Review whether your business would benefit from taking out a further government backed recovery loan of more than £250,000, consider the requirement for personal guarantees. These can be required for loans of more than £250,000 but the loans could be split between lenders to bring each below the £250,000 threshold.
• Utilise the current Capital Gains Tax rates. The Chancellor shied away from aligning to income tax, but we can expect future changes. If you have any investments, do think about whether it is sensible to realise capital gains to make use of the annual exemption (£12,300) before the end of the tax year and indeed for next tax year. It is worth a review of your assets to minimise any future tax liabilities on sale.
• Make the most of tax relief on pension contributions, particularly if you are a higher rate taxpayer. Whilst the government did not make changes in this Budget they cannot be ruled out in the future. Depending on your earnings and income levels, you may be able to contribute up to £40,000 each tax year into a pension, whilst benefitting from tax relief. With your pension funds also benefitting from a 25% tax-free lump sum on extraction and exemption from Inheritance Tax, this remains an extremely tax efficient tool.
• Review your Will and Inheritance Tax – With the Inheritance Tax nil rate band having been frozen at £325,000 now for 12 years, and for a further 5 years until 2026, it is increasingly likely that your estate will fall into the IHT net, based on house prices increases. However, whilst the nil rate band has been frozen, we have in that time had a “main residence nil rate band” of £175,000 introduced, which you can benefit from if your main home is to be left to direct descendants. Therefore, do review your Will to ensure that your Estate will benefit from this additional relief where possible. A full Inheritance Tax review would also ensure that you are taking advantage of other reliefs, including annual exemptions, gifts out of excess income and other lifetime planning tools.
• Consider the Income Tax threshold freezes – Over the course of the next 5 years, despite a promise of no rises to income tax rates, the amount of tax you will be paying (when factoring in inflation) will go up because of the freeze in the tax-free personal allowance and thresholds. To mitigate against this rise, business owners should consider remuneration planning to take advantage of different reliefs, married couples should consider splitting income producing assets between them to take full advantage of the lower tax bands, tax free personal allowances, savings allowances and dividend allowances available to all and individuals generally should consider investing in tax exempt savings such as ISAs.

We’ll keep an eye on any developments and will be regularly updating the Budget pages of our website. If you would like to discuss the implications, please don’t hesitate to get in touch.