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This is a summary of Gordon Brown's 11th budget report as Chancellor delivered on 21st March 2007.
The information in this summary is based on our understanding of the Chancellor's proposals.
No action should be taken without obtaining appropriate professional advice and as ever the devil will be in the detail.
We now summarise the main tax effects of the budget.
BUDGET HIGHLIGHTS
This budget was probably more radical than any in recent times. There was the shock ending of the 2% cut in basic rate income tax, although when looking at more of the detail below you will see there were plenty of rises to counteract this.
Most of the tax rates and allowances for 2007/08 were already known but there were some significant changes for 2008/09 onwards.
Overall the budget was tax neutral. Whilst poorer families were probably the biggest winners and Mr Brown believes that 80% of us will be better or no worse off, the biggest losers were probably...
- Small businesses who saw the small companies corporation tax rate increased from 19% to 22% by 2009.
- Higher earners, partly as a result of the National Insurance changes where those on incomes of £43,000 or more could end up paying around £1,000 more in NI.
Other key highlights included...
- A rise in the higher rate income tax threshold to £43000 by 2009.
- Decrease of 2% in the main corporation tax rate for larger companies.
- The abolition of the 10% starting rate of income tax on non-savings income.
- Some simplification of the tax system, mainly through tax bands and capital allowances.
- Increased personal allowances for pensioners.
- The inheritance tax nil rate band will rise to £350,000 by 2010.
- Tax credits remain a key part of Mr Brown's tax system for giving back to workers on lower incomes.
- Road tax on the highest polluting vehicles is increased to £300 and to £400 from next year. Least polluting vehicles to have the duty cut to £35.
- Child benefit for a first child to rise from £17.45 to £20 a week by 2010.
- Tax relief on empty property is to be restricted to 6 months and to 3 months on empty retail property.
PERSONAL TAX
Income Tax Rates
- From April 2008 the basic rate of income tax was cut by 2%, from 22% down to 20%.
- At the same time, this has been partly counteracted by scrapping the lower rate 10% tax band for non-savings income.
So there will be just 2 tax rates - 20% and 40%, apart from keeping the 10% rate for savings income which has kept some of the complexity.
Income Tax Bands
The income level at which 40% tax starts to be paid increases to £43000 (presently just over £38000) but not until 2009.
Increased Personal Allowances for Pensioners
- For pensioners under 75, the tax free personal allowance is rising from £7,280 to £9,770 by 2011.
- For the over 75's the tax free allowance will rise annually from £7,420 to £10,000 by 2011.
However, pensioners earning more than £25,830 could find they are no better off due to the rules whereby your tax free allowance is affected by the amount you earn.
National Insurance
The upper earnings limit for National Insurance is being raised to bring it in line with the 40% income tax threshold to £43,000 in 2009 (presently £33,540).
Increased ISA Limits
With effect from 6th April 2008 you can save up to...
- £3,600 in a cash ISA (presently £3,000)
- £7,200 in a stocks and share ISA
This is with an overall annual savings limit of £7,200.
The simplified structure for ISA's that will come into force in 2008 was already announced by the Chancellor in the pre-budget report last year. The changes mean that although you can put more into a cash ISA, if you put the maximum of £3,600 in, you will only be able to invest £3,600 in stocks and shares, which is less than the current limit of £4000.
The simplified structure also removes the distinctions between cash mini ISA's, stocks and shares mini ISA's and maxi ISA's with effect from 6 April 2008.
Enquiry Window
For self assessment returns for individuals and companies, the enquiry window for HMRC to enquire into your Tax Return presently runs from 12 months from the filing deadline and so acts as a disincentive file your return early.
The enquiry window will now be linked to the date you actually file your return with effect from 2007/08 onwards.
Overseas Property Owners
People who own properties abroad often do so through a company, either for legal or tax reasons abroad. At present this could result in a tax charge really meant for employees who receive free holidays in a house provided by their employer as a result of being assessed to a benefit in kind.
Whilst this has rarely happened in practice, the Chancellor announced that such rules will not apply to people who invest in their own properties through a company. The removal of this charge is also retrospective. This charge will no longer apply to companies whose sole activity is holding the property for personal occupation and/or letting. The property also has to be the company's only or main asset.
Pension Term Assurance
The Chancellor put an end to tax relief on pension term assurance. Individuals will no longer be able to get tax relief on premiums paid to personal fixed term life insurance policies where the only benefit payable is a lump sum on death or critical illness.
The good news is that relief for policies taken out before the relevant cut-off date can continue to be claimed as long as the policy is not varied.
Self Assessment Filing Dates
For 2007/08 and future years there are new filing dates for paper returns which have to be filed by 31st October (presently 31st January). Online returns continue to have the 31st January deadline and so for the 2007/08 returns they still have until 31st January 2009 to file.
EMPLOYMENT TAX
Employee Benefit Trusts
There is already a limit on the amount an employer can have as a tax deduction for contributions, which is limited to the amount actually paid to the employee within 9 months of the end of the accounting period, such payment also to give rise to tax and national insurance.
However, some employers have tried to go around these rules by declaring a trust over assets which they already control and claimed a tax deduction for the value of that declaration. The new legislation will ensure that no tax deduction is possible in these circumstances.
Company Car and Fuel Benefits
- Company car drivers who have a car capable of being run on E85 fuel will get a discount of 2% on the percentage applied to the list price with effect from 6th April 2008 for company car tax.
- The same 2% reduction will also apply for cars capable of being run on E85 fuel for company fuel tax.
