George Osborne’s first Budget has been described as the most significant in a generation. There were large tax rises for consumers, but basic rate taxpayers should pay less tax.

For companies, there was welcome news in the form of reduced corporation tax rates and the promise of tax simplification in future, but this was tempered by reduced tax allowances for capital expenditure.

Many investors had feared large rises in capital gains tax. Investors who qualify for Entrepreneurs’ Relief will benefit from an increase in the capital gains covered by it to £5m over a lifetime, but other investors will suffer from an immediate rise in the capital gains tax rate from 18% to 28%.

It is difficult to imagine Gordon Brown proudly uttering the words “we are set to miss the golden rule in this cycle by £485 billion” but today’s Budget saw the demise of golden rules, prudence and “neo-endogenous growth theory”. In their place were shared pain and a promise that “Everyone will share in the rewards” when the public finances are repaired.

We had been carefully prepared for the pain of this Budget ever since the Coalition Agreement was signed in early May with the promise of higher capital gains tax rates and the widely rumoured VAT increase. After living in fear for two months, the feeling in the Friend office this afternoon is that the pain could have been an awful lot worse. Many people will pay more tax, but most will pay less than they had feared.

Income tax and National Insurance Contributions (“NICs”)

As widely reported, the personal allowance for basic rate taxpayers will increase by £1,000 from next April, saving basic rate taxpayers £200 per year. Higher-rate taxpayers, earning over £44,000 or so, will be only £65 per year better off because the earnings threshold for higher rate tax will be reduced, or £100 worse off if their income is from savings or investments. Anyone earning over £113,000 per year will be at least £335 worse off as a result of the changes.

Otherwise, there were no changes to previously announced income tax and NIC rises, so the 50% rate remains in place, an effective tax rate of 60% will apply to income between £100,000 and £112,950 and we will all be paying an extra 1% National Insurance from next April.

Employers’ National Insurance Contributions (“NICs”)

To mitigate “Labour’s Jobs Tax”, as Employers’ NICs are always described, the earnings threshold for paying Employers’ NIC will be increased by £21 per week when the rate is increased from 12.8% to 13.8% next April. Employers’ NICs on employee earnings of less than £20,800 per year will be lower than had neither of the changes been made.

Capital Gains Tax (“CGT”)

The CGT rate will increase from midnight tonight (Tuesday) to 28% for higher-rate taxpayers. However, Entrepreneurs‘ Relief will also be increased from tonight to cover the first £5m of qualifying capital gains in a lifetime.

Broadly, Entrepreneurs’ Relief reduces the CGT rate to 10% for sales of qualifying business assets and of shares in unquoted trading companies where the seller has held at least a 5% shareholding for at least 12 months and is an officer, director or full-time employee of the company.

It would appear that the Conservatives have won most of the arguments regarding CGT with the Liberal Democrats. Entrepreneurial activity will continue to be favoured whilst the Government have acknowledged that very high rates of CGT would be counterproductive.

The big losers from this change will be second-home owners, stock market investors and investors holding small stakes in companies or who are not officers, directors or full-time employees of companies whose shares they hold. Venture capitalists and business angels may wish to consider how they manage their investments, particularly if they do not qualify for Enterprise Investment Scheme (“EIS”) benefits.

Pensions

When introducing the 50% top rate of tax, the previous government also introduced a fiendishly complicated system to ensure that 50% taxpayers received only 20% tax relief on pension contributions. Whilst acknowledging the need to retain the £3.5bn tax that this measure is designed to generate (and presumably to demonstrate that everyone is suffering together), the Chancellor did suggest that this regime would be simplified, probably by the imposition of an annual limit on tax effective pension contributions.

VAT

The biggest jeer from the Labour benches was reserved for the increase of VAT from 17.5% to 20% from 4 January 2011. The date was clearly chosen to avoid the inflationary effects of two VAT rises in the same year and measures will be put in place to prevent arrangements designed to charge 17.5% VAT on goods or services to be provided after the increase.

Corporation Tax Simplification

George Osborne announced that he wanted to simplify the UK’s corporation tax system over the next 5 years. The UK proudly boasts the longest tax code in the world, having recently overtaken India. Whilst the simplification measures have not yet been announced, the Government’s policy approach indicates that they wish to restore the tax system’s reputation for predictability and stability and to make it more competitive, simpler, greener and fairer. Such an approach is to be welcomed, but please rest assured that, whatever the changes, a poor tax adviser is still likely to be as rare as silverware in the England trophy cabinet!

Corporation Tax Changes

The main rate of corporation tax will be reduced from 28% to 24% in annual 1% increments from next April, whilst the small companies rate will be reduced to 20%, also from next April.

To compensate for these rate reductions, the annual investment allowance (“AIA”) will be reduced from £100,000 to £25,000 and the capital allowances rate will be reduced from 20% of qualifying expenditure to 18% from April 2012. The AIA gives a 100% first year allowance on expenditure up to the limit and it may be worth considering bringing forward expenditure to benefit from the more generous rates.

Despite concerns that the reduced headline rate would mask a higher effective tax rate, the government have promised that manufacturing will pay less tax overall as a result of these changes.

Other Measures

The Chancellor promised to look into the taxation of foreign profits regime, which makes the UK a fairly unattractive holding company regime for many multinationals, and to consider the taxation of intellectual property. This could include the introduction of a low rate of tax for income derived from patents.

Banks are to be hit with a £2bn levy on their balance sheets and National Insurance holidays will be introduced for new businesses taking on employees outside of London and the Southeast.

Finally, the favourable tax status of furnished holiday lettings will be retained whilst targeted tax relief for the video games industry will be withdrawn. Clearly, the new generation of MPs do not have Playstations in their Cornish holiday homes!

Summary

Today’s Budget contained a large number of tax increases together with a few tax reductions. Whilst we are all likely to pay more tax in future, it is to be hoped that the tax system will ultimately become more efficient, making the UK a more attractive place to do business.

A detailed Budget analysis will be available on our website www.friendllp.com. If you would like to discuss the Budget, please contact Frank Upton, Iain Wright or your usual Friend LLP contact.