Pre-Budget Report Analysis
Desperate Measures
(Pre-Budget Report 2008 Analysis)
By Carl Bayley BSc ACA
The Pre-Budget Report, traditionally presented in late autumn, has grown significantly in importance over recent years. Once a rather minor prelude to the Budget itself, the Pre-Budget Report might now perhaps be better viewed as the Autumn Budget.
Set against a backdrop of massive economic uncertainty, the 2008 Pre-Budget Report was, in fact, probably one of the most widely anticipated Government announcements of recent years. In 2007, new Chancellor of the Exchequer, Alistair Darling, had already arrived with a bang when he demonstrated a willingness to introduce enormous and fundamental changes to the UK tax system in the Pre-Budget Report; saving only minor (but important) details for the Budget the following Spring. Given the financial difficulties facing the Government, the business community and the world at large, this year’s Pre-Budget Report seemed likely to be every bit as shocking.
Even before the report itself was delivered, speculation was rife, with rumours circulating of what desperate measures designed to shore up the UK’s flagging economy might be contained within the report. The emerging story was clear: temporary pay-outs designed to re-start the economy would need to be paid for with massive tax increases to follow later. But who would benefit from the pay-out and who would pay for it later?
Gordon Brown promised ‘temporary, targeted and timely’ intervention and yet leaked details of a proposed cut in the VAT rate from 17.5% to 15% and a new 45% ‘super-tax’ rate to be introduced after the next General Election smacked of a lurch to the left as Gordon Brown’s old-style socialism continued to re-emerge from the ashes of Tony Blair’s ‘new labour’ dream.
So it was that, in the midst of a political, economic and media maelstrom, our Darling Chancellor gave his second Pre-Budget Report to the House of Commons on Monday, 24 th November 2008.
As expected, the Chancellor laid out a number of short-term tax cuts and benefit increases. Also included were a number of delays to tax increases already in the pipeline.
Swiftly, however, it became clear who was ultimately going to have to pay for these short-term cuts and temporary postponements: all of us!
Yes, some of the future tax increases are targeted at high earners with over £100,000 of annual income. The biggest tax-raising measure, however, a 0.5% increase in National Insurance across the board from April 2011, will hit every employed or self-employed person below state retirement age, as well as every employer. Don’t be fooled into thinking “it’s only 0.5%, it’s not a lot”; coupled with recent increases in the upper earnings threshold, this latest increase means that some taxpayers face an estimated 36% increase in their National Insurance bill over a three year period.
But this is still not the main reason why I say that all of us will have to pay for the temporary tax cuts proposed in the Pre-Budget Report. Even the Government’s own incredibly optimistic growth forecasts suggest that the short–term measures in the Pre-Budget Report will create unprecedented levels of national debt. The UK’s forecast debt level by 2013/14 represents 57% of our Gross Domestic Product – higher than when Jim Callaghan’s Labour Government was embarrassingly forced to go begging ‘cap in hand’ to the International Monetary Fund back in the 1970s.
In reality, things could be even worse and, inevitably, this will have to mean massive tax increases across the board for everyone. After the next General Election, of course!
For the time being, however, let’s look at the proposed changes announced in the Pre-Budget Report.
Income Tax and National Insurance
The personal allowance and basic rate band are both being substantially increased for 2009/10, to £6,475 and £37,400 respectively. This gives permanent effect to the changes made in May 2008 (when the personal allowance was increased retrospectively in order to compensate those who had lost out from the abolition of the 10% starting rate band) and adds some more on top.
As a result, the higher rate Income Tax threshold will increase by 7.4% from its current level of £40,835 to £43,875 next April. As proposed in Gordon Brown’s last Budget as Chancellor in March 2007, the National Insurance upper earnings limit will be aligned with this threshold from 6 th April 2009.
The alignment of the National Insurance upper earnings limit with the higher rate Income Tax threshold represents a significant tax increase for those on middle incomes and, as we know, this will be compounded by further National Insurance increases in 2011.
Other Income Tax and National Insurance bands and allowances will simply increase by inflation in April 2009. Full details of the new rates for 2009/10 announced in the Pre-Budget Report are set out in Appendix A.
The bad news starts in April 2010, when a new system of personal allowance withdrawals will begin to bite for those with total income over £100,000.
For every £2 of income in excess of £100,000, £1 of personal allowance will be lost. For example, an individual with income of £101,000 will lose £500 of their personal allowance. This process will continue until the individual has lost half of their personal allowance, thus creating a band of income from £100,000 to around £106,700 (estimated) with a marginal Income Tax rate of 60%. For employed and self-employed individuals under state retirement age, this becomes 61% when we add in National Insurance, or 61.5% from 6 th April 2011.
The remaining half of the individual’s personal allowance will be withdrawn when their income exceeds £140,000, using the same process as set out above and thus creating another band of income from £140,000 to around £146,700 with a marginal tax rate of up to 61.5%.
More pain follows in April 2011 with the 0.5% increase in National Insurance across the board which we have discussed already. Those on very low incomes will be spared a little of the pain as the earnings threshold will be re-aligned with the Income Tax personal allowance (as it was prior to the retrospective change to the personal allowance made in May 2008).
