Alistair Darling confirmed many of the expected tax changes in his Budget speech yesterday. We have included a summary of issues that will impact your personal and business cash flows. It should be stressed that this is a short summary of some of the more applicable changes; it does not set out to describe all of the proposed changes to tax law in the Budget 2008.
Other non-tax business matters flagged in the Chancellor’s speech included an increase in the small firms loan guarantee scheme to £60m, the launch of a new £12.5m fund for female entrepreneurs, and a target for small and medium sized businesses to win up to 30% of public sector contracts in the next five years.
Pensioners will also be gratified to learn that the winter fuel allowance is to increase in 2008-09 to £250 for the over 60’s, and to £400 for the over 80’s. The chancellor has also indicated that he will bring forward the increase in the first child, child benefit to £20 per week in April 2009.
Personal Tax Issues
Income Tax Allowances 2008-09
All income tax allowances will increase in line with inflation. The personal allowance will increase to £5,435. The age-related personal allowances will rise to £9,030 for people aged between 65 and 74 and to £9,180 for those aged 75 and over.
The married couple’s allowance (for those aged less than 75 and born before 6th April 1935) is increased to £6,535. The equivalent allowance for those over 75 is increased to £6,625.
The income limit for age-related allowances will be increased to £21,800.
Blind person’s allowance increased to £1,800.
Income tax Rates
In 2008-09 the 10% starting rate is abolished. (But see comment below regarding savings income.)
The standard basic rate of income tax is reduced to 20% and will be applied to the first £36,000 of taxable income.
Income in excess of £36,000 will be taxed at the higher rate of 40%.
There is a new 10% starting rate for savings income only, with a limit of £2320. If your taxable non-savings income is above this limit the 10% savings rate will not be available.
There are no changes to the 10% dividend ordinary rate or the 32.5% dividend upper rate.
All chargeable gains for individuals and partnerships will be taxed at 18%.
Indexation and taper relief no longer apply. Gains will be calculated as 18% of the difference between original cost, (or market value at 31 March 1982 if purchased before that date) and the net sales proceeds.
In certain circumstances sellers of qualifying businesses will only pay CGT at an effective rate of 10%, the so-called Entrepreneurs’ Relief.
This relief will be available to qualifying gains post 6 April 2008 up to a lifetime limit of £1m.
Cigarettes – the price of a pack of 20 will increase by 11p
Cigars – the price of a pack of 5 will increase by 4p
4p to a pint of beer,
3p to a litre of cider
14p to a bottle of wine
55p to a bottle of spirits
If you are in transit between two places outside the UK, even if you are in the UK at midnight during the transit process, this will not count towards your days of presence in the UK. To claim this exemption you must not interrupt the transit process to say attend a business meeting.
Loss of personal allowances and reliefs.
This provision will apply to UK residents who have unremitted foreign income and gains in excess of £2,000 a year, and who claim to use the remittance basis of taxation.
Taxpayers in this category will lose:
the entitlement to certain personal allowances and reliefs,
access to the annual exempt amount for capital gains purposes.
Closing loopholes remittance basis
Legislation will be introduced to remove various loopholes and anomalies which allow remittance basis users to remit income and gains to the UK without paying tax on them. Some of these provisions will apply from 12 March 2008.
Annual charge £30,000
The annual charge will apply to individuals over the age of 18 years who are UK residents, and have been UK residents for more than seven out of the past ten years, who claim the remittance basis of taxation and who have unremitted foreign income and gains in excess of £2,000 a year.
The £30,000 is treated as a tax charge and therefore available for double tax relief.
If a taxpayer gives up the remittance basis, and pays UK tax on his worldwide earnings and gains, the annual charge will not apply.
Additionally the activities of shipbuilding and coal and steel production will be excluded investments in the Enterprise Investment, Corporate Venturing and Venture Capital Trust schemes from the same date.
