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Introduction

Budget Summary Introduction

The Chancellor was keen to impress on everyone listening that the circumstances surrounding the Pre-Budget Report were extraordinary, and they were Someone Else's Fault - he constantly referred to the global financial crisis and to other countries that are doing at least as badly as we are. The Opposition also thought it was Someone Else's Fault, but they were pointing at the man sitting next to Mr Darling - his predecessor in the office for ten years.

Wherever the blame lies, Mr Darling repeated again and again that he had decided to take action to deal with it: he would not sit on his hands and watch the economy sink into depression. His hope is that the action he has taken will boost economic activity and make the slowdown shorter and less painful. His critics will say that his entire strategy is based on hope: some of the key projections of growth are more optimistic than other forecasters' figures, and he has taken credit for billions of pounds of efficiency savings that may not be delivered.

Even with those hopeful predictions, the Chancellor's expected levels of borrowing are unprecedented. He is willing to spend money now - borrowed money - to tide us over the pain of recession, and does not expect to start paying it back until 2015. That is likely to be the other side of two General Elections, and who knows what other shocks will derail the plans before then?

Among all the economic argument and talk of billions of pounds to be paid back on the never-never, the Chancellor made a number of important announcements that directly affect ordinary taxpayers this year, next year and the year after. This newsletter outlines the most important changes and explains their effect on taxpayers and businesses. Difficult times require good advice: we are here to help.

Cuts and clawbacks

The big giveaway is a cut in VAT to take effect next week - with rises in National Insurance Contributions two-and-a-half years away. Because prices are usually quoted "including VAT", people may not notice the VAT change - but they will surely spot the NIC when it comes out of their pay-packets.

Personal Tax

10% compensation

Mr Darling's first big tax headache as Chancellor - almost worse than dealing with Northern Rock - was the abolition of the 10% tax band that Gordon Brown left in his in-tray when he moved next door to No.10. The result was that many lower earners had to pay 20% on more of their income and saw their take-home pay fall in April 2009: the protests were so strong that the Chancellor had to take the unprecedented step of changing personal allowances and tax bands during a tax year. Even that did not fully compensate those who lost out.

Now Mr Darling has announced that he will make the revised allowances and rate bands - the "compensation" for the problem Mr Brown created - "permanent". So the bands and allowances for 2009/10 will be based on the 2008/09 figures, uplifted for inflation, rather than going back to what they would have been without this temporary measure. The adjustment this year did not cover the whole of the extra tax that the lower earners suffered - it will be increased next year, effectively saving £145 rather than £120.

Number crunching

The personal allowances for 2009/10 will rise as follows:

	2008/09	2009/10
Basic Personal Allowance	£6,035	£6,475
Personal Allowance (65-74)	£9,030	£9,490
Personal Allowance (75+)	£9,180	£9,640
Blind Person's Allowance	£1,800	£1,890
Married Couple's Allowance*	£6,625	£6,965
Minimum MCA	£2,540	£2,670
Income Limit for age allowances	£21,800	£22,900
Basic rate limit	£34,800	£37,400

* only available for those born before 6 April 1935; allowed at 10%

The NIC threshold remains less than the personal allowance for 2009/10 at £5,715pa (or £110pw). The upper earnings limit for NIC will be £43,875pa (or £844pw), a substantial increase from the current level of £40,040. This means that employees will pay the higher rate of 11% on an additional £3,555 of income, a tax increase of £355 for those earning above that level.

The percentage rates of income tax and NIC remain the same as for 2008/09.

You're NICked

The big tax-raising measure announced was the increase in all rates of National Insurance Contributions by 0.5% from April 2011. The Chancellor promised that this would coincide with the beginning of a strong economic recovery, so perhaps he thinks that we will not notice. The Shadow Chancellor also pointed out that the next election is certain to fall before April 2011, so the clawback may no longer be Mr Darling's problem.

At the moment, employees pay 11% on earnings between £5,435 and £40,040 a year, and 1% above that. The thresholds will have risen by 2011, but the 0.5% increase on its own will mean an extra cost - a tax, even if the politicians will not call it that - of about £220 on a salary of £50,000. Employers also pay 12.8% in secondary contributions on all earnings they pay to their employees over £5,435. This will rise to 13.3%, increasing staffing costs.

