BUDGET SUMMARY APRIL 2009

Significant Points

• Income tax rates to rise for high earners in 2010/2011
• Further increases to come in taxation of company cars
• Tax relief for pension contributions to be restricted for high earners in 2010/2011
• Increase in ISA investment limits
• Extension of Stamp Duty Land Tax holiday to December 2009

Personal Income Tax

Tax rates and allowances
The tax rates and allowances for 2009/2010 were as announced in November. The allowances generally have been increased at above the rate of inflation and the rates of tax remain 20% and 40% (10% and 32.5% for dividend income). The effect on the income tax liability of a person with total income of £50,000 is a reduction of about £696 when compared with 2008/2009. However, if this is all salary, increases in NIC amounting to £353 would reduce this saving.

In November, increases in the top rate of tax for very high earners were announced to take effect in 2011/2012. They have now been brought forward to 2010/2011 and the top rate will become 50% rather than 45%. The dividend rate will be 42.5%, up from the present 32.5%. These top rates will apply to people with incomes over £150,000 a year.

At the same time, for those with incomes over £100,000 a year, the personal allowance will be restricted. At present the personal allowance is relieved at the marginal rate, so it is worth 40% of £6,475, i.e. £2,590. The amount of the allowance will be reduced by £1 for every £2 of income above £100,000 until it falls to zero. The effect of this will be a marginal rate of income tax of 60% in the band of approximately £100,000 to £113,000 within which the allowance is being withdrawn.

The rates of income tax on discretionary trusts will also rise in 2010/2011 to match the top rates of income tax.

Furnished holiday lettings (FHL)
For many years, losses arising on UK furnished holiday lettings have been eligible for tax relief against other income. This will stop after 2010/2011. In the meantime, losses on letting of furnished accommodation in the European Economic Area which satisfies the conditions for FHL will be eligible for relief against other income.

Tax Credits

Rates of credit
Many of the rates of tax credit have risen in line with inflation. The figures that are most relevant to high earners – the “family element”, £545, and the level of combined income at which it starts to be withdrawn, £50,000 – remain unchanged.

National Insurance Contributions (NICs)

Rates and limits
The rates of NIC remain unchanged. An increase is expected in 2011, but no further details of this were given in the Budget.

The upper earnings limit, at which employee contributions drop from 11% to 1%, has increased substantially this year in order to align it with the level at which higher rate income tax is payable. Different amounts are subject to income tax and NIC (e.g. savings income, which is not charged to NIC), therefore, it will be rare for the thresholds to coincide exactly. What is certain is that the increase in the upper earnings limit will significantly increase the NIC payments of high earners; a higher proportion of their pay will be charged at 11% instead of 1%.

A new threshold has also been introduced for 2009/2010. The “upper accrual point” is the top limit for those on contracted-out pensions to enjoy the contracting out rebates. For example, an employee with a salary-related contracted-out scheme will pay 9.4% NIC on earnings between £110 and £770 a week, then 11% on earnings between £770 and the upper earnings limit of £844, then 1% on any earnings above that.

These two changes together mean that the rates of NIC may be unchanged, but the amounts of NIC deducted from the pay of high earners will increase sharply between March and April. For example, a contracted-out employee earning £4,000pcm will pay £307 rather than £277 – an increase of 10%.

Employees

Company cars and fuel
There are no changes to the taxation of company cars and fuel for 2009/2010. The charge is based on a percentage of the list price for the car and the same percentage of a fixed figure of £16,900 for the fuel. The percentage is linked to the CO2 emissions rating of the car.

It had already been announced that there will be increases to tax charges from April 2010 because the thresholds for CO2 emissions will be lowered by 5g/km: for most people this will add 1% to the percentage that is applied to the list price of the car and to the standard figure for fuel to give the taxable benefits in kind. A further 5g/km will be taken off the thresholds for 2011/2012, leading to a further 1% addition to most people’s percentages. For example, a petrol-engined car with a rating of 150g/km will have a percentage of 18% in 2009/2010, 19% in 2010/2011 and 20% in 2011/2012.