As a result, from April 2011, employed earners will pay National Insurance at 11.5% on a band of income estimated to run from around £6,945 to around £47,145 and 1.5% on any further income above this band. Employers will pay secondary National Insurance at 13.3% on all wages and salaries over around £6,945. All in all, the cost of employing a higher rate taxpayer will increase to a total of 54.8%, even without taking the higher marginal rates described above into account. Worse will follow in 2012 when a new system of compulsory pension contributions is scheduled to come into force, adding a further 3% to the cost of employment.
From April 2011, self-employed individuals will pay Class 4 National Insurance at 8.5% on profits between around £6,945 and around £47,145 and will pay 1.5% on further profits above this band.
Also, in April 2011, the Government proposes to introduce a new 45% Income Tax band for all individuals with income over £150,000. For all employed and self-employed individuals under state retirement age this will produce a total combined Income Tax and National Insurance rate of 46.5% on all income in excess of £150,000 (plus an extra 13.3% for employers).
There is no suggestion that the two personal allowance withdrawal limits of £100,000 and £140,000 will be index-linked in any way. The same goes for the £150,000 threshold for the new super-tax rate of 45%. My suspicion is that these limits will remain fixed, meaning that (when we return to inflation as normal) their real value will diminish over time, bringing more and more people within the scope of marginal tax rates of up to 61.5%.
Details of the estimated tax bands for the next few years are given in Appendix B. These estimates are based on the assumption that there will be no further changes to the UK tax regime beyond the measures announced to date and that allowances, rate bands and thresholds will increase in line with inflation at an average rate of 3.5% per annum except as noted above. I sincerely doubt that there will be no further changes to the UK tax regime but, when it comes to estimating the impact of the measures announced in the Pre-Budget Report, these estimates are the best basis available at the present time and will be used for the purpose of the illustrative tables which follow.
When reviewing the tables which follow please therefore note that information relating to 2009/10 is based purely on the proposals announced in the Pre-Budget Report, but that information relating to later years also includes a degree of estimation and is based on the estimates set out in Appendix B. Where 2008/9 is also included for comparative purposes, this is obviously based on current rates, allowances, etc.
Employment Income
Combining all of the changes set out above produces the following marginal rates of combined Income Tax and National Insurance for employed earners over the next few years:
|
2009/10 |
2010/11 |
2011/12 |
||||||
|
% |
Band |
Cum |
% |
Band |
Cum |
% |
Band |
Cum |
Earnings Threshold |
0% |
£5,715 |
£5,715 |
0% |
£5,925 |
£5,925 |
n/a |
|
|
Personal Allowance |
11% |
£760 |
£6,475 |
11% |
£780 |
£6,705 |
0.0% |
£6,945 |
£6,945 |
Basic rate band |
31% |
£37,400 |
£43,875 |
31% |
£38,800 |
£45,505 |
31.5% |
£40,200 |
£47,145 |
Higher rate |
41% |
thereafter |
|
41% |
£54,495 |
£100,000 |
41.5% |
£52,855 |
£100,000 |
Marginal rate |
|
|
|
61% |
£6,705 |
£106,705 |
61.5% |
£6,945 |
£106,945 |
Higher rate |
|
|
|
41% |
£33,295 |
£140,000 |
41.5% |
£33,055 |
£140,000 |
Marginal rate |
|
|
|
61% |
£6,705 |
£146,705 |
61.5% |
£6,945 |
£146,945 |
Higher rate |
|
|
|
41% |
thereafter |
|
41.5% |
£3,055 |
£150,000 |
Super rate |
|
|
|
|
|
|
46.5% |
thereafter |
|
Notes to the table
- ‘Cum’ = cumulative income for allowances and bands up to that point.
- In 2009/10 and 2010/11, income over the earnings threshold but under the personal allowance suffers National Insurance at 11% but is free from Income Tax. For 2011/12, the National Insurance earnings threshold is to be re-aligned with the personal allowance.
- In 2009/10 and 2010/11, the basic rate band is subject to Income Tax at 20% and National Insurance at 11%. For 2011/12, the National Insurance rises to 11.5%.
- In 2009/10 and 2010/11, higher rate income suffers Income Tax at 40% plus National Insurance at 1%. For 2011/12, the National Insurance rises to 1.5%.
- Where personal allowances are being withdrawn in the small band of income above both £100,000 and £140,000, this creates a marginal Income Tax rate of 60%. To this must be added the National Insurance which continues to be payable.
- In 2011/12, income over £150,000 suffers ‘super tax’ at 45% plus National Insurance at 1.5%.
It is interesting to reflect that in March 2007 Gordon Brown promised that by April 2009 we would have a greatly simplified system with just two tax bands and the personal allowance. Instead, by April 2011, we will have no less than eight tax rate bands!
