In the Chancellors’ Pre-Budget speech on the 24th November 2008, the Chancellor talked of “extraordinary challenging times” and “exceptional economic circumstances” that have hit the UK economy. He also acknowledged that the Britain’s economy is weaker than predicted when he announced the last budget in March 2008.

Public borrowing is likely to be in the order of £100 billion in 2008/09. The peak of borrowing is likely to be in 2009/10 when the predicted level will reach £118 billion.

The highlight of the speech was the announcement of an immediate tax cut. The Chancellor said we need “action now to boost economic activity”. He immediately cut the rate of VAT from 17.5% to 15% effective from 1 December 2008.  However the VAT rate will be returning to 17.5% on 1 January 2010. The Chancellor hopes to encourage consumer spending with the cut in VAT.

However there is to be a new higher 45% rate of tax for earnings over £150k, but this will not come into effect until April 2011, shortly after the expected General Election.

Personal allowances will be restricted for incomes between £100K and £140K, and abolished for incomes above £140K.

With effect from April 2011 there will be a 0.5% increase in both employers’ and employees’ national insurance contributions, and the starting thresholds for NICs will be put in line with that for income tax.

However the Chancellor did announce that small businesses will be able to agree with HM Revenue & Customs a payment schedule for all taxes which suits their cash flow. In addition the planned rise in the small company’s rate to 22 per cent has been deferred for a year.

Another very welcome announcement which Mr. Darling did not mention in his speech was the indefinite postponement of the so-called ‘income splitting’ rules that would have affected many entrepreneurial family businesses.

Large and medium-sized companies will also welcome the announcement that dividends from foreign subsidiaries are to be exempted from tax. This will hopefully stimulate growth within UK companies and buck the recent trend of companies relocating outside of the UK to countries with a favorable tax treatment of foreign dividends.

The main changes announced in the pre budget report can be summarized as follows

Income tax rates and allowances

• For 2009-10, the main rates of income tax will be the 20% basic rate and the 40% higher rate.
• A new 45% rate of income tax will be introduced and will apply to taxable non-savings and savings income above £150,000 from 6 April 2011.

Personal allowances

• The personal allowance for those aged under 65 will increase from £6,035 to £6,475 for the 2009/10 tax year.
• For those aged between 65 and 74, the allowance is increased to £9,490 and for those aged 75 and over the allowance rises to £9,640
• From 2010-11 the basic personal allowance will be reduced in two stages for those with gross incomes above £100,000 and £140,000.

National Insurance Contributions (NICs)

• The starting point for employers’, employees’ and self-employed NICs in 2009-10 will increase in line with inflation to £110 per week. The upper earnings and profits limits for Class 1 and 4 NICs respectively will increase from £770 to £844 per week.
• As previously announced, for 2009-10 the upper earnings limit for primary Class 1 NIC will be aligned with the level at which people start to pay higher rate income tax.

Value Added Tax (VAT)

• The Pre-Budget Report saw the standard rate of VAT reduced temporarily by 2.5% to 15%. The reduced rate of 15% applied with effect from 1 December 2008 until 31 December 2009. On 1 January 2010 the rate will revert to 17.5%.
• The zero rate and 5% rate of VAT are unaffected by the changes.

Corporation tax – small companies’ rate

• The planned increase on 1 April 2009 of the small companies’ rate of corporation tax from 21% to 22% has been deferred until 1 April 2010.

Trading losses

• The Government today announced a measure which will apply to both companies and unincorporated businesses making losses from carrying on trades, professions or vocations.

Pensions

• The Annual Allowance (the amount an individual taxpayer can contribute to a UK registered pension with tax relief) and the Lifetime Allowance (the amount up to which taxpayers can take benefits from their pension funds without incurring a tax charge) will be frozen from 6 April 2011 at £255,000 and £1.8m respectively until 5 April 2016.

This is the first pre-budget report that has effectively set tax rates and allowances for up to 7 years in advance and if you should need any further guidance or advice then please contact Gareth Short at Wingrave Yeats on 0207 495 2244 or email Gareth at gshort@wingrave.co.uk

This entry was posted on Thursday, January 15th, 2009 at 9:02 pm and is filed under Money and Lifestyle. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.