The upper limit on list prices, currently £80,000, will also be removed in 2011/2012, so drivers of very expensive cars will see a substantial increase in their tax charges.

Savings

Pension contributions
For the current tax year, 2009/2010, pension contributions will be relieved as in past years, with expected increases in the maximum amounts of contributions and tax-free funds at retirement.

Tax relief will be restricted for the highest earners – those with incomes over £150,000 – from April 2011: instead of the current relief at the marginal rate of 40%, the relief will be tapered to 20%, the same level of relief that basic rate taxpayers receive, by the time income reaches £180,000. There will be measures to stop people on very high earnings paying unusually large contributions to take advantage of the greater relief in advance of the change: if someone with earnings over £150,000 pays contributions that are greater than £20,000 and greater than the regular contributions paid in previous years between 22 April 2009 and 05 April 2011, there will be a supplementary tax charge which will have the effect of cutting tax relief to 20%.

Individual Savings Accounts (ISAs)
The limit for investment in tax-free ISAs increases from £7,200 to £10,200. This higher limit will apply from 06 October 2009 for people aged 50 and from 06 April 2010 for everyone else. Up to £5,100 can be invested in cash ISAs. As before, the balance has to be invested in stocks and shares.

Capital Gains Tax (CGT)

Annual exemption and rate
The annual exempt amount for CGT rises from £9,600 to £10,100. Most trusts enjoy half the personal exemption (£5,050). The rate of CGT remains unchanged at 18% on net gains after reliefs, losses and the annual exemption. Entrepreneurs’ Relief reduces the rate to 10% on the first £1m of gains on disposals of qualifying business assets.

Agricultural property
Holdover relief allows someone who gives away agricultural property to pass on the CGT charge on the gift to the donee. Up to now, the relief has only been available for land situated in the UK. From 22 April 2009, land anywhere in the European Economic Area can qualify.

Inheritance Tax (IHT)

Rates and threshold
There are no changes to IHT rates. As previously announced, the nil rate threshold rose on 06 April 2009 to gifts of up to £325,000.

Stamp Duty / Stamp Duty Land Tax (SDLT)

Extended holiday
The one-year increase in the threshold for SDLT on residential property to £175,000 is extended by a further four months to 31 December 2009. After that, the 1% rate will again apply to purchases of residential property for consideration above £125,000 in general, or £150,000 in “disadvantaged areas”. Once the threshold is exceeded, SDLT applies to the whole of the consideration: the charge on consideration of £176,000 is £1,760, not £10 (1% of the excess over £175,000).

Corporation Tax

Rates of tax
The rates of corporation tax remain 28% for companies with profits over £1.5m and 21% for companies with profits up to £300,000, with a marginal rate in between those levels of 29.75%. The calculations are more complex for associated companies or those which receive dividend income. The small companies rate was intended to rise to 22% on 01 April 2009, but (as announced in November) this increase has been deferred to 01 April 2010.

Value Added Tax (VAT)

Registration threshold
The threshold of VATable turnover for registering a business for VAT rises by £1,000 to £68,000 from 01 May 2009. The level of turnover below which a business can deregister also rises by £1,000 to £66,000.

Standard rate
There were no further announcements about the standard rate of VAT. The temporary cut to 15% will, therefore, end on 31 December 2009, and the rate will return to 17.5% on 01 January 2010. Measures have already been announced to stop traders artificially advancing tax points for supplies in order to charge 15% to people who cannot recover VAT in respect of goods or services that will really be supplied after the rate rises.

This information is based on the proposals put forward by the Chancellor in his 2009 Budget and need to be approached with caution as details may change during the passage of the Finance Bill through Parliament. We recommend you contact us before acting upon any information contained herein and we cannot accept responsibility for any action taken without such advice.

<back

Please register for regular financial news and to recommend a friend:

Register with us

 

These documents require Adobe Acrobat. Downloads may not work with older versions, please download the latest Adobe Acrobat Reader version 9 free of charge and follow steps 1, 2 & 3