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Article 7 DB Wood Budget News 2009 Notes
Monday, 27th April 2009
As the industry expected there were some sweeping tax reforms, which will affect most of our clients in a neutral or negative manner. Unfortunately, the Governments handling of public finances left Alistair Darling little choice but to reduce tax breaks for higher earners and increase their tax charges.
It has been well documented in the media that the Governments policy to spend rather than save would mean that his bullish forecasts for economic growth, combined with poor regulation and a global financial crisis would result in the requirement for drastic measures.
It is not our role to act as political commentators, but it is our role to give advice to our clients on the effects that changes in tax legislation and budget spending will have on client’s wealth, both now and in the future and where possible, what actions should be taken to plan most appropriately. We have split our response into two sections, firstly the effects from a Business perspective and secondly the effects on the individual tax payer.
Key Changes for Businesses.
Rates of Corporation Tax
The headline rate of corporation tax, which applying to profits over £300,000 remains at 28%; for profits up to £300,000 the rate of corporation tax was due to increase by 1% to 22% from April 2009. However, this increase has been deferred, so the rate remains at 21%.
NOTE: The benefits of converting from self employed status to Ltd company status are less than they were, due to recent increases in the lower rates of corporation tax. It is still worth pointing out where we see the cross over point for tax efficiency. If as a self employed person your net profits are in excess of £60,000, then it is very likely you would save around £5000 a year in tax by moving status. The same does not necessarily apply in reverse and individual circumstances will differ. Professional advice will quickly asses the benefits either way.
Capital Expenditure Allowances
Writing down allowances on capital expenditure has been increased from 20% to 40% for one year. The annual investment allowance (100% write off) of £50,000 remains in place, with the 40% allowance applying to any expenditure above this figure.
Note: This will only be of any major benefit for larger companies, or smaller companies making an unusual one off large purchase. Smaller companies should make sure they use their £50,000 allowance to capacity, rather than using 40% in one year and 60%. As so often in life, timing and planning are important to maximise tax efficiency.
Cars
Capital allowances for cars will be based on carbon emissions not price. The allowance will be capped. For cars with emissions equal or lower than 160, expenditure can now be included in the general pool and will be subject to the normal rate of capital allowance, 40% for the next twelve months and 20% thereafter (see above).
For cars with emissions greater than 160, an annual writing down allowance of only 10% will be available.
Note: This change is a move to link vehicles with capital allowances and not so directly with benefits in kind. Cars with greater emissions of course give rise to greater tax levels, as the Government look to do their bit for the environment.
Carry-back of Losses
As a change to the original announcement, losses can be carried back for up to three years and has been extended to cover two years rather than the one year. This will cover two years from 24th November 2008 for companies and the 2008/8 and 2009/10 tax years for unincorporated businesses.
Key Changes for Individuals and Families
Tax Rates & Allowances:
National Insurance Contributions
National Insurance Contributions (NIC) start at £110 per week. This is a key difference as the starting point was the same as income tax and this is now not the case. This equates to £5720 and is the minimum amount required to qualify for the basic state pension. The Upper Earnings Limit (UEL) for primary Class 1 NICs has been aligned with the level at which people start to pay higher rate income tax
The main rate of Class 1 and Class 4 NICs will remain in 2009/10 at 11% and 8% respectively. However, the rate of Class 2 NIC has risen to £2.40 per week.
Note: Please remember, as also announced in the November 2008 pre-budget report, an increase of 0.5% in NI Contribution rates will also take effect from 6 April 2011.
Income Tax
The basic personal allowance for 2009/10 will is £6475 (+£440). Therefore the first £124 per week of earnings is free from tax.
Changes to the top rate of tax:-
The new top rate of income tax will be increased from 40 to 50% for income in excess of £150,000. Furthermore, this increase will now be introduced a year earlier, commencing 6 April 2010.
From the same date, the basic personal allowance for income tax will be gradually removed for individuals with earnings above £100,000, on a 2-for-1 basis. This means anyone whose income exceeds £112,950 will not be entitled to any personal allowance.
From 2010-11 there will be three rates of tax on dividends; 10%, 32.5% and the new highest rate of 42.5%, for those with incomes exceeding £150,000.
Note: The net effects of these changes are:
Individuals will pay a marginal rate of tax of 60% on income between £100000 and £112950.
If this income is derived from earnings the marginal rate rises to 61.5% because of the additional national insurance contribution of 1.5%.
The effects of these measures put the UK’s high earners ahead of both France and Germany in levels of taxation. It will be interesting to see if this has any directional effect on London remaining the main financial centre in Europe.
Taxation of Trusts
The government is extending the introduction of the new 50% income tax rate and the 42.5% dividend rate to family trusts, from next year.
Note: This reduces the effectiveness of asset protection, but further supports the use of bonds as the vehicles of choice to trustees, as they are non income bearing.
Child and Working Tax Credits rates and Child Benefit
All elements of the Working Tax Credit, apart from the childcare element, have increased in line with inflation. The limits on eligible childcare costs in the childcare element remain at £175 for one child and £300 for two or more children. The proportion of childcare costs payable through the childcare element of WTC remains at 80%.
