Ellacotts Provide More Detailed Information on Yesterday’s Budget
23 April 2009
It is the day after the Budget and we have had the opportunity to review and consider the proposed changes and accompanying documentation in more detail.
The Chancellor predicted that the economy will contract by approximately 3.5% of GDP in 2009 – much worse than he predicted in the Pre-Budget Report. The Government’s borrowing requirements are also higher than previously predicted. The outcome of this is tax increases and spending cuts in order to meet the growing budget deficit. Some of the planned tax increases will be phased in.
The key tax issues are:
• Rate of income tax for those earning more than £150,000 to rise to 50% from April 2010. In the pre-budget report the proposal was to increase the rate of income tax to 45% from April 2011. Also from April 2011 National Insurance Contributions (NIC) will be increased by 0.5%. Employees will pay NIC at a rate of 11.5%, self employed at 8.5% and employees at 13.3%. The higher rate of NIC for employees and self-employed individuals will also increase by 0.5% to 1.5% with effect from 6 April 2011. The combination of income tax and NIC increases will mean individuals earning in excess of £150,000 will suffer a marginal rate of 51.5%.
• From 6 April 2010, there will be 3 rates of tax on dividend income. Where income falls within the basic rate band, the 10% tax credit will continue to cover any tax liability, as before. The equivalent rate for 40% taxpayers will continue to be 32.5% but a new rate is introduced of 42.5% where income would be taxed at 50%.
• Tax relief on pension contributions to be restricted for individuals with earnings in excess of £150,000. This is effective from April 2011. At present tax relief is available up to 40% on pension contributions up to a maximum of 100% of net relevant earnings. Tax relief on pension contributions will be tapered for individuals earning between £150,000 and £180,000, from 50%, the new higher rate of tax for individuals earning over £150,000 down to 20%, with only basic rate tax relief available where income exceeds £180,000. In anticipation of the new restriction, the Government is introducing new rules to apply from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals. The restrictions will apply to people whose income is £150,000 or higher, who change their normal ongoing regular pension contributions, and where pension contributions (including employer or third party contributions) exceed £20,000. This will remove the advantage to those individuals of increasing their pension contributions in excess of their normal pattern.
• From April 2010, where an individual’s net income is above £100,000 the personal allowance will be reduced by £1 for every £2 above the income limit. Based on the personal allowance of £6,475, this will mean the full personal allowance will be extinguished at an income level of £112,950.
• A temporary 40% first year allowance (FYA) for expenditure on general plant and machinery. This will relate to expenditure in excess of the £50,000 on which the annual investment allowance of 100% can be claimed. The FYA will be available on qualifying expenditure incurred within the 12 month period from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses.
• Businesses making losses will be able to carry back losses against the previous three years trading profits. The pre-budget report indicated this measure will apply for one year. This has been extended by a further year. This will apply to unincorporated businesses making a trading loss in the 2008/2009 and 2009/2010 tax years. For companies it relates to losses made in accounting periods between 24 November 2008 and 23 November 2010. The amount of loss than can be carried back to the previous year remains unlimited. After carry back of losses to the previous year, a maximum of £50,000 of unused losses will be available for carry back to the earlier two years.
• Certain favourable tax treatments enjoyed by Furnished Holiday Lets (FHL) are being temporarily extended to FHL elsewhere in the European Economic Area (EEA). Losses on FHL can be offset against other income, profits on FHL count as net relevant earnings for pension purposes and capital gains tax rollover relief can defer a capital gains liability. The Government has announced its intention to withdraw these favourable tax treatments on all Furnished Holiday Lets (in the UK and elsewhere in the EEA) in April 2010.
• The Business Payment Support Services facility has been extended from 22 April 2009 to allow businesses who are expecting to make losses in the current year, to set these against their previous year’s profit, and therefore not pay their current tax bill.
• From 1 April 2009 for companies or 6 April 2009 for unincorporated businesses the capital allowances that can be claimed on cars will be based on the emissions of the vehicles.
• Those with agricultural property and woodlands in the European Economic Area (EEA) may benefit from an extension of Inheritance Tax Agricultural Property Relief and Woodlands Relief to property in the EEA. Property qualifying for this extended relief will also qualify for Capital Gains Tax holdover relief.
• From 6 April 2010 the additional rate for Trusts will rise to 50% with a new highest rate of tax on dividends of 42.5%.
• The ISA limit will be raised to £10,200, up to £5,100 of which can be saved in cash. The new limit will apply to people aged 50 and over in 2009/2010 and for all ISA investors from 2010/2011 onwards.
• Stamp duty holiday for houses up to £175,000 to be extended to 31 December 2009.
• The temporary reduction in the rate of VAT from 17.5% to 15% to continue until 31 December 2009. Anti avoidance provisions are to be introduced to prevent traders issuing invoices charging the 15% VAT rate even though the goods and services will be delivered after the change of rate of VAT.
• From next month until March 2010 motorists to get a £2,000 discount on new cars if they trade in cars older than 10 years.
Budget proposals can change before they are formally included in the Finance Bill which is likely to be published in July 2009. If you have any queries concerning any of the above mentioned issues, or would like advice on the best possible course of action in particular areas, please contact Brian King, Tax Partner at Ellacotts LLP on 01295 250401 or e-mail bking@ellacotts.co.uk