More importantly, however, let’s look at what this all does to the total Income Tax and National Insurance burden suffered by employed individuals below state retirement age:
Annual Earnings |
Tax & NI 2008/9 |
Tax & NI 2009/10 |
Tax & NI 2010/11 |
Tax & NI 2011/12 |
£10,000 |
£1,295 |
£1,176 |
£1,107 |
£962 |
£20,000 |
£4,395 |
£4,276 |
£4,207 |
£4,112 |
£30,000 |
£7,495 |
£7,376 |
£7,307 |
£7,262 |
£40,000 |
£10,595 |
£10,476 |
£10,407 |
£10,412 |
£50,000 |
£14,532 |
£14,189 |
£13,957 |
£13,848 |
£100,000 |
£35,032 |
£34,689 |
£34,457 |
£34,598 |
£150,000 |
£55,532 |
£55,189 |
£57,639 |
£58,126 |
£250,000 |
£96,532 |
£96,189 |
£98,639 |
£104,626 |
As we can see, there are tax reductions for everyone in 2009/10, although these do not appear to be targeted at anyone in particular, thus failing to fulfil one of Gordon Brown’s three key criteria.
In fact, whilst those earning £40,000 or less save just £119, higher earners save £343, almost three times as much. Gordon Brown promised ‘temporary, targeted and timely’ intervention. Well, it’s certainly temporary, but the above table shows that it’s very badly targeted. Whether it’s timely remains to be seen!
The following year brings little change for those on low to middle incomes, but the tax increases for high earners begin to bite producing a 4.4% increase for those earning £150,000.
The National Insurance increases in April 2011 mean increased tax bills in two years’ time for everyone earning between £39,077 and £45,845, or £71,913 or more. Many commentators have, however, suggested that the National Insurance increases will affect those on much lower income levels. This is because those commentators have been looking at the National Insurance changes in isolation rather than the overall picture. We will look at this idea further in Appendix C, where we will see that the National Insurance increase will indeed hit individuals with income substantially less than the £40,000 suggested by the Government.
Generally, however, I would say that it is the overall increase in our tax bills which concerns us, rather than the specific elements which make up the increase.
Whatever the answer is to the question of who is affected by the National Insurance increase in 2011, there is no doubt that the position is compounded for the very highest earners who also suffer from the impact of the new 45% super tax. In fact, the highest earners in our table suffer a total tax increase of 8.8% over the two years from April 2009 to April 2011.
Self-Employment
The marginal rates of combined Income Tax and National Insurance suffered by self-employed individuals over the next few years will be as follows:
|
2009/10 |
2010/11 |
2011/12 |
||||||
|
% |
Band |
Cum |
% |
Band |
Cum |
% |
Band |
Cum |
Earnings Threshold |
0% |
£5,715 |
£5,715 |
0% |
£5,925 |
£5,925 |
n/a |
|
|
Personal Allowance |
8% |
£760 |
£6,475 |
8% |
£780 |
£6,705 |
0.0% |
£6,945 |
£6,945 |
Basic rate band |
28% |
£37,400 |
£43,875 |
28% |
£38,800 |
£45,505 |
28.5% |
£40,200 |
£47,145 |
Higher rate |
41% |
thereafter |
|
41% |
£54,495 |
£100,000 |
41.5% |
£52,855 |
£100,000 |
Marginal rate |
|
|
|
61% |
£6,705 |
£106,705 |
61.5% |
£6,945 |
£106,945 |
Higher rate |
|
|
|
41% |
£33,295 |
£140,000 |
41.5% |
£33,055 |
£140,000 |
Marginal rate |
|
|
|
61% |
£6,705 |
£146,705 |
61.5% |
£6,945 |
£146,945 |
Higher rate |
|
|
|
41% |
thereafter |
|
41.5% |
£3,055 |
£150,000 |
Super rate |
|
|
|
|
|
|
46.5% |
thereafter |
|
Class 2 National Insurance will also continue to be payable on self-employment income, as detailed in Appendix B.
The rates set out above are effectively derived in the same way as for employment income except that the rate of National Insurance suffered on self-employment income between the earnings threshold and the higher rate Income Tax threshold is 8% rather than 11% in 2009/10 and 2010/11 and 8.5% rather than 11.5% in 2011/12.
The resultant estimated total Income Tax and National Insurance suffered by self-employed individuals under state retirement age over the next few years is as follows:
Annual Earnings |
Tax & NI 2008/9 |
Tax & NI 2009/10 |
Tax & NI 2010/11 |
Tax & NI 2011/12 |
£10,000 |
£1,278 |
£1,173 |
£1,115 |
£1,006 |
£20,000 |
£4,078 |
£3,973 |
£3,915 |
£3,856 |
£30,000 |
£6,878 |
£6,773 |
£6,715 |
£6,706 |
£40,000 |
£9,678 |
£9,573 |
£9,515 |
£9,556 |
£50,000 |
£13,614 |
£13,169 |
£12,899 |
£12,777 |
£100,000 |
£34,114 |
£33,669 |
£33,399 |
£33,527 |
£150,000 |
£54,614 |
£54,169 |
£56,581 |
£57,055 |
£250,000 |
£95,614 |
£95,169 |
£97,581 |
£103,555 |
As we can see, the story for self-employed taxpayers in 2009/10 and 2010/11 is similar to that for employed taxpayers, with small savings for everyone in 2009/10 and little change in the following year except for those with profits over £100,000 who suffer the impact of the withdrawal of their personal allowances.
