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Savings And Investments

The Budget announced an increase in the overall ISA limit from £7,200 to £10,200 for the tax year 2010/11, of which £5,100 can be invested in cash. These limits take effect for people over the age of 50 on 6 October 2009.

The increase of £1,500 over the current annual £3,600 which can be invested in a cash ISA in fact benefits a saver paying the basic rate of Income Tax by only £6 a year, assuming an interest rate of 2%.

An investment in an Enterprise Investment Scheme (EIS) may now be carried back in full and used against the previous year’s income. The old rules were complex and effectively allowed a maximum of £50,000 (often much less in practice) to be carried back.

Business Tax

Capital allowances on new plant and machinery purchased in the year 1 April 2009 to 31 March 2010 are increased to 40% in the first year, with 20% of the balance being claimed in subsequent years. Note that this is in addition to the annual investment allowance of £50,000. So a business spending £100,000 on plant and machinery in the year ended 31 March 2010 would be able to claim the annual investment allowance of £50,000 and a further £20,000 (40% of the remaining £50,000). An allowance of 20% of the balance of £30,000 (£6,000) would be claimable in the following year.

Businesses making trading losses may temporarily carry the loss back and use it against profits in the last three years, rather than the normal one year. For companies, this applies to losses incurred in accounting periods ending between 24 November 2008 and 23 November 2010. For unincorporated businesses, it applies to losses made in the tax years 2008/09 and 2009/10. The loss carried back beyond one year is restricted to £50,000 per accounting year. Thus, a business with losses of £50,000 in both 2008/09 and 2009/10 would be able to carry each loss back three years.

Taxpayers owning furnished holiday homes which are let out may currently set off losses on such properties against their other income. This special treatment is withdrawn from 6 April 2010.

Income Tax Rates And Allowances

A new top rate of 45% was announced in the Pre-Budget Report. Despite doubts cast on the wisdom of this by the Institute of Fiscal Studies on the eve of the Budget, there will now instead be a top rate of 50% on earnings above £150,000 from the tax year 2010/11.

This affects some 350,000 taxpayers and may affect lower earners as well if, as has been hinted, many of the new top rate taxpayers decide to take their businesses abroad. Economists have highlighted the large increases in the total tax take when Nigel Lawson abolished the old 60% tax rate in 1988, and similar increases were seen in the US under Ronald Reagan in 1981 and 1986 and more recently under George W. Bush. A few days after the Budget, it emerged that the Treasury forecasts that 69% of people affected by the tax will find ways of avoiding it.

Also in 2010/11, the personal allowance is gradually reduced to nil for those earning over £100,000. For every £2 of income above £100,000, the personal allowance is reduced by £1. Based on the 2009/10 personal allowance of £6,475, a person with income of above £112,950 will have no personal allowance. The marginal Income Tax rate for those earning just above £100,000 will therefore be 60% (61.5% by 2011 when combined with National Insurance). Some 700,000 people will see an extra tax bill of £220 a month as a result.

For earnings above £150,000, higher rate pension relief will be restricted from 6 April 2011. Those earning above £180,000 will obtain relief at only 20% on pension contributions. Between £150,000 and £180,000, a taper relief will apply. The detailed rules have yet to be published at the time of writing, but we understand that there will be consultation during the summer. High earners may decide to make pension contributions in advance while higher rate relief is still allowed, but special rules apply from 22 April 2009 which will prevent higher rate relief being claimed on one-off contributions of more than £20,000 by high earners.

Benefits In Kind

Company car benefit is set out as a percentage of the price of the car and depends on CO2 emissions. The percentages for the next three years have been set out, and the current limit of £80,000 on the price of a car ceases to apply from 6 April 2011.

Capital Gains Tax And Inheritance Tax

The annual exemption from Capital Gains Tax applies to gains of £10,100 (up from £9,600).

The Inheritance Tax threshold rises from £312,000 to £325,000.

The Inheritance Tax relief on farmland is extended to farmland held anywhere in the European Economic Area.

VAT

The Budget confirmed that the standard rate of VAT will revert to 17.5% on 1 January 2010, despite pressure from retailers, who have to implement the change at a time which coincides with their busiest trading period.

The VAT registration threshold increases from £67,000 to £68,000 from 1 May 2009.

Redundancy Pay

Usually the cap on a week’s earnings for the purposes of statutory redundancy pay rises annually on 1 February. The current cap is £350. The Budget announced a one-off increase to £380 without saying on which date this will take effect, though it is believed that this will be in October 2009. The Government will consider introducing a “floor” which will set a minimum level for statutory redundancy payments.

Stamp Duty

The holiday on Stamp Duty on properties worth up to £175,000 is extended to the end of 2009, after which it will revert to 1% on properties costing above £125,000. But estate agents have pointed out that the holiday has had very little effect on the housing market in the seven months that it has already been in operation.

National Insurance

The Budget confirmed that National Insurance contributions will rise by 0.5% from 6 April 2011.

Tax Evasion

Those who deliberately understate their income and gains by £25,000 or more will be “named and shamed” on the website of H.M. Revenue & Customs. HMRC have long protected taxpayers’ confidentiality, but this is set to change.

HMRC will also be able to demand up to five years’ worth of extra records from UK residents who deliberately understate their tax bill by more than £5,000.

Large companies will have to advise HMRC of the identity of their senior accounting officer, who will have to certify annually that their accounting systems are adequate for the purposes of tax reporting. The individual, as well as the company, will be liable for penalties for failure to comply.

The above constitutes an outline of the some of the more significant points in this year’s Budget. The advance notice of most of the changes gives you time to prepare for them. For further information and advice, please contact Peter Hughes.

27 April 2009