Introduction
With Gordon Brown now in the top seat, the eyes of the
nation were on Alistair Darling as he delivered his first
pre-budget report. The will-they-won’t-they speculation
surrounding the election, plus some tax cuts promises from
the opposition meant that Darling had to deliver some potentially
vote-winning changes.
Below is a summary of the key issues for you here to help
you understand how the changes will affect your business,
you and your family and what the Government’s spending
plans are for 2008 and onwards.
Personal Tax
The Government’s modernisation of the tax system
continues with several major announcements.
All married couples and civil partners automatically benefit
from double the standard inheritance tax allowance, and
capital gains tax is reformed with the introduction of
a single rate of 18 per cent. More information can be found
on these later in this report.
Other taxation measures include actions to protect tax
revenues and further modernise the tax system. An emphasis
was placed on tackling tax avoidance, including countering
the exploitation of interest relief by individuals, amending
the disguised interest rules to prevent abuse, and ensuring
that scheme pensions and lifetime annuities are used solely
to provide an income for life and not as a means of diverting
tax-relieved pension savings into inheritance. The details
of these measures have not yet been published.
Alongside reforms announced in Budget 2007, the new measures
announced in this pre-budget mean that by April 2009 many
individuals and families will be better off. Below are
some examples of the effect these changes will have:
- A single-earner family with two children on male mean
earnings (£35,900) will be £320 a year better
off, with the direct tax burden on the family falling
to 20 per cent.
- A single-earner family with two children on median
earnings (£27,000), will be around £540 a
year better off;
- A single-earner couple without children on half median
earnings (£13,500) and receiving the WTC will be £175
a year better off;
- Around 600,000 fewer pensioners will pay income tax
than would otherwise be the case, so that in total only
43 per cent of pensioners will be taxpayers. By April
2011, no pensioner aged 75 or over will pay any tax until
their income reaches £10,000; and
The income tax personal allowances for under 65s and NICs
thresholds and limits, except the upper earnings and profit
limits, will be raised in line with the Retail Price Index
from April 2008.
On the back of a suggestion from the opposition, the Chancellor
plans to raise more money from wealthy individuals who
classify themselves either as non-domiciled or non-resident.
Many people in this category are domiciled in tax havens
such as Monaco but operate their businesses or employment
in the UK. People in this category who have lived here
for more than seven years will pay a flat rate of £30,000.
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Non Domicile
Residents
A range of reforms will take effect from April 2008.
The main being that UK residents who are non-domiciled,
who wish to continue to be taxed on a ‘remittance
basis’ rather than on their worldwide income and
gains, will have to pay an annual charge of £30,000.
This change is to ensure that these individuals contribute
in respect of the foreign income and gains which they keep
off shore and on which they do not pay UK tax. The charge
will only apply if they have been resident in the UK for
more than seven years.
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Benefits
and Working Families
The Government continues its theme of eradicating child
poverty and proving a better deal for working and lone
parents. An In-Work Credit, which has been piloted since
2004, will be rolled out nationally from April 2008. This £40
payment (£60 in London) is for lone parents who have
been on Income Support for more than twelve months but
are now returning to work, and will be paid for the first
year of their employment.
The incapacity benefits system is being overhauled, with
a simplified Employment and Support Allowance (ESA) taking
its place from 2008. The intention is to focus on what
a claimant can do, rather than what they cannot do.
Child tax credit will go up in April 2008 by £175
a year, rather than the £150 increase previously
announced, with a further £25 increase in 2010.
All elements of the Working Tax Credit are to be uprated,
in line with the Retail Prices Index (RPI), with the exception
of the childcare element.
The Chancellor confirmed the Budget 2007 measures to increase
the income threshold below which WTC can be claimed in
full by £1,200 to £6,420 and the increase in
the withdrawal rate for tax credits by two percentage points
to 39 per cent.
In addition, from April 2008, the disregard of tax credits
in Housing Benefit will increase in line with RPI.
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Pensions and Retirement
In an effort to provides security for the poorest pensioners
and rewards those with modest savings, the Government will
increase the Pension Credit standard minimum guarantee
to £124 for single pensioners and to £189 for
couples in 2008-09, a rise of £5 a week for a single
person and £7.65 a week for a couple.