In 2011/12, however, the National Insurance increases fall harder on the self-employed, especially at middle income levels. To illustrate what I mean, let’s revisit the table but, this time, let’s adjust the self-employment profits in 2011/12 to account for inflation at 3.5% and see just what the effective tax increase is in real terms. Remember, an individual must increase their income by the same rate as inflation just to stand still and enjoy the same income in real terms from one year to the next. This, in effect, is what our new table reflects.
Profit 2010/11 |
Tax & NI 2010/11 |
Profit 2011/12 |
Tax & NI 2011/12 |
Increase |
£10,000 |
£1,115 |
£10,350 |
£1,106 |
-0.8% |
£20,000 |
£3,915 |
£20,700 |
£4,055 |
3.6% |
£30,000 |
£6,715 |
£31,050 |
£7,005 |
4.3% |
£40,000 |
£9,515 |
£41,400 |
£9,955 |
4.6% |
£50,000 |
£12,899 |
£51,750 |
£13,503 |
4.7% |
£100,000 |
£33,399 |
£103,500 |
£34,980 |
4.7% |
£150,000 |
£56,581 |
£155,250 |
£59,496 |
5.2% |
£250,000 |
£97,581 |
£258,750 |
£107,624 |
10.3% |
With inflation running at an estimated 3.5%, any increase over and above that rate in the above table represents a tax increase in real terms and means that a greater proportion of the individual’s income is taken in tax.
As we can see, all self-employed taxpayers with annual profits of around £20,000 or more will suffer a tax increase in real terms and the increase for the highest self-employed earners rises to over 10% or 6.8% above inflation.
See Appendix C for further analysis of the impact of the proposed National Insurance increases on self-employed individuals.
Rental Income, Pension Income, Etc.
Other forms of income are not subject to National Insurance and will not therefore suffer from the increases in National Insurance proposed for 2011. The proposed Income Tax changes will still affect such income, however, and the marginal Income Tax rates over the next few years on rental income, pension income and any other income not subject to National Insurance, and not classed as savings income or dividends, are as follows:
|
2009/10 |
2010/11 |
2011/12 |
||||||
|
% |
Band |
Cum |
% |
Band |
Cum |
% |
Band |
Cum |
Personal Allowance |
0% |
£6,475 |
£6,475 |
0% |
£6,705 |
£6,705 |
0% |
£6,945 |
£6,945 |
Basic rate band |
20% |
£37,400 |
£43,875 |
20% |
£38,800 |
£45,505 |
20% |
£40,200 |
£47,145 |
Higher rate |
40% |
thereafter |
|
40% |
£54,495 |
£100,000 |
40% |
£52,855 |
£100,000 |
Marginal rate |
|
|
|
60% |
£6,705 |
£106,705 |
60% |
£6,945 |
£106,945 |
Higher rate |
|
|
|
40% |
£33,295 |
£140,000 |
40% |
£33,055 |
£140,000 |
Marginal rate |
|
|
|
60% |
£6,705 |
£146,705 |
60% |
£6,945 |
£146,945 |
Higher rate |
|
|
|
40% |
thereafter |
|
40% |
£3,055 |
£150,000 |
Super rate |
|
|
|
|
|
|
45% |
thereafter |
|
The above rates apply to individuals aged under 65 at the end of the tax year. We will look at the position for older taxpayers a little later.
The resultant Income Tax burden on individuals receiving these types of income is estimated as follows:
Income |
Tax 2008/9 |
Tax 2009/10 |
Tax 2010/11 |
Tax 2011/12 |
£10,000 |
£793 |
£705 |
£659 |
£611 |
£20,000 |
£2,793 |
£2,705 |
£2,659 |
£2,611 |
£30,000 |
£4,793 |
£4,705 |
£4,659 |
£4,611 |
£40,000 |
£6,793 |
£6,705 |
£6,659 |
£6,611 |
£50,000 |
£10,626 |
£9,930 |
£9,558 |
£9,182 |
£100,000 |
£30,626 |
£29,930 |
£29,558 |
£29,182 |
£150,000 |
£50,626 |
£49,930 |
£52,240 |
£51,960 |
£250,000 |
£90,626 |
£89,930 |
£92,240 |
£96,960 |
As usual, those with income over £100,000 suffer from the loss of their personal allowance in 2010/11 and those with income over £150,000 also suffer from the introduction of the 45% ‘super tax’ in 2011/12.
Interest Income
Interest and other savings income will continue to benefit from the 10% starting rate of Income Tax but only where the individual’s other income (excluding dividends) does not exceed the amount of their personal allowance plus the starting rate band.
The starting rate band has been set at £2,440 for 2009/10, meaning that only those with other income (excluding dividends) of less than £8,915 will benefit (or less than £11,930 for those aged 65 to 74 and less than £12,080 for those aged 75 or more).
Those who do benefit will simply suffer £244 less Income Tax for 2009/10 than the amounts set out in the previous table, with similar reductions in later years.
