Synopsis – Budget 2002 Briefing

On the 17^th April 2002, the Chancellor delivered a tax-and-spend budget. Below is the outline of the key measures announced in the Budget 2002.

Income Tax and Personal Allowances

Income tax rates have remained unchanged. Although personal allowances for the current tax year (2002-03) have increased to £4,617, there will be no increase in the £4,615 personal allowance to protect against inflation for next tax year.

A baby rate of children’s tax credit has been introduced from April 2002 and will be joined for one year by the Children’s Tax Credit. Both will however be replaced by a new system of “Child Tax Credit” from April 2003. The new system will render all other child-related benefits obsolete apart from the universal Child Benefit.

The rates of tax applicable to dividends are 10 per cent for income below the basic rate and 32.5 per cent above it.

National Insurance Contributions (NICs)

Whether you are employers, employees or self-employed, you will be hammered with a 1% increase on all earnings above the NICs threshold of £89 per week, starting from 6^th April 2003-04. This is in addition to existing rates of contribution below the upper earnings limit for employees and the upper profits limit for the self-employed.

As a result, some salary increases will end up being taxed at a rate of 53.8%. The self-employed are also hit, with their Class 4 NI rate increasing from 7% to 8% and the additional 1% again applying to profits above the upper limit.

Corporation Tax

The corporation tax staring rate has been reduced from 10% to zeros. So, a company with profits of only £10,000 will no longer pay any corporation tax. The small companies rate has been reduced from 20% to 19%.

With these changes and the increase in NI rates, businessmen need to consider carefully as to how they structure their tax affairs.

Capital Gains Tax

The annual exempt amount is increased to £7,700 for individuals, trustees of settlements for the disabled, and personal representatives of the estate of a deceased person, and £3,850 for other trustees.

The maximum rate of business assets taper relief will be available after assets have been held for two years, not four. This will apply to disposals made on or after 6^th April 2002 (i.e. not just to disposals of assets held for more than two years after 6^th April 2002). This means that only 25% of the gains arising on qualifying assets which have been owned for two years or more will be taxed, giving a maximum CGT rate of only 10%.

There is no further relief for investment assets, for example, shares and property owned by private individuals.