Alistair Darling’s Pre Budget Report yesterday was aimed at kick-starting the economy. However, its handouts consisted of a number of small and temporary measures for lower and middle income earners, with higher earners being hit hardest from 2010 onwards with increases in tax and the loss of the personal allowance.
VAT
The standard rate of VAT has been reduced from 17.5% to 15% from 1 December 2008. This is a temporary measure until 1 January 2010 when it will revert to 17.5%. The change will not affect zero rated supplies such as basic foodstuffs, exempt supplies such as education and supplies subject to VAT at 5% such as domestic fuel.
Tobacco and Alcohol Duty
Tobacco, alcohol and fuel will not benefit from the reduction in VAT as duty on cigarettes will increase by 2%, other tobacco products by 4%, and alcohol by 8%.
Petrol Duty
Petrol duty will increase by 2p per litre on 1 December 2008 and again by 1.84p per litre on 1 April 2009. The current reduction in duty enjoyed by biofuel will cease in 2010 and these fuels will be subject to the same duties as petrol.
Income Tax
From 6 April 2011 a 45% rate of tax will apply to income over £150,000. Dividends over that limit will be taxed at 37.5%.
From 6 April 2010 onwards the personal allowance will change for those who earn over £100,000 but under £140,000. £1 of the allowance will be lost for every £2 above the income limit up to a maximum of one-half of the basic personal allowance.
Those earning more than £140,000 will lose a further £1 for every £2 above £140,000 up to a maximum of the full amount of the personal allowance.
The personal allowances for 2009/10 were also announced. For those under 65, the first £6,475 is free of tax, with the next £37,400 taxed at 20%, meaning the higher rate threshold will be £43,875. Age allowance will increase by £460 to £9,490 for those aged between 65 and 74 and by £460 to £9,640 for those aged 75 and over.
National Insurance Contributions
From 6 April 2011, all NICs (including the employer rate) will increase by 0.5%.
Income Shifting
It was announced that legislation to prevent income shifting (mostly seen where a spouse is employed in a family business to use up his or her personal allowance and basic rate tax band) would be deferred and therefore not included in the Finance Act 2009.
Trusts
From 6 April 2011 the dividend trust rate and trust rate of tax will be increased to 37.5% and 45% respectively.
Corporation Tax
The planned increase of the small companies’ rate of corporation tax from 21% to 22% from 1 April 2009 has been deferred until 1 April 2010.
Extension of Trading Loss Carry Back for Business
This will apply for one year and will extend the period that current trading losses from businesses can be carried back against previous profits, from the current one year entitlement to a period of three years, with losses being carried back against later years first.
Pension Schemes
The PBR also changes the rules regarding individuals who are contributing large amounts into their pension schemes. The annual limit of £235,000 will rise annually by £10,000 to £255,000 in 2010/11, however thereafter it will remain constant until after 2015/16. Likewise the lifetime allowance, currently 1.65 million will increase to 1.8 million by 2010/11, but will not increase again before the end of 2015/16.
Other Benefits
A one-off payment of £60 for pensioners was announced that will be paid in January. Additionally, pension credit will be increased in January as will child tax credit and child benefit.
If you would like further advice about how the Pre Budget Report affects you or your business please contact Roddy Harrison rah@bto.co.uk, Claire Macpherson cem@bto.co.uk or Emma Donaldson edo@bto.co.uk for further information.