Dividends
Most dividends carry a notional tax credit of one ninth meaning that, for Income Tax purposes, a dividend of £90 is treated as if it were income of £100 from which tax of £10 had already been deducted at source. The deemed dividend of £100 is then subject to Income Tax at 32.5% if received by a higher rate taxpayer, or 10% in other cases. After deducting the notional tax credit, the Income Tax actually payable on a dividend received by a higher rate taxpayer works out at an effective rate of 25%. Other taxpayers effectively receive dividends tax free but the notional tax credit is never repayable, even where dividends are received by a non-taxpayer.
This system has been in force for many years. Until 5 th April 2008 it only applied to UK dividends, on 6 th April 2008 it was extended to most foreign dividends and, from 6 th April 2009, it will apply to all dividends except for foreign dividends received by the owner of 10% or more of the shares in a company resident overseas where that company is not subject to local Corporation Tax.
The withdrawal of personal allowances on income over £100,000 and income over £140,000 will create an effective additional tax cost on dividend income falling in the small bands above these limits from 6 th April 2010. Due to the notional tax credit, every £90 of dividend income falling in these bands will be treated as income of £100, meaning that £50 of the individual’s personal allowance will be lost.
For those receiving dividend income only, this, in turn, will mean that an extra £45 of dividend income (i.e. £50 less the one ninth tax credit) will no longer be covered by their basic rate band and will be taxed at an effective rate of 25%.
Hence, for £90 of dividends received, a total of £135 extra dividend income will be taxed at an effective rate of 25%, producing extra tax of £33.75. This represents an effective marginal tax rate of 37.5%.
From 6 th April 2011, dividends received by an individual with taxable income over £150,000 will be subject to Income Tax at 37.5%. The one ninth notional tax credit will, however, continue to apply. For example, a dividend of £90 will be deemed to carry a £10 tax credit, thus giving rise to taxable income of £100. The Income Tax charge on this income at 37.5% will therefore be £37.50. However, after deducting the £10 notional tax credit, this will be reduced to £27.50. This represents an effective marginal tax rate of 30.56% (or 30 and five ninths per cent to be precise).
Putting all this together, the Income Tax suffered by an individual receiving dividend income only over the next few years can be estimated as follows:
Income |
Tax 2008/9 |
Tax 2009/10 |
Tax 2010/11 |
Tax 2011/12 |
£30,000 |
£0 |
£0 |
£0 |
£0 |
£40,000 |
£812 |
£128 |
£0 |
£0 |
£50,000 |
£3,312 |
£2,628 |
£2,261 |
£1,892 |
£100,000 |
£15,812 |
£15,128 |
£14,761 |
£14,392 |
£150,000 |
£28,312 |
£27,628 |
£28,770 |
£29,288 |
£250,000 |
£53,312 |
£52,628 |
£53,770 |
£59,844 |
It is important to remember always that, because of the one ninth notional tax credit, each £90 of dividend income becomes £100 of taxable income for the purposes of all Income Tax bands, allowances and thresholds. As a result, an individual receiving dividend income only will be subject to the following effective marginal tax rates over the next few years:
|
2009/10 |
2010/11 |
2011/12 |
||||||
|
% |
Band |
Cum |
% |
Band |
Cum |
% |
Band |
Cum |
Basic rate band |
0% |
£39,488 |
£39,488 |
0.0% |
£40,955 |
£40,955 |
0.0% |
£42,431 |
£42,431 |
Higher rate |
25% |
thereafter |
|
25.0% |
£49,046 |
£90,000 |
25.0% |
£47,570 |
£90,000 |
Marginal rate |
|
|
|
37.5% |
£6,035 |
£96,035 |
37.5% |
£6,251 |
£96,251 |
Higher rate |
|
|
|
25.0% |
£29,966 |
£126,000 |
25.0% |
£29,750 |
£126,000 |
Marginal rate |
|
|
|
37.5% |
£6,035 |
£132,035 |
37.5% |
£6,251 |
£132,251 |
Higher rate |
|
|
|
25.0% |
thereafter |
|
25.0% |
£2,750 |
£135,000 |
Super rate |
|
|
|
|
|
|
30.6% |
thereafter |
|
Older Taxpayers
Individuals aged 65 or more at the end of the tax year are entitled to higher age-related personal allowances, although these are withdrawn at the rate of £1 for every £2 of income in excess of the ‘income limit’. For 2009/10, both the age-related personal allowances and the income limit have been increased in line with inflation. See Appendix A for further details.
Individuals over state retirement age are also exempt from National Insurance.
The estimated tax burden on a person aged between 65 and 74 at the end of the tax year (and not married to, or in a civil partnership with, a person born before 6 th April 1935) for the next few years is as follows:
Income |
Tax 2008/9 |
Tax 2009/10 |
Tax 2010/11 |
Tax 2011/12 |
£10,000 |
£194 |
£102 |
£34 |
£0 |
£20,000 |
£2,194 |
£2,102 |
£2,034 |
£1,964 |
£30,000 |
£4,793 |
£4,705 |
£4,654 |
£4,494 |
£40,000 |
£6,793 |
£6,705 |
£6,659 |
£6,611 |
£50,000 |
£10,626 |
£9,930 |
£9,558 |
£9,182 |
£100,000 |
£30,626 |
£29,930 |
£29,558 |
£29,182 |
£150,000 |
£50,626 |
£49,930 |
£52,240 |
£51,960 |
£250,000 |
£90,626 |
£89,930 |
£92,240 |
£96,960 |
The above table applies to most forms of income received by older taxpayers, including employment, self-employment, rental and pension income. Generally, it will also apply to interest and other savings income, subject to the minor potential savings discussed above.