- The figure for the company car fuel benefit charge to which the relevant percentage is applied will remain unchanged at £14,400 for 2006/07.
BUSINESS TAXES
Corporation Tax
- Main corporation tax rate. This has been reduced by 2% from 30% down to 28% from April 2008. That applies for companies with profits in excess of £1.5 million.
- Small companies rate. That is companies with profits up to 300K who will be dismayed to see the small companies rate increased from 19% to 20% from April 2007, 21% from April 2008 and 22% from April 2009. This has been designed to reduce the tax differences between the self-employed and small companies, where Mr Brown claims individuals artificially incorporate themselves to pay less tax. Surely not!
Greater consideration will now be required as to the tax benefits of incorporation for small businesses, especially with the reduction in the basic rate of income tax also coming into effect. - The upper and lower profit limits remain unchanged.
Managed Service Companies and Contractors
The pre-budget announced draft legislation relating to managed service companies, so that those working under such arrangements, would pay the same tax and NI as employees from April 2007, with the MSC having to account for the tax and NI.
This budget aims to make it even more difficult to the avoid the new legislation. There will be a focus on looking at the nature and characteristics of the MSC to decide if it is an MSC. Where the MSC does not pay the tax and NI due, that debt will be able to be transferred to the directors of the MSC and the MSC provider. Also, for travel and subsistence purposes, the contractor will be treated as if employed by the end user, so not able to claim travel to where the duties are performed. The new regime will be very complex and expert assistance is critical. Using your own limited company, instead of a managed service company may be a viable alternative.
Capital Allowances
Overall there is to be a simplification of the capital allowances regime with increased allowances coming for new investment in plant and machinery.
- The temporary rate of 50% first years capital allowances on plant and machinery for small businesses is extended for one more year and for medium size businesses remains at 40%.
- From April 2008 there is a new system coming in. Small firms can claim a new 100% relief for new capital investment in plant and machinery up to £50,000 by means of a new "annual investment allowance" (AIA), which is effectively a 100% capital allowance. The new AIA is a cash flow benefit by speeding up the rate at which tax relief is given rather than being spread over a number of years.
- Allowances for pooled plant and machinery are to be reduced by aligning them with the economic rate of depreciation at 20% (previously 25%) from April 2008.
- Subject to consultation there will be a reduction in the capital allowances for fixtures that are integral to a building from 25% to 10% from April 2008.
- Annual relief for long life assets to be raised from 6% to 10% from April 2008.
- The expensive car rules will be removed, to be replaced with a system based on CO2 emissions.
- Industrial Buildings Allowances, Hotel Buildings Allowances and Agricultural Buildings Allowances to be phased out over the next four years.
- The tax credit for research and development will increase from 150% to 175% from April 2008 for small companies and from 125% to 130% for large companies.
Empty Properties Land Remediation
A 100% Business Premises Renovation Allowance is being introduced after 11th April 2007, for renovating business premises that have been empty for a year or more and are located in certain disadvantaged areas. This extends the relief presently available and also includes offices and shops.
Landfill Tax
The standard rate is being increased from 1st April 2007 from £21 to £24 per tonne.
From 1st April 2008 it will increase to £32 per tonne, with the lower rate increasing from £2 to £2.50 per tonne.
Landlord's Energy Saving Allowance
This allows for a deduction for expenditure on energy saving items against property rental income which was announced in the Pre-Budget.
The annual allowance is for £1,500 per property and not per building as was originally the case. It will be available until 2015.
CAPITAL TAXES
Inheritance Tax Nil Rate Band
The inheritance tax nil rate band will increase to £350,000 by 2010 (presently £285,000). This had already been set to rise to £325,000 by 2009. After allowing for potential house price inflation, these increases may not be as generous as they seem.
Pre-Owned Assets
Where an individual enjoys the benefit of free or low cost use of an asset they previously owned or provided the funds to purchase, an income tax charge was previously introduced on 6th April 2005.
An election can be made to include the asset as part of their estate for inheritance tax purposes instead and so avoid the pre-owned assets charge. The legislation will allow HMRC to accept late elections for the income tax charge not to apply and the inheritance tax gift with reservation regime to apply instead.
Capital Gains Tax Annual Exemption
The annual capital gains tax exemption for individuals will rise to £9,200 (presently £8,800) from 6 April 2007.
Stamp Duty Land Tax for new Carbon Homes
From 1 October 2007 until 30th September 2012, all new zero carbon homes costing up to £500K are to be exempt from stamp duty land tax. Homes above this will have the first 500K exempt.
Pension Funds
Despite calls for change, significant tax charges at death on pensions remain in place. Those passing on their pension fund on death and aged over 75 can have their fund hit by a tax charge of up to 82 per cent.
VALUE ADDED TAX
Turnover Limits
The VAT registration turnover limit rises to £64,000 from 1 April 2007 (previously £61,000).
The deregistration limit increases to £62,000 (presently £59,000).
VAT Fuel Scale Charges
These will in future be based on CO2 emissions with effect from accounting periods beginning on or after 1st May 2007.
Transfers of a Going Concern
At present, when a business is transferred as a going concern for VAT purposes, the seller has to transfer the VAT records to the purchaser. However, it will now be possible from 1st September 2007 for the seller to retain the records by applying to HMRC, unless the purchaser was to keep seller's VAT number.
Less VAT to help Smokers Quit!
Whilst the price of a packet of cigarettes has risen 11p, nicotine patches and similar products will have a reduced VAT rate of 5% from 1st July 2007.
