BUDGET SUMMARY MARCH 2008

Significant points

• Fundamental reform of Capital Gains Tax confirmed – no closure of last-minute tax planning before 05 April.
• Nil rate band for Inheritance Tax transferable between married couples and civil partners where second dies on or after 9 October 2007.

Personal Income Tax

Tax rates and allowances

Personal allowances and higher rate thresholds were increased in line with inflation.  Age-related allowances were increased at above inflation, taking more pensioners outside the charge to income tax.  As announced last year, general income - salary, profits, pensions, rent - will no longer benefit from the 10% starting rate, while the basic rate drops from 22% to 20%.  The benefit of these changes is in the region of £790 for a higher-rate taxpayer. 

The loss of the 10% rate on earnings means that someone with a salary of between £5,650 and £16,500 could be worse off.  A high earner will also pay more in National Insurance Contributions as a result of the raising of the upper earnings limit, which will cancel much of the income tax cut.  The people who benefit most are those with mainly investment income.

The overall effect is complicated by the different rates which continue to apply for general income, interest and dividends, and the possibility that a separate claim may be made for Working and Child Tax Credits to be repaid by the Revenue.  The calculation of the tax position remains as complex as ever.

National Insurance Contributions (NICs)

Rates and limits

The percentage rates of NIC remain unchanged.  There are small increases in the thresholds and also in the flat rate weekly payments under Classes 2 and 3.

The most striking change is a significant increase in the upper limit at which employee contributions drop from 11% to 1% and self-employed contributions drop from 8% to 1%.  It was announced last year that this upper limit is to be aligned with the higher rate income tax threshold, probably in 2009/10.  The increase widens the 11% band from £29,615 to £34,605: someone with high earnings will pay £499 extra on salary or £350 extra on self-employed profits as a result in 2008/09.

Savings

Pension contributions

The maximum amount of a tax-efficient pension fund from which benefits are drawn in 2008/09 is £1.65m.  The maximum employer contribution to a pension fund that will enjoy tax relief is £235,000; if an employee or self-employed person contributes personally, tax relief will be available on a gross premium of up to 100% of current year earnings up to the same £235,000 annual limit.

The drop in the basic rate of income tax to 20% will lead to an increase in some personal pension contributions.  These are normally paid net of basic rate tax, so the premium has been 78% of a gross amount – this will rise to 80% of the gross figure from 6 April 2008.  A higher rate taxpayer will still enjoy 40% tax relief overall, but the higher rate relief will come later through the tax return.

Individual Savings Accounts (ISAs) and Personal Equity Plans (PEPs)

The rules for ISAs and PEPs change significantly on 6 April 2008, as announced last year:

• “Mini and maxi ISAs” are abolished.

• Up to £3,600 p.a. can be invested in a “cash ISA”.

• Up to £7,200 p.a., less what has been invested in cash, can be invested in a “stocks and shares ISA” with the same or a different provider.

• Existing cash mini-ISAs, TESSA-only ISAs and the cash component of maxi-ISAs will be converted to cash ISAs.

• Existing stocks and shares mini-ISAs, the share component of maxi-ISAs and PEPs will be converted to stocks and shares ISAs.

Investors will be permitted to move money from cash ISAs to stocks and shares ISAs, but not vice versa.

Capital Gains Tax (CGT)

Annual exemption

The annual exemption for individuals has been increased to £9,600 for 2008/09 (2007/08: £9,200).  Trustees receive half this figure (£4,800 for 2008/09; £4,600 for 2007/08), although this may be shared between trusts which have been set up by the same person.

Major reform of the tax

As announced in the Pre-Budget Report in October 2007, the following major changes will take effect for disposals on or after 6 April 2008:

• abolition of taper relief, which, since 1998, has reduced the chargeable gain based on the length of ownership and has reduced the effective rate of tax on business assets to 10%.

• abolition of indexation allowance, which was added to the cost of assets owned since before 1998 to allow for the effect of inflation – this has been frozen at the 1998 figure since then, but even the frozen figure will disappear in 2008/09.

• introduction of a single flat rate of 18% to replace taper relief, indexation allowance and the charging of gains at the taxpayer’s marginal rate of income tax (10%, 20% or 40%).

• changes to the tax treatment of assets that have been owned since before 31 March 1982 – in future, only the market value at 31 March 1982 will be used to compute gains, and the original cost will be ignored altogether.

The changes will allow a very significant simplification of the rules for computing gains on shares and securities.  In most cases shares in the same company will be “pooled together” and treated as a single asset from which disposals are taken at average cost.

Many other aspects of CGT – for example: the exemption of the only or main residence and the deferral of gains using reinvestment in Enterprise Investment Scheme shares – remain unchanged.  The taxation of gains of companies is also unaffected, as they pay corporation tax rather than CGT.

Entrepreneurs’ Relief

A new relief will be introduced for disposals after 5 April 2008 to compensate some of those who would have enjoyed an effective rate of CGT of 10% under the taper relief regime for business assets.  The main rules are:

• the asset disposed of must be a business or an interest in a business, shares in a company for which the individual works and owns at least 5%, or related assets owned outside such a business or company and disposed of at the same time.

• the assets must have been owned for at least a year.

• an individual will have a lifetime allowance of gains of up to £1m which will be eligible for the relief – this limit will be applied cumulatively to successive disposals.

• the relief will operate by reducing the chargeable gain by 4/9, cutting the effective rate of tax from 18% to 10%.

Inheritance Tax (IHT)

Rates

The nil rate band for transfers after 5 April 2008 rises, as previously announced, from £300,000 to £312,000.  Rates of tax remain unchanged at 40% (death transfers) and 20% (lifetime chargeable transfers).

Transfer of nil rate band

The Budget confirms the announcement from the October 2007 Pre-Budget Report that the nil rate band will be effectively transferable between husband and wife.  Where one spouse has died with a chargeable estate for IHT of less than the nil rate band at the time, the unused proportion will be added to the nil rate band of the surviving spouse on the second death.  This relief applies where the survivor dies on or after 9 October 2007, whenever the first spouse died.

It does not necessarily mean, however, that a nil rate band discretionary will trust might no longer be required.

Corporation Tax

Rates

The main rate of Corporation Tax (for companies with profits over £1.5m) falls from 30% to 28% with effect from 1 April 2008.  The small companies rate (for companies with profits up to £300,000) rises from 20% to 21% on the same date, and will rise to 22% from 1 April 2009.  The effective marginal rate for profits between £300,000 and £1.5m in the year to 31 March 2009 will be 29.75% (down from 32.5%).

Other Measures

Filing deadline

As previously announced, self-assessment returns for tax year 2007/08 may still be filed online up to 31 January 2009.  Returns in hard copy will have a new earlier deadline of 31 October 2008.  The due dates for paying tax are not affected (31 January 2009 for the balancing payment of income tax and CGT for 2007/08).

Payments on account (POA)

Self-assessment taxpayers have to make two payments on account, on 31 January during the tax year and 31 July following, based on the self-assessment tax liability of the previous year.  No POA are due if the previous year’s liability does not exceed £500 or 20% of the total tax payable.  The £500 limit will increase to £1,000 from 6 April 2009 onwards, i.e. for the 2009/10 payments on account due on 31 January 2010 and 31 July 2010.  Her Majesty’s Revenue & Customs (HMRC) are introducing measures to allow payment of tax by credit card.

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