Older taxpayers receiving dividend income only will be subject to the same tax rates as set out previously.
Trusts
From 6 th April 2011, the trust rate of Income Tax is to be increased to 45% and the dividend trust rate to 37.5%.
In other words, most discretionary trusts will pay Income Tax on all income in excess of £1,000 at the same rate as applies to an individual with income over £150,000!
Tax Credits
The rates of Working Tax Credits and Child Tax Credits for 2009/10 were announced in the Pre-Budget Report. Most Tax Credits will be subject to modest increases in line with inflation, except that:
- The child element increases by an extra £75 above inflation, from £2,085 to £2,235
- The family element, baby addition and childcare element of Working Tax Credits are all frozen at their 2008/9 levels.
The second point above means that the value of these credits in real terms is reduced by the effects of inflation.
Furthermore, the first and second income withdrawal thresholds are also frozen at their 2008/9 levels of £6,420 and £50,000 respectively. (The first income withdrawal threshold for those entitled to Child Tax Credits only is, however, to be increased from £15,575 to £16,040.)
The freezing of the main withdrawal thresholds again serves to reduce the value of tax credits in real terms.
For example, a family with household income of £50,000 in 2008/9 would be fully entitled to the family element of Child Tax Credit, £545. To keep pace with inflation (estimated at 3.5%), the same family will need income of £51,750 in 2009/10 simply to stand still in real terms. Sadly, however, without having enjoyed any real increase in their income, the family will lose £116 of their tax credit, when they really needed an increase of £19 purely to combat inflation. In effect, the family will be £135 worse off in real terms. Targeted? Timely? I think not!
VAT
As expected, the standard rate of VAT is being reduced from 17.5% to 15%.
The reduction is a temporary measure applying for the thirteen month period from 1 st December 2008 to 31 st December 2009 (inclusive).
On 1 st January 2010 the standard rate will revert to 17.5%. Government plans to increase the standard rate to 18.5% in 2011 appear to have been shelved (for the time being at least).
Invoices raised prior to 1 st December 2008 in respect of goods or services not supplied until on or after that date may be adjusted to reflect the new rate. In such cases, the supplier should issue a credit note to reflect the VAT reduction.
Rates applying under the VAT flat rate scheme are also being adjusted downwards, typically by around 1% to 1.5%.
From 1 st April 2009, eligibility for the flat rate scheme will be based purely on taxable turnover. The second test, relating to total income, will be abolished.
Business Tax
Despite the Government’s promise to help small businesses at this difficult time, there was very little help for this vital sector of the economy in the Pre-Budget Report. What little help there was mostly arises merely through the postponement of some of the tax rises already in the pipeline. Can the postponement of a planned additional tax burden really be regarded as help? In my book, it amounts to no more than taking your foot off a drowning man’s head rather than throwing him the lifeline he so desperately needs.
For a start, the unfortunate point about the proposed tax reductions for 2009/10 for most self-employed taxpayers is that these reductions will not generally produce any cash savings until January 2011, when the tax for that year is due under self-assessment. Some people may be able to reduce their payments on account in January and July 2010, but only if they are able to predict their tax bill for 2009/10 with a reasonable degree of accuracy by that time.
The best news for small businesses must be the further postponement of the proposed income-shifting legislation. The Chancellor confirmed in the Pre-Budget Report that this legislation will not be included in the 2009 Finance Bill but the position will be kept under review.
The planned increase in the small companies rate of Corporation Tax from 21% to 22% on 1 st April 2009 is also to be postponed until 1 st April 2010. The increases already made from 19% to 20% in 2007 and from 20% to 21% in 2008 stand, however, so the pressure on our drowning man is eased only slightly.
For a limited period, companies and individuals are to be allowed to carry back trading losses against profits arising in the same trade during the previous three years, instead of the usual twelve months.
The facility applies to trading losses arising in company accounting periods ending during the period from 24 th November 2008 to 23 rd November 2009 (inclusive) and trading losses arising in accounting periods of unincorporated businesses (sole traders and partnerships) which fall to be taxed in the year ending 5 th April 2009.
Where a claim is made, the losses must first be set against the profits of the immediately preceding accounting period. Any remaining loss up to a maximum of £50,000 may then be carried back to the previous year with any excess still remaining thereafter being carried back one more year. (Suitable adjustments must be made where accounts have been drawn up for periods other than a year.)
Claims for loss carry backs may be made as soon as the loss has been calculated for an accounting period which has expired but the resultant repayments will not be made until after the date of Budget 2009.
Cars
Previous proposals for a new capital allowances regime for company cars and other cars used in business were confirmed in the Pre-Budget Report. From April 2009, the rate of writing down allowances on cars will be based on carbon dioxide emissions rather than price.
The changes apply to cars purchased by companies on or after 1 st April 2009 and to cars purchased by unincorporated businesses on or after 6 th April 2009.
