Watch out for tax creep

Tax creep may be a rude name for the Chancellor.  It is also the process by which tax allowances wither away if they are not increased in line with inflation.  The result is a stealthy increase in tax.

The latest candidate is the level of income at which 40% higher income tax rate cuts in.

In the halcyon days of 2009/10, the personal allowance was £6,475 and the basic rate income tax band £37,400, so higher rate tax started at an income of £43,875.  Currently, the threshold is £42,475.  It will be the same in the next tax year after 5 April.  From April 2013, the point above which 40% income tax is payable is reduced to £41,450.

All of this is done with the laudable aim of giving lower earners more benefit than higher earners from the increase in the personal income tax allowance.  For us taxpayers, increasing the personal allowance but lowering the threshold for higher rate tax fees like the more we pull the bedclothes up, the more our feet stick out the bottom of the covers.  It means hundreds of thousands more people will find themselves paying income tax at 40%.

Where members of one family work in a business run through a partnership or a company, it becomes more important than ever to allocate earnings and profits on a commercial justifiable basis, but also with an eye to avoiding family members going into the 40% income tax band if possible.

Where you work in partnership with your spouse and/or your adult children, you may consider a higher profit share for them can be commercially justified.

Other examples of tax creep are the annual capital gains tax allowance, which stays fixed at £10,600 next year, and the nil rate band for inheritance tax which stays at £325,000 (where it has been since 2009) until 2015.

One better piece of news is that the new 7% rate of Stamp Duty Land Tax on properties over £2m only applies to residential properties.  Most farms count as mixed (residential and commercial) properties, so the maximum rate of stamp duty for farms is 4% where the purchase price exceeds £500,000.

Finally, DEFRA announce a consultation about making it easier to get planning for change of use of redundant agricultural buildings for other purposes.  Anything which reduces the blizzard of expensive specialist reports currently needed for such planning projects would be most welcome.

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