The child element of the Child Tax Credit has increased by £150 for 2009/10. The elements for disabled children and severely disabled children are increasing by £130 and £55 respectively. The family element and baby addition remain unchanged.
The income threshold for receiving maximum CTC only is increasing to £16,040, equivalent to the effective threshold for lone parents and couples receiving both WTC and CTC. The threshold for receiving maximum WTC remains at £6,420 and the threshold for receiving maximum family element of CTC remains at £50,000. The withdrawal rate for the family element remains at 6.67% and for the rest of tax credits at 39%. The disregard for changes in income during the tax year remains at £25,000.
Working Tax Credits and Guardians Allowance are being increased in line with indexation.
Child benefit will rise for the eldest child in a family by £20 per annum, however benefit for other siblings will rise in line with inflation to £13.20 per week.
Capital Gains Tax
The new personal exemption for 2009/10 will be £10,100, with the flat rate of tax of 18% on realised gains above this figure continuing. There are no changes to Entrepreneurs Relief.
Company Cars
For some time now the benefit charge on cars has been determined by its list price and the level of CO2 it omits.
2009/2010
The emissions threshold percentages will be shifted down by 5g CO2 per Km. The £80,000 cap on car list price will be abolished to ensure that drivers of the most expensive of cars pay a fair amount of tax.
The earlier reductions for Euro 4 diesel cars and other hybrids, or alternative fuels will no longer be available, but replaced, by a fairer system for rewarding all low emission cars with a lower rate of benefit charge.
VAT
The temporary rate of 15 per cent will cease on 31 December 2009. The standard rate of VAT will return to 17.5 per cent from 1 January 2010.
From 1 May 2009 the annual turnover threshold for businesses who need to register for VAT will rise to £67000. (+£1000)
Stamp Duty Land Tax (SDLT)
The temporary suspension of SDLT on the purchase of houses, with values of up to £175,000 will continue until 31 December 2009.
Inheritance Tax (IHT)
The IHT NIL Rate band for 2009/10 is as pre-announced £325,000 for individuals or £650,000 for married couples and civil partners. The tax rate remains 40% beyond these numbers. There are no changes as yet to next years (2010/11) rates of £350,000 [single] and £700,000 [married/civil partnership] respectively.
SAVINGS AND INVESTMENTS
Tax Relief on Pensions
Commencing 6 April 2011, individuals earning over £150,000 making lump sum pension contributions can now only get 40% tax relief on the first £20,000.
The rules which await clarification appear to state relief is available at 20% on income above £180,000 and tapered from 40% to 20% between £150,000 and £180,000.
Therefore, there are no changes on contributions up to the limit of this allowance which will continue to attract tax relief of 40%. This applies to regular contributions made by the individual and their employer.
The Government has suggested they will introduce Anti-Forestalling measures, aimed at preventing individuals affected by the change from loading up their pension funds prior to April 2011. These measures will include rules to catch new salary sacrifice arrangements and therefore include employer payments.
The Annual Allowance for pension contributions for 2009-2010 is set at £245,000. This is due to increase to £255,000 in 2010-2011, but as announced in the pre-budget report in November 2008, the allowance will then be frozen for the following 5 years.
Note: As the tax relief on the benefits received may now exceed the tax relief on the investment made. It will be important to ensure pension investment is the most viable investment solution.
Individual Savings Accounts
With affect from 6 October 2009 the ISA limit will increase for people aged 50 and over for 2009/10 tax year to £10,200, up to £5,100 of which can be saved in cash. The increased limit will apply for all ISA investors from 6 April 2010 onwards.
Clarification is awaited as to whether investors must have reached 50 at the start of the current tax year, or simply prior to making an investment, in order to benefit from the higher limit.
Investment Trust Companies investing in Interest bearing Assets
Investment Trusts will now be able to elect to be taxed under new legislation allowing them to invest in interest bearing assets, in a tax efficient way. The new rules allow the Investment Trust to receive a tax deduction for any interest distributions made, effectively removing any Corporation Tax liability that would otherwise arise on the distributed income.
Note: This could make a difference to the way in which investors can access the corporate bond market. To date, investment trusts have been disadvantaged in this market when compared to unit trusts and other open-ended investment companies. This will no longer be the case, opening up a new and possibly more competitive method of investing in bonds for the small saver.
Venture Capital Schemes
Investors receiving tax relief under the Enterprise Investment Scheme (EIS), Corporate Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme will see the following improvements with immediate effect:
Money raised by subscriptions to these schemes will now only need to be fully invested in or by the qualifying businesses within two years of shares being issued, rather than as now 80% utilized within 12 months.
For the EIS scheme, the period for carrying back tax relief has now been extended and allows the full amount subscribed (currently a maximum of £500,000), to be carried back instead of the previous limit of £50,000 of any investments made.
Note: Although these investments are high in risk, the reduction in pension tax relief for investors might lead to a search for other tax-favoured investment schemes such as EIS or VCT arrangements. The client’s attitude to risk is crucial in making any such recommendation.