Cars with carbon dioxide emissions in excess of 160g/km will fall into the special rate pool and attract writing down allowances at just 10%. Lease payments on cars falling into this category will be subject to a 15% disallowance.
Cars with carbon dioxide emissions in excess of 110g/km but no greater than 160g/km will fall into the general pool and attract writing down allowances at 20%.
Cars with carbon dioxide emissions of 110g/km or less will continue to be eligible for a 100% first year allowance until 31 st March 2013.
Cars owned and privately used by business partners or sole traders will not be pooled but will be subject to the same rates of writing down allowances with the usual reduction in respect of private use. The great advantage for cars used by such unincorporated business proprietors, however, is that by not being pooled, the cars should (it currently appears) continue to give rise to a balancing allowance on disposal (although balancing charges may also occasionally arise).
For company cars, and other cars used by employees, purchased after the change in April 2009, there will be no possibility of a balancing allowance arising on the car’s disposal unless the business also ceases at that time or the pool balance falls below £1,000. This will lead to a massive delay in the tax relief for expenditure on these cars and it will therefore often make sense for businesses to replace these cars prior to the change in the capital allowances regime next April.
Cars already held prior to the change in April 2009 will continue to be subject to the existing capital allowances rules for a period of five years until April 2014, or until disposal, if sooner.
Leased cars held prior to the change in April 2009 will also continue to be subject to the existing rules for the remainder of the lease.
One change to the previous proposals made in the Pre-Budget Report is that motorcycles will not be subject to the new capital allowances regime for cars and, like most vans, will be eligible for the annual investment allowance when used in a qualifying business. This will provide immediate 100% relief for motorcycles purchased by most small businesses, including any ‘perk’ bike purchased for the director of a small company.
Other Points in Brief
- As previously announced, the lifetime limit and annual limit for pension schemes will continue to increase in the short term, reaching £1.8m and £255,000 respectively in 2010/11. Sadly, however, the limits will then be frozen for a five year period, until 2015/16.
- Qualifying bonds may be included in Individual Savings Accounts (ISAs) from 15 th December 2008.
- Fuel duty on both petrol and diesel is to increase by 2p per litre from 1 st December 2008, by a further 1.84p per litre from 1 st April 2009 and by 0.5p per litre above inflation from 1 st April 2010.
- From 1 st November 2009, there will be four bands for Air Passenger Duty, with two rates within each band (as now, one rate for the cheapest fare on each flight and a higher rate for all other fares). Bizarrely, the bands are based on the distance from London to the capital city of the destination country (except for Russia East of the Urals), rather than the actual distance of the flight. Rates of duty will range from £11 for a cheap flight to a country whose capital city is no more than 2,000 miles from London to £110 for a business class seat on a flight to a country whose capital city is over 6,000 miles from London. All of the rates of duty will be increased again from 1 st April 2010, when they will range from £12 to £170.
- A new business support service is to be launched within HM Revenue and Customs to enable small business owners struggling to pay outstanding tax bills to negotiate their own payment plan. To date, enquiries made to HM Revenue and Customs about the service have met with a stunned silence from staff yet to be advised of the scheme!
- Under a new ‘Small Business Finance Scheme’, small businesses unable to obtain funding from the increasingly unhelpful banking industry will be able to borrow between £1,000 and £1m directly from the Government. Who the Government will borrow the money from remains to be seen!
- Initially, the Pre-Budget Report included proposals for an 8% increase in alcohol duty from 1 st December 2008 which would have put 3p on a pint of beer, 13p on a bottle of wine and 53p on a bottle of spirits. When challenged, however, the Government swiftly executed one of its infamous ‘U-Turns’ and halved the proposed increase to just 4%.
- The Class 3 National Insurance rate will increase by almost 50%, from £8.10 per week to £12.05 per week, or a total of £627 a year. This will severely affect many people trying to maintain their state pension entitlement, including many parents staying at home to look after children.
Appendix A
UK Tax Rates and Allowances 2007/8 to 2009/10
Rates Bands, allowances, etc.
2007/8 2008/9 2009/10
£ £ £
Income Tax
Personal allowance 5,225 6,035 6,475
Basic rate band (1) 20% 34,600 34,800 37,400
Higher rate: 40%
Higher rate threshold: 39,825 40,835 43,875
Starting rate band applying to interest and other savings income only (2)
10% 2,230 2,320 2,440
National Insurance Contributions
Class 1 – Primary 11% ) On earnings between earnings threshold and
Class 4 8% ) upper earnings limit
Earnings threshold 5,225 5,435 5,715
Upper earnings limit 34,840 40,040 43,875
Class 1 – Secondary 12.8% - On earnings above earnings threshold
Class 1 & Class 4 1% - On earnings above upper earnings limit
Class 2 – per week 2.20 2.30 2.40
Small earnings exception 4,635 4,825 5,075
Class 3 – per week 7.80 8.10 12.05
Pension Contributions
Annual allowance 225,000 235,000 245,000
Lifetime allowance 1.6M 1.65M 1.75M
Capital Gains Tax
Annual exemption:
Individuals 9,200 9,600 (4)
Trusts 4,600 4,800 (4)
Inheritance Tax
Nil Rate Band 300,000 312,000 325,000
Annual Exemption 3,000 3,000 3,000
Pensioners, etc.
