Monday, 23 April 2007

Budget Overview March 2007

Gordon Brown surprised every body by leaving his most "impressive" tax cut until the end of his Budget speech – and cut the basic rate of income tax by 2p, from 22p to 20p in the £ from April 2008. As you will see from the more detailed commentary below the 2p cut is not the complete story!
Most of the changes in allowances and tax rates for 2007-2008 are already published. However there are a number of interesting changes to report for 2008-2009.
Please be aware that this report has been produced from the Budget Notes released after Mr Brown's speech. We will have to await the publication of the Finance Bill 2007 to examine the fine print!
Personal Tax Issues
Income Tax
From 6 April 2008 the basic rate will be reduced to 20% (previously 22%).
The starting rate of 10% will be removed for earned income and pensions, but will continue to be available for savings income and capital gains. For tax payers whose income is primarily earned or from pensions this further change will reduce some of the benefit received when the basic rate drops in April 2008.
Personal Allowances for the over 65s will be increased by £1,180 over indexation in 2008-2009.

National Insurance
The upper threshold for primary National Insurance up from £33,540 to £34,840
Combining the personal allowance and the new basic rate band, we see that most people will only begin to pay higher rate Income Tax in 2007/8 when their income exceeds £39,825.
So, it's pretty much business as usual for 2007/8. The following few years, however, will see some rather more significant changes:
  • Basic rate income tax to reduce from 22% to 20% from 6th April 2008.
  • 10% starting rate band to be abolished for earned income and pensions from 6th April 2008.
  • Upper threshold for primary National Insurance Contributions to increase by £3,900 more than inflation for 2008/9.
  • Age-related personal allowances for all taxpayers aged 65 or more to increase by £1,180 more than inflation in 2008/9.
  • Personal allowances for taxpayers aged 75 or more to be increased to £10,000 by 2011/12.
  • Higher rate Income Tax threshold to increase by £800 more than inflation for 2009/10.
  • The upper threshold for primary National Insurance to be aligned with the point at which taxpayers begin to pay higher rate Income Tax from 6th April 2009.

    The last point may not sound very radical. However, it spells out the potential for a major change to the UK tax system: the abolition of National Insurance!

This is because of the fact that once the primary National Insurance threshold is aligned with the point at which higher rate Income Tax cuts in, for most people we will effectively have a simple two-tier tax system.

All basic rate taxpayers will also pay primary National Insurance contributions (currently 11% for employees and 8% for self-employed taxpayers) on all of their earned income and all higher rate taxpayers will be paying National Insurance at just 1% on their earned income in excess of the higher rate threshold. This will create just two effective tax rates from 2009/10 onwards. For employees these rates will be 31% and 41% and, for the self-employed, 28% and 41% (as things currently stand).

After 2009 we may see a total integration of the two taxes so that everyone pays 41% in higher rate tax and, perhaps, 31% in basic rate tax. Once the Income Tax and National Insurance thresholds are aligned this would be easy to do. The vast majority of the electorate, with mostly employment income, would not see much change, so it would be politically acceptable.
The self-employed, pensioners and landlords would all suffer effective tax increases however, as the benefit of paying lower, or zero, National Insurance Contributions would be eradicated.

Homes abroad owned through a Company
Legislation is to be introduced in the Finance Bill 2008 that will remove any benefit in kind tax charge if you have purchased a property abroad, through a company, and have an element of personal use of the property.
Without this legislation owners who direct and control the company may get caught by the living accommodation benefit charge.
Certain conditions will need to be met to secure the exemption.
Change to filing date self assessment returns
For the year 2007-2008 and subsequent years the filing deadlines are revised.
Paper Returns must be filed by 31 October. The 2007-08 returns must be filed by 31 October 2008. (The present deadline for paper returns is 31 January following the end of the tax year).
Online Returns continue to be due by 31 January following the end of the relevant tax year. So for 2007-08 returns must be filed by 31 January 2009.

Business Tax Issues

Corporation Tax
The current main corporation rate of 30% remains unchanged until 1 April 2008 when it will be reduced to 28%.
The small companies rate will increase as follows:
In 2007-2008 - increase from 19% to 20%
In 2008-2009 - increase from 20% to 21%
In 2009-2010 - increase from 21% to 22%

Research & Development Tax Relief
Support for SME companies with fewer than 500 employees will be introduced in the Finance Bill 2007 - the operative date is yet to be announced.
From 2008-2009, and subject to State Aid approval, the enhanced deduction available to SMEs in respect of qualifying expenditure will rise from 150% to 175%.

Increased rate of Capital Allowances for small businesses.
The temporary 50% first-year capital allowance will be extended for a further year. For the self-employed until 5 April 2008, for companies paying corporation tax until 31 March 2008.
The rate of first year allowance for medium sized businesses remains unchanged at 40%.

Reform of Capital Allowance system proposed for 2008-2009
From April 2008 it is proposed to abandon the present system of FYA's (first year allowances) in favour of an Annual Investment Allowance. The scope of the allowance is subject to consultation but will be applied to the first £50,000 of expenditure on plant and machinery.
Changes in writing down allowance
From April 2008 the annual writing down allowance on "pooled" plant and machinery will be reduced from 25% to 20%.
From the same date the 6% rate of writing down allowance on long-life assets will be increased to 10%.
Industrial Building Allowance (IBA's) /Agricultural Buildings Allowance (ABA's)
As part of a major reform of business tax it is proposed to phase out both IBA's and ABA's over the next 4 years. To prepare the way balancing adjustments and recalculation of writing down allowances will be withdrawn for all transactions on or after 21 March 2007.

Business Premises Renovation Allowance
The long awaited commencement date for this tax allowance has now been published - it will be applied to qualifying expenditure incurred on or after the 11 April 2007.The allowance will provide a 100% write off for capital expenditure on the renovation or conversion of business property in disadvantaged areas. The allowance will only be given if the building has been vacant for at least one year.

VAT and Other Duty

VAT Issues
The registration and deregistration limits have been increased, effective date 1 April 2007. The new limits are:
Registration limit £64,000
Deregistration limit £62,000
The general principles to be applied remain unchanged.

Fuel Scale Charges
VAT fuel scale charges will be based on CO2 emissions for accounting periods beginning on or after 1 May 2007.

Vehicle Excise Duty
The Government is raising the rate for the most polluting cars (band G) to £300 in 2007-08 and £400 in 2008-09; and reducing the rate for low carbon band B cars to £35 in 2007-08, with that rate then frozen for the subsequent two years.

Until 2012, all new zero carbon homes up to £500,000 will be exempt from stamp duty.
Landfill tax will rise by £8 each year from April 2008
Rise in climate change levy rates from 1st April 2008 in line with current inflation.

DISCLAIMER - PLEASE NOTE: The ideas and information shared with you in this posting are intended to inform rather than advise. Taxpayers circumstances do vary it is important that consult your accountant or tax adviser before implementation. If you do or do not take action as a result of reading this information, before taking professional advice we will accept no responsibility for any financial loss incurred.

Dynamic Business Strategies Ltd

The Counting House
14 Walford Place
Registered in England. Reg No.5418835
Tel: 07917 446068


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