The perilous state of the UK finances meant that tax increases were almost inevitable, but a 50% rate of income tax for those earning over £150,000 coupled with a complete withdrawal of personal allowances once earning over about £113,000 was not expected. Higher rate tax relief for pension contributions is also restricted, and the favourable tax regime for furnished holiday lettings will be withdrawn from April 2010. Some businesses will benefit from an extension of loss relief and a limited increase in capital allowances, whilst individuals will be able to put more into ISA’s but otherwise tax breaks are thin on the ground.
The 50% rate of income tax will apply from 6 April 2010 on income above £150,000. This replaces the proposed 45% rate, which was going to come in a year later on 6 April 2011. Dividend income above £150,000 will be taxed at 42.5%.
The tax free personal allowance (£6,475 for 2009/10) will be tapered down to nil for those individuals who have taxable income of £100,000 or more from 6 April 2010. So once you have taxable income of about £113,000 you will completely lose the benefit of the tax free personal allowance.
If you have a significant amount of cash retained within your own company you may consider withdrawing some of those funds in the current tax year while the highest rate of tax is only 40%, or 32.5% on dividends, and you have full use of your personal allowance.
Pension contributions currently attract tax relief at your highest rate of tax however much you earn. This tax relief is thus worth more to those who pay tax at 40%, than basic rate taxpayers. With the increase in the top rate of tax to 50% from 6 April 2010 the tax relief on pension contributions would become even more valuable.
The Government has foreseen this and plans to restrict the tax relief given on pension contributions for those who pay tax at 50%. From 6 April 2011 the tax relief will be tapered down from those earning over £150,000 so that those earning £180,000 or more will only get the basic rate tax relief on all their pension contributions. The delay until 2011 in changing the tax relief would offer a window of opportunity for pension planning, but that window has been blocked immediately for those earning £150,000 or more. If such an individual increases their current pension contributions beyond their normal contribution level, and those total contributions exceed £20,000 per year, a penalty rate of tax will apply.
The Chancellor has made two adjustments to help savers and pensioners who have been hit hard by the reductions in interest rates:
- The ISA savings limits are to be increased to £10,200, and £5,100 for the cash-only element of the ISA. These new limits come into effect on 6 April 2010 for most savers, but savers who are aged 50 on more on 6 October 2009 will be able to take advantage of the new limits from that date.
- The amount of capital disregarded when making a claim for pension credit, and certain other benefits will be increased from £6,000 to £10,000 from November 2009.
Savers who lost money when their bank went into liquidation will generally be compensated under the Financial Services Compensation Scheme (FSCS). This scheme returns the capital that was lost and an amount in respect of lost interest. The savers will now be taxed on the compensation received in respect of the interest lost, as if that amount was interest payable by a bank.
The annual capital gains exemption for 2009/10 has been set at £10,100 for individuals and £5,050 for most trusts. This exemption remains in place irrespective of the levels of gains made in the tax year. The rate of capital gains tax for 2009/10 is set at 18% for all taxpayers. These two measures mean that most individuals pay far less tax on capital gains than they do on earnings, savings, dividends or profits.
Businesses that make trading losses can generally carry back the loss to set against profits made in the previous accounting period. This one-year carry back facility was extended to three years last November, but only for sole-trader or partnership accounting periods ending in the year to 5 April 2009 (2008/09), or for company periods ending in the year to 23 November 2009. As the recession is now expected to last longer than first thought, this loss relief extension will now apply to the following accounting periods:
- For unincorporated businesses: the periods ending in the tax years 2008/09 and 2009/10.
- For companies: the periods ending in the two years to 23 November 2010.
For each loss making period an unlimited amount of loss can be carried back one year, but a maximum of £50,000 can be carried back to the previous two years. The losses must be used against the profits of the later period first.
If you are having difficulties paying the tax due on the profits made in the earlier accounting period, which will be partly or wholly cancelled out by losses made in the current year, you can ask HMRC for time to pay the tax due. The HMRC officers should now take into account the expected loss that will be carried back, but they may want to talk to us as your accountant to verify the scale of the loss.
All businesses can now claim 100% capital allowances for plant and machinery purchased each year under the Annual Investment Allowance (AIA). The AIA is generally capped at £50,000 per year for each business or group of companies. Any expenditure in excess of the AIA cap goes into the relevant capital allowance pool and receives tax relief at either 10% or 20% per year.
Now for one year only the excess expenditure, which is not covered by the £50,000 AIA limit, can qualify for a 40% first year allowance. This 40% allowance will cover plant and machinery purchased in the year ending on 31 March 2010 by companies, or to 5 April 2010 by unincorporated businesses, but not cars, integral features, long life assets or leased equipment.
The changes to capital allowances on cars have already come into effect for cars purchased after 31 March 2009 by companies, and after 5 April 2009 by unincorporated businesses. The main changes are that cars with CO2 emissions exceeding 160g/km are allocated to the special rate capital allowance pool, where the cost receives tax relief at only 10% per year. Other cars go into the general pool and receive tax relief at 20% per year, unless the car has very low emissions of 110g/km or less when it can qualify for a 100% first year allowance.