1. EMI’s will be limited to qualifying companies with fewer than 250 employees.
2. Companies involved in shipbuilding and coal and steel production will no longer qualify.
3. The individual employee option limit will be increased from £100,000 to £120,000
Business Tax Issues
The small companies tax rate, for companies with taxable profits up to £300,000, will increase to 21% from 1 April 2008.
The Government are also legislating to simplify the Associated Companies rules. The changes will apply to directors or shareholders who are also members of separate business partnerships. If your company has associated connections within the definitions set out in tax law, this can severely restrict the amount of profit your company can earn at the smaller companies tax rate. The changes will apply from 1 April 2008.
Industrial and Agricultural Buildings allowances
Between the 1 April 2008 and 31 March 2011, for companies paying corporation tax, and 6 April 2008 and 5 April 2011, for businesses paying income tax, the present industrial and agricultural buildings writing down allowances are to be phased out, by reducing the allowance in steps of 25% each year.
New allowance for certain ‘Integral features and thermal insulation’ of a building
Expenditure on new or replacement:
electrical systems (including lighting systems);
cold water systems;
space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems;
lifts, escalators, and moving walkways;
external solar shading; and
All such expenditure will in future be treated separately for capital allowance purposes and will be available for an annual writing down allowance of 10% of the qualifying expenditure.
Plant and Machinery
The annual writing down allowance is being reduced from 25% to 20%.
Natural Gas, Biogas and Hydrogen refuelling equipment.
The 100% first-year allowance is being extended for an additional 5 years to 31 March 2013. Its scope is extended to include refuelling equipment for Biogas.
Cars with low CO2 emissions
The 100% first-year allowance for expenditure on cars with CO2 emissions not exceeding 120g/km is due to end on 31 March 2008. This allowance is to be extended for an additional five years until 31 March 2013.
The allowance will only be available for vehicles whose CO2 emissions do not exceed 110g/km.
The Chancellor has also disclosed changes to be made to the capital allowance treatment of cars from April 2009. Cars with CO2 emissions above 160g/km will qualify for a 10% writing down allowance, cars with emissions below 160g/km will be able to claim a 20% writing down allowance.
Plant and machinery – Annual Investment Allowance
Most businesses will be able to claim this new allowance. It allows the first £50,000 of qualifying expenditure to be completely written off in the year of purchase. The allowance is proportionately reduced if your first affected accounting year ends between April 2008 and March 2009.
Expenditure in excess of £50,000 is added to your general tax pool and will qualify for the appropriate writing down allowance. For 2008-2009 this will be 20% of the excess over £50,000.
The are a number of provisions to stop certain related businesses each claiming the £50,000 allowance.
Introduction of first year tax credits.
For companies only. If a company makes a loss in a year in which they make an investment in certain energy saving or environmentally beneficial plant and machinery, they can surrender the part of the loss attributable to the 100% enhanced capital allowances, for a cash payment.
The payable tax credit will be 19% of the surrendered loss. The tax credit claimed cannot be greater than:
-the total of the companies PAYE/NIC liabilities for the same period, or
Small Plant and Machinery Pools
If your business has a balance of £1,000 or less in a general pool of assets, from April 2008 you can write off the balance completely for tax purposes. This will save you having to claim increasingly smaller writing down allowances in future years.
Refunds of tax would have been proportionately reduced. To maintain cash flow charities would have needed to approach their donors for more funding.
To counter this the Revenue are introducing a 2% supplement. The extra tax concession will apply for the tax years 2008-09, 2009-10 and 2010-11.
You will be glad to know that the Revenue have bowed to pressure from interested parties and have deferred implementation until April 2009, pending further consultation.
The Government has confirmed that any donations made by retailers to charities will attract tax relief in the normal way.
Compulsory registration applies if taxable turnover exceeds £67,000. (previously £64,000)
Applications for deregistration can apply if taxable turnover is below £65,000. (previously £62,000)
This limit is to be increased for all accounting periods commencing on or after 1 July 2008 to the greater of:
1% of turnover subject to an upper limit of £50,000
This relief re-establishes rights that were incorrectly taken away when the present 3 year rule was introduced in 1996/1997.