Part of the newly-announced anti tax-avoidance measures
will prevent the use of scheme pensions and annuities to
enable inheritance of tax-relieved savings and ensure that
UK tax-relieved pensions funds in overseas schemes continue
to be protected from the Inheritance Tax Threshold.
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Inheritance
Tax
One of the biggest and most talked-about announcements
was the change to the Inheritance Tax Threshold (IHT).
Because there is no IHT paid on assets passing between
married couples or civil partners, anyone leaving all their
assets to their spouse does not make use of their individual
tax-free allowance of £300,000. To address this imbalance,
all married couples and civil partners will automatically
benefit from double the standard inheritance tax allowance.
In real terms, this means that if a person’s tax-free
allowance is not used on their death, it can be transferred
to their surviving spouse or civil partner, enabling every
married couple or civil partnership to benefit from double
the tax-free allowance (£600,000 in 2007/08) in addition
to spouse relief. The IHT allowance will rise by April
2010 to £350,000 for individuals and £700,000
for couples.
The Government has also extended this entitlement to the
three million existing widows, widowers and bereaved civil
partners.
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Capital
Gains
A major reform to capital gains tax will be introduced
via a single rate of 18 per cent from 6th April 2008. The
Government aims to ensure a more sustainable system that
is straightforward and internationally competitive
As part of this new system the annual exempt amount (currently £9,200)
will remain in place, but taper relief and indexation allowance
will be withdrawn.
For some entrepreneurs, business creators and private
equity chiefs, who now pay only 10 per cent tax, this reform
represents a steep tax rise. However for many ordinary
investors in the stock market or property who currently
pay up to 40 per cent tax on their capital gains, this
will be welcome news.
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Companies
Changes to the tax system will have an impact on businesses,
particularly in light of new anti tax-evasion measures
and the new capital gains rules.
Other measures include an amendment to the regulations
on the tax treatment of loans and derivatives that hedge
a company’s currency risk from investment in foreign
operations, to ensure only the “hedged” position
is taxed, with effect from 1 January 2008, followed by
more extensive changes in 2009.
The taxation of small unincorporated businesses will be
reduced by £50 million in 2009-10, as the self-employed
already pay income tax and national insurance contributions
on their business profits.
A flaw in the legislation governing the sale of leasing
companies, which is resulting in an unintended tax charge
and could prevent genuine commercial restructuring, will
be removed via legislation with retrospective effect from
5 December 2005.
The Government announced continued support for business
and the promotion of enterprise, including the allocation
of a total of three rounds of Enterprise Capital Funds
at £50 million per year.
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Company Cars
Where a car is provided for an employee’s private
use, a taxable benefit arises which is based on the list
price of the car and its CO2 emissions. The percentages
range from 15% to 35% for most cars. There are currently
discounts available for environmentally friendly cars and
from 6 April 2008 there will be a 2% discount for cars
that have been manufactured to run on E85 fuel.
If fuel is provided for private motoring then a fuel benefit
tax charge arises based on the percentage used for the
car benefit and a ‘multiplier’, which is currently £14,400.
For 2008/09 the figure will increase to £16,900.
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Flight Tax
From 1 November 2009, air passenger duty will be replaced
with a duty payable per plane.
Other transport measures include free off-peak bus travel
to all residents in England over the age of 60 and eligible
disabled people from April 2008, and £15 billion
of Government funding in the rail network over five years.
The road pricing scheme is also being taken forward.
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The Economy
The Chancellor warned that there will be more economic
pain because of the world financial crisis.
UK economic growth is predicted to slow from 3 per cent
in 2007 to 2-2.5per cent in 2008, a reduction from the
previous forecast of 2.5-3per cent made in the Budget 2007.
The current instability is likely to slow growth in the
US and EU, but the Chancellor is optimistic that the UK
would grow faster in 2007 than any other major economy.
Public finances should still be in a strong position,
especially if growth returns to its forecast level of 2.5
per cent to 2.75 per cent in future years, but the Government's
public sector overall borrowing would increase by £4billion
in 2008 to £38bn. The Chancellor seemed confident
of long-term improvement, however, predicting a decline
in Government public sector borrowing to £25bn by
2011/12.
Budget proposals may be subject to amendment in the
Finance Act. You are advised to seek professional advice
before taking any action as a result of the contents
of this summary.
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