The disadvantage of pooling the expenditure on cars is that when a car is sold, the disposal proceeds are deducted from any other costs in the pool, but any unrelieved cost of the car remains in the pool to be gradually written-off at 20% or 10% per year. Cars owned at the April start date are treated separately, so the unrelieved cost is given as an allowance when the car is sold. The Government is introducing anti-avoidance rules to prevent businesses taking advantage of the old rules for cars by selling the vehicles at less than market value, or by artificially closing down the company to claim the allowances.
The taxable benefit for having use of a company car is to increase again from 6 April 2011. The scale of CO2 emissions that sets the taxable amount of the vehicle’s list price will start at 15% for cars with CO2 emissions of 121-129g/km. Although cars with CO2 emissions of no more than 120g/km will continue to produce a taxable benefit of 10% of their list price. The taxable benefit of driving an electric car is 9% of the list price. The list price that is taken into account is currently capped at £80,000, but this cap will be removed from 6 April 2011. Various discounts for alternatively fuelled cars will also be removed.
Car Scrappage Scheme
If you have a car which is more than 10 years old you will be able scrap it and get £2,000 off the price of a brand new car, but only for a limited period until March 2010. You will have to show you have been the registered keeper of the vehicle for the previous 12 months before ordering the new car.
The Chancellor confirmed that the standard rate of VAT will revert to 17.5% on 1 January 2010. If businesses try to avoid the VAT rate increase by paying early or by invoicing early at the current rate of 15%, they will have to pay a supplementary charge of 2.5%.
The compulsory VAT registration threshold will increase by just £1,000 to £68,000 on 1 May 2009. Businesses are obliged to register for VAT once their turnover for any 12 month period exceeds this limit, or if they expect their turnover to meet this threshold in the next 30 days. The turnover threshold, below which a business may apply to be deregistered for VAT, will increase to £66,000 on 1 May 2009.
If you buy or sell goods or services across international borders you need to be aware of changes in the VAT rules which are going to be phased in between 1 January 2010 and 1 January 2013. Currently only businesses that sell goods into other countries need to complete an EC sales list, but from 1 January 2010 businesses that supply services to customers in other countries will need to complete this document every quarter. The rules that govern when and where a service is treated as being supplied are also changing.
From 1 January 2010 it will be easier to reclaim VAT incurred in another EU country, as the claim will be made directly to HMRC in electronic form.
Stamp Duty Land Tax
As the property market slumped last summer the Chancellor was forced to announce an increase in the threshold where Stamp Duty Land Tax becomes payable on a property transaction. This threshold was raised from £125,000 to £175,000 for just one year to 2 September 2009. However, as the property market has still not recovered this higher threshold will now remain in place until midnight on 31 December 2009, when presumably the recession will be over!
Stamp Duty Land Tax is a big expense for leaseholders of flats who wish to buy the freehold of their property from the landlord. The law is to be changed to allow relief from this tax when a group of leaseholders come together to buy the freehold of the whole block.
The Government has suddenly realised that a number of tax rules that restrict tax relief to land in the UK are illegal under EU law. These rules include the inheritance tax reliefs for agricultural property and woodlands, which until now only applied to land in the UK, the Channel Islands and the Isle of Man.
This inheritance tax relief can now be claimed on any qualifying agricultural land or woodlands situated in a country in the European Economic Area (EEA), which comprise the EU countries and a few more. If inheritance tax has been paid on such non-UK property since 23 April 2003 the executors of the estate can claim a refund.
Furnished Holiday Lettings
Another tax relief that currently only applies to UK property is that for furnished holiday lettings. If the strict conditions apply to the property the letting business is treated as a trade, so losses can be set-off against other income and gains on the property may be rolled-over. HMRC has now been forced to accept that property in other EEA countries can qualify as furnished holiday lettings, and taxpayers will be able to make claims for the associated reliefs where those claim periods are still open. However, rather than expand the scope of tax relief for furnished holiday lettings to the whole of Europe, HMRC are withdrawing the tax relief completely from April 2010.
No Budget would be complete without a raft announcements designed to discourage or catch-out those that deliberately evade tax.
This year the Chancellor has decided to use the name and shame tactic. The names, addresses, and professions of taxpayers who are found to have deliberately understated their tax liabilities by £25,000 or more will be published on the HMRC website. This will apply to businesses as well and individuals, but only after the case has been closed and the penalties have been agreed. Any taxpayer who makes a full disclosure of the tax due to HMRC will not be named in this way.
Another way of clamping down on tax evasion by large companies is to make the company accountant personally responsible for the accounting system which is used to hide the tax evasion. The accountant will have to pay any penalties for tax evasion personally. This will only apply to companies defined as large by the Companies Act 2006, which is really very large, but it is an interesting new approach.
Finally there will be no escape for tax defaulters. Where HMRC has lost track of a taxpayer who owes them money, an employer or company will be forced to hand-over contact details of that individual.