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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