Self-employed people will also suffer the 0.5% increase on their current rates of 8% and 1%, but there is no secondary contribution for them.

To offset the increase for lower earners, the starting point for NIC will rise to match the income tax personal allowance. It was the same for several years, but the late fix brought in this year to compensate low earners for the loss of the 10% tax band made the two figures different again. Putting the starting point for NIC up to the personal allowance again in 2011 will reduce the impact of the rate increase on lower earners. Those earning up to about £13,000 should pay no more than they do now.

The Government's press releases claim that the totality of the changes will leave a person with income of £40,000 paying no more in April 2011 than they were in April 2008. That may simply mean that the rise in tax rates has balanced the normal increases in allowances and tax bands.

The tax raised by this measure will be about £3.8 billion a year, which dwarfs all the other "bad news" in the Chancellor's statement.

High earners

The Chancellor has at last decided to raise income tax for high earners, in spite of promises made by his predecessor not to do so. The increase to 45% is deferred until 2011/12, and it will only bite on those earning over £150,000 a year, so it is hardly a return to the tax rates of Old Labour in the 1970s - but as the top rate of income tax has been fixed at 40% since 1988, it is a significant step.

Dividends will be charged at a higher rate of 37.5%, less a 10% tax credit, above the £150,000 threshold. For someone with an income of £200,000, this 5% increase represents an extra £2,500 in tax.

There is also a significant change to the relief for the personal allowances of high earners. From 2010/11, those with incomes above £100,000 will have a reduced allowance. The rules are complicated, but the effect is that the allowance will be tapered away so that it is worth 20% of its full value rather than the top rate of tax. Where income exceeds £140,000, the allowance will be tapered further until it is worth nothing at all. For someone on a £200,000 income, the loss of the personal allowance represents a tax increase of £2,590 at 2009/10 rates - more when increases in the allowances by 2010/11 are taken into account. The total increase for this taxpayer will therefore be over £5,000 from the higher rate and lost allowance.

Conservative commentators object to high tax rates partly because they encourage avoidance. There are likely to be steps that people can take in advance of these changes to reduce their impact, and we will be pleased to advise you if you are affected.

Employee shares

The rules on employee incentive schemes involving awards of shares are notoriously complicated, and they can create tax charges on paper profits which the unfortunate employee never enjoys in cash - particularly in times when the value of the shares may fall significantly between the employee receiving them and selling them.

The Government has been reviewing the rules and has announced several changes to simplify the rules and remove anomalies. Unfortunately, the rest of the law in this area still has many catches for the unwary - if you are paid in shares, we will be pleased to help you steer clear of the traps.

Lifetime limit

Since 2006, individuals have been restricted in the amounts they can contribute to tax-advantaged pension schemes. There is an annual limit on what you pay in, and a lifetime limit on the amount that you can accumulate by the time you take the benefits. If you go over those limits, there are tax charges. They were initially set at levels which would not trouble most ordinary taxpayers - contributions of £215,000 a year, and a lifetime fund of £1.5m. The annual increases in these limits for the first five years were also set in advance - up to £255,000 and £1.8m by 2010/11.

The Chancellor has now announced that those figures will be frozen for the following five years - at least to the end of 2015/16. Although they remain generous by many people's standards, freezing them must make them relevant to more and more people each year. Of course, the lifetime limit will be less likely to bite if the Chancellor's measures do not revive the economy and the Stock Market is still in dire straits by the end of 2016.

The economic turbulence makes it difficult to plan for the future, but it's still important to do so. If you want to discuss how the tax rules can help your pension provision, we will be happy to help.

Trust taxation

The increases in income tax rates which will take effect in 2011/12 also apply to trusts. For the last few years all trusts have had to pay tax at 40% on most types of income and 32.5% on dividends (less a 10% tax credit). The new rates will be 45% and 37.5%.

Settlors, trustees and beneficiaries may want to review their current arrangements to see whether they are tax efficient now, and whether they need to take action between now and 2011 to avoid the increase in tax. We will be happy to help.