Age allowance: 65-74 7,550 9,030 9,490
Age allowance: 75 and over 7,690 9,180 9,640
MCA: born before 6/4/1935 6,285 6,535 6,965
MCA: 75 and over 6,365 6,625 6,965
MCA minimum (3) 2,440 2,540 2,670
Income limit 20,900 21,800 22,900
Blind Person’s Allowance 1,730 1,800 1,890
Notes
- The basic rate on income other than interest, dividends and other savings income was 22% prior to 6 April 2008. The rate applying to dividends is 10%.
- The starting rate applied to all income prior to 6 April 2008.
- The Married Couples Allowance, ‘MCA’, is given at a rate of 10%.
- The annual Capital Gains Tax exemptions for 2009/10 have not yet been announced.
Appendix B: Estimated Future Tax Rates and Allowances
2010/11 to 2013/14
|
Rates |
Bands, allowances, etc. |
|||
|
|
2010/11 |
2011/12 |
2012/13 |
2013/14 |
|
|
£ |
£ |
£ |
£ |
Income Tax |
|
|
|
|
|
Personal allowance |
|
6,705 |
6,945 |
7,195 |
7,455 |
Basic rate band |
20% |
38,800 |
40,200 |
41,700 |
43,200 |
Higher rate threshold |
40% |
45,505 |
47,145 |
48,895 |
50,655 |
Super rate threshold |
45% |
n/a |
150,000 |
150,000 |
150,000 |
First PA Withdrawal |
|
100,000 |
100,000 |
100,000 |
100,000 |
Second PA Withdrawal |
140,000 |
140,000 |
140,000 |
140,000 |
|
|
|
|
|
|
|
Starting rate band applying to savings income only |
|
||||
|
10% |
2,530 |
2,620 |
2,720 |
2,820 |
|
|
|
|
|
|
Capital Gains Tax |
|
|
|
|
|
Annual exemption |
|
10,400 |
10,800 |
11,200 |
11,600 |
|
|
|
|
|
|
Inheritance Tax |
|
|
|
|
|
Nil Rate Band |
|
350,000 |
363,000 |
376,000 |
390,000 |
|
|
|
|
|
|
Age-related allowances |
|
|
|
|
|
Age allowance: 65 -74 |
|
9,830 |
10,180 |
10,540 |
10,910 |
Age allowance: 75 & over |
9,980 |
10,330 |
10,700 |
11,080 |
|
MCA maximum |
|
7,215 |
7,475 |
7,745 |
8,025 |
MCA minimum |
|
2,770 |
2,870 |
2,980 |
3,090 |
Income limit |
|
23,800 |
24,700 |
25,600 |
26,500 |
|
|
|
|
|
|
National Insurance |
|
|
|
|
|
Class 1 Rate |
|
11% |
11.5% |
11.5% |
11.5% |
Class 4 Rate |
|
8% |
8.5% |
8.5% |
8.5% |
Additional Rate |
|
1% |
1.5% |
1.5% |
1.5% |
Primary Threshold |
|
5,925 |
6,945 |
7,195 |
7,455 |
Upper Earnings Limit |
|
45,505 |
47,145 |
48,895 |
50,655 |
Class 2 per week |
|
£2.50 |
£2.60 |
£2.70 |
£2.80 |
Appendix C: National Insurance Increases Re-Examined
As explained previously, many commentators have suggested that the National Insurance increases due to take place in April 2011 will affect many people on much lower income levels than the £40,000 suggested by the Government.
To examine this suggestion, we need to isolate two of the changes taking place on 6 th April 2011 and see what impact they would have if no other changes were taking place. For this purpose, the two key National Insurance changes proposed for 6 th April 2011 are:
- A 0.5% increase in the rate of Class 1 National Insurance paid by employees.
- The re-alignment of the National Insurance earnings threshold with the Income Tax personal allowance.
Using our estimated 2010/11 rates as a base (see Appendix B), the second measure above will save an employee National Insurance at 11% on £780 (£6,705 - £5,925), i.e. £85.80. If no other changes were made, they would then pay an extra 0.5% on their earnings over £6,705. It would therefore take further earnings of 200 x £85.80 before all of the initial saving was lost, meaning that all employees with income over £23,865 (£6,705 + 200 x £85.80) would be adversely affected by the increase in the National Insurance rate.
If we carry out the same exercise using the proposed tax allowances for 2009/10 as our base (see Appendix A), it would mean that all employees earning over £23,195 would be adversely affected by the change.
For self-employed taxpayers, the same exercise (again using the proposed tax allowances for 2009/10 as our base) yields an income level of just £18,635 as the break-even point above which taxpayers will be worse off as a result of the National Insurance increases due in April 2011.
So, yes, I can agree with the commentators who suggest that many individuals with earnings well below the national average (currently around £22,000) will be adversely affected by the 0.5% increase in National Insurance in April 2011.
Gordon Brown isn’t robbing the rich to feed the poor; he isn’t even robbing the poor to feed the rich (as so often in the past); he’s robbing everyone to feed his debts!