How the UK Emergency Budget affects Online Merchants



The emergency budget was almost certainly bad news for most of the country, and few will remain unaffected although it’s intended that those with the lowest earnings will be hit least. Reductions in child tax credits will be reduced or removed for the highest paid workers and change to income tax will also assist lower paid workers with no benefit to higher rate tax payers.

However the budget sets out a clear mandate for private businesses with measure to assist them, whilst there are no surprises that government spending in the public sector has been hit hard. There will be a two-year pay freeze for public sector workers earning more than £21,000, although the 1.7 million lower paid workers will get a flat £250 pay rise each year. Limits will be put on the salaries of the highest paid public sector workers.

The main changes that will affect online businesses are:

“The change that will affect most eBay and online traders and of course every single consumer in the country is the rise in VAT!”

VAT

Almost certainly the change that will affect most eBay and online traders and of course every single consumer in the country is the rise in VAT from 17.5% to 20% which will come into effect on 1st January 2011. There will be no changes to the current zero rate items such as food, children’s clothing and books. The reduced rate of 5% also remains unchanged.

It’s worth noting that this affects almost every purchase made in the country, including fuel where there were no duty changes. However it’s still well short of the maximum allowed by the EU which is 25% VAT.

Corporation Tax and Capital Allowances

The main rate of corporation tax will fall to 27% on 1 April 2011, with further 1% cuts in the following three years ending at 24% in 2014. The small profits rate of corporation tax will fall to 20% for 2011, rather than increasing to 22% as previously announced. This is a move which businesses will welcome and 24% corporation tax rate would be the lowest in the G7 unless other countries follow suit. The corporation tax is an indicator that the government is serious about competitiveness for the UK’s businesses.

There is a downside for investment though, capital allowances changes will reduce the rate at which businesses receive tax relief for investment in plant and machinery. However over time they will still be able to recoup cost, but over a longer period of time.

Income Tax

Lower paid workers will benefit from the £1000 raise to £7,475 before they start to pay Income Tax. The higher rates thresholds for tax and National Insurance will be reduced so higher paid earners won’t benefit. Employers will benefit from the employers National Insurance threshold (the point at which they pay N.I on employees earnings) rising by £21/week.

National Insurance Holiday for New Businesses

In certain parts of the country employers will not have to pay the first £5,000 of employer’s Class 1 National Insurance Contributions for the first 12 months of employment their first 10 employees. This will apply to most of the UK with the exception of London and the South East. However this does appear unfair to existing businesses that may be just about to take on their first employee as well of course those that live in the excluded areas.

Capital Gains

Basic rate taxpayers will pay Capital Gains Tax at a rate of 18% compared to 20% levels of income tax and the annual exemption of £10,100 will remain. Higher-rate taxpayers will pay Capital Gains Tax at a rate of 28% compared to levels of income tax at 40%. . Surprisingly the chancellor said that raising the higher rate above 28% would result in a fall in total revenues. This is better news that forecast as figure for Capital Gains of as much as 40% or 50% were predicted. This change lowers the incentive to extract profits from a company other than as Income, and will affect those who have built a successful business and wish to float them with a share issue or to simply sell them

However the 10% Capital gains tax rate for entrepreneurs, which currently applies to the first £2m of qualifying gains made over a lifetime, will be extended to the first £5m of lifetime gains.

How the UK Emergency Budget affects Online Merchants was last modified: May 25th, 2011 by Andrew Pinner