Pre-Budget Report: November 2008
January 9th 2009
The Chancellor of the Exchequer Alistair Darling delivered his second Pre-Budget Report on 24 November 2008 against a backdrop of global economic uncertainty, announcing a raft of measures aimed at stimulating the economy and boosting consumer confidence.
The Chancellor unveiled a £20bn package, effective until April 2010, supposedly designed to help individuals and businesses to weather the storm. The measures announced are thus a mix of short term tax reductions and longer term tax increases.
The main tax proposals include the following:
- reduction in standard rate of VAT from 1 December 2008 to continue for 13 months
- The 2008/09 “one-off” increase in personal tax allowances (tax benefit £120) made permanent
- From 2011/12, the top rate of income tax will be 45% for taxable income over £150,000. Those with gross income of over £100,000 will see their personal allowance reduced or removed completely.
- From the same tax year, all the main national insurance contribution rates will rise by 0.5%.
- The 1p planned increase in the small companies’ rate of corporation tax will be deferred for one year. It will remain at 21% during 2009-2010
- new loss carry back provisions
- details of changes to capital allowances for cars.
VALUE ADDED TAX
The standard rate of value added tax (VAT) will be 15% from 1 December 2008 until 31 December 2009, reverting to 17.5% from 1 January 2010 in a move to stimulate spending. No changes have been made to the 5% reduced or the 0% rate.
Suppliers will be able to apply the 15% VAT rate to invoices originally issued at 17.5% for goods and services they supplied after 30 November 2008. At the end of the temporary reduction period, measures will be introduced to ensure businesses cannot use artificial arrangements to reduce the VAT rate on goods or services to be provided after 31 December 2009.
In addition, a 2p per litre increase in fuel duty on petrol and diesel will take effect on 1 December 2008.
INCOME TAX
The government has announced significant changes to the system of personal allowances and tax rates for the next few years. These mainly impact on those with higher levels of income. These changes are set out below.
Allowances and rates
For the tax year 2009/10, the personal allowance will be increased by more than the rate of inflation to £6,475. The Chancellor decided not to claw back any of the increase announced in May that was intended to compensate for the abolition of the 10% rate band on non-savings income.
Changes for 2010/11
From 2010/11 the personal allowance will be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of gross income they have above the income limit up to a maximum reduction of half of the basic allowance.
For those with income of above a second income limit of £140,000 the amount of the allowance will be further reduced at the same rate until the allowance is extinguished.
Changes for 2011/12
An additional higher rate of income tax of 45% will be introduced for incomes above £150,000. The corresponding rate for dividends will be 37.5%.
Trust Rates
From 2011/12, the tax rate for trusts will rise to 45%, with the dividend tax rate rising to 37.5%.
Allowances - personal and age-related allowances 2009-2010
|
£ |
|
| Personal allowance (age under 65) |
6,475 |
| Personal allowance (age 65-74) |
9,490 |
| Personal allowance (age 75 and over) |
9,640 |
| Married couple’s allowance* (aged less than 75 and born before 6 April 1935) |
6,865 |
| Married couple’s allowance* (age 75 and over) |
6,965 |
| Married couple’s allowance* (minimum amount) |
2,670 |
| Age allowances income limit |
22,900 |
| Blind person’s allowance |
1,890 |
NATIONAL INSURANCE
Several changes will be made to national insurance contributions (NICs) from 2011/12:
- The NICs starting point will be broadly aligned with the income tax personal allowance, as used to be the case before 2008/09.
- There will be a 0.5% increase in the employer, employee and self-employed rate of national insurance contributions (both main and additional rates).
- Class 4 self-employed NIC rates will also increase by 0.5% to 8.5% and 1.5%.
COMPANY CARS
A new emissions-based approach to tax relief will replace the existing regime for business cars. This will take place from 1 April for corporation tax and 6 April 2009 for income tax.
BUSINESS TAX
Corporation Tax Rates
The planned increase of the small companies’ rate from 21% to 22% will be deferred until 1 April 2010.
‘Income shifting’
The government intended that legislation would take effect from 6 April 2008 to address ‘income shifting’ ie shifting part of an individual’s income to someone else who is subject to a lower rate of tax.
The government has consulted on this issue but, given the current economic challenges, is deferring action and will not bring forward legislation in Finance Bill 2009. The issue will be kept under review.
Trading losses
Companies and unincorporated businesses will be able to carry back trading losses to set against their profits of up to three years earlier, subject to limitations.
- Losses carried back must first be set against profits of the preceding year. Then a maximum of £50,000 of the balance of unused losses will be available for carry-back to the earlier two years, taking the more recent year first.
- The £50,000 cap is reduced proportionately if the loss-making period is less than 12 months.
- For companies, the measure will have effect only for accounting periods ending in the period 24 November 2008 to 23 November 2009.
- For unincorporated businesses, it will apply to trading losses for the tax year 2008/09.
OTHER MATTERS
Child benefit and child tax credit
Child benefit increases from £18.80 per week to £20 per week for the first child (and from £12.55 to £13.20 per week for subsequent children) would be brought forward from April 2009 to January 2009.
The child element of child tax credit will be increased by £25 above indexation from April 2009 rather than April 2010. This means the child element will rise by £75 above indexation to £2,235.
Pensions and retirement
From April 2009, the basic state pension will rise to £95.25 per week for a single person and £152.30 for a married couple. A £60 one off payment will also be made in January 2009 to every individual entitled to the £10 Christmas bonus for pensioners.
From April 2009, the Pension Credit minimum income guarantee would rise to £130 for single pensioners and £198.45 for couples.
Alcohol and cigarettes
Duty on alcohol and tobacco will be rise to match the cut in VAT. For cigarettes, this will take effect from 24 November 2008 and for alcohol, it will apply from 1 December 2008.
Vehicle Excise Duty (VED)
New VED rates, designed to encourage motorists to drive fuel-efficient vehicles, will be introduced in 2009 but there will be no significant rate changes until 2010.
Six new bands will be introduced in April 2009, taking the total to 13. However, VED rates will not increase by more than £5 for any car.
From April 2010, the government will start to separate out the 13 rates but no driver in a given band will pay more than £30 more in that year.