Credits and benefits

The rates of Child and Working Tax Credits have been increased, although the income withdrawal threshold of £50,000 has not been increased so those with higher incomes are still unlikely to qualify. In a time of falling incomes, it is worth remembering to put in a claim for these credits in good time because they can only be backdated by three months from the date of claim. If a provisional claim is made early in the tax year and rejected because the prior year's income is too high, credits can be paid for the whole tax year in arrears if income later falls to qualifying levels.

Child benefit is one of the simplest of all benefits, paid universally to the mother of qualifying children without any means testing. The rates will increase to £20 for the first child and £13.20 for subsequent children, and these rises will apply from 5 January 2009 instead of the usual 5 April.

Pensioner boost

The State Pension rises in line with the rate of inflation every April - the percentage increase is measured for the year to September, and inflation was high over those 12 months. So the basic pension is increasing next April from £90.70pw to £95.25pw.

The Chancellor announced that there would be an additional payment of £60 to all pensioners in January - £120 for couples - so they would not have to wait so long for the extra spending power. This will be in addition to the winter fuel payment and the Christmas bonus of £10.

There will also be above-inflation increases in the standard minimum income guarantee within Pension Credit from April 2009.

Business Tax

VAT difference?

The headline-grabbing "good news" is a cut in VAT from 17.5% with effect from 1 December 2008. It's supposed to get consumers out in the shops to boost the economy, but it's possible that the immediate effect will be that no-one buys anything substantial during the last week of November!

The Chancellor is confident that this will help the economy, but there are uncertainties. Passing on the VAT cut will not be cost-free or easy for many retailers, particularly small ones: catalogues, menus, brochures may already be printed with prices in. All those £9.99 items will have to be marked down to £9.77. Where many retailers are making much bigger price reductions already, it is not clear whether this change will make much difference to consumers.

On bigger items, and on supplies that are priced "plus VAT", the saving may well be worthwhile. On a £10,000 extension or new kitchen, you will save £250. If you've already agreed a price for something that's being delivered next week, you'll need to check whether the supplier will pass on the saving.

The reduction is also only temporary - the rate goes back up to 17.5% from 1 January 2010. That means that businesses will have to deal twice in 13 months with all the complications of a VAT standard rate change - we've only had one in the last 25 years. There'll be a scramble to buy things before the rate rise, and we are promised anti-avoidance rules to stop people locking in the benefit of the lower rate for things they will really only be buying later.

The VAT giveaway may be good news or make little difference for consumers, but it's definitely a headache for businesses. If you want to discuss what it means for your pricing and your paperwork, we will be happy to help you.

Small company tax

Small companies pay a lower rate of corporation tax - currently 21% on profits of up to £300,000, while larger companies pay at 28%. The small companies rate was planned to rise to 22% from 1 April 2009, but this has been deferred for a year. The maximum benefit of this is £3,000 for a company at the very top of the small companies profits band.

The logic of the increases in the small companies rate was apparently to bring the rates of tax payable by small businesses into line - when the plan was announced, the rate was 19% and the basic rate of income tax was 22%: sole traders and partnerships were paying 3% more on their profits than incorporated businesses. The income tax rate has now been cut to 20%, so there is still no link between the two.

The fact that unincorporated businesses pay NIC in addition to income tax still leaves a company likely to pay less tax on profits. If you want to review the form in which you carry on your trade, we will be pleased to advise you.

Company losses

One of the problems of an economic downturn is that tax is paid in arrears. You can be paying tax on last year's profits at the moment that you are making this year's losses, so you don't have the money to pay.

The tax rules have for years allowed you to set one year's losses against the previous 12 months' profits, so you can get back some of that earlier tax payment. But it doesn't help if you are making a big loss after a small profit - you can't go back more than 12 months, unless you are going out of business altogether. You end up having to carry forward the loss into the future to set off against the next time you make money.

The Chancellor has extended the carry-back of losses up to £50,000 to three years. That should help a little, but it won't make a difference for bigger amounts. The extra relief is supposed to be available for just one year - accounting dates falling between 24 November 2008 and 23 November 2009. Mr Darling expects the economy to be recovering by that time, so perhaps we are not supposed to make losses any more or perhaps they will have to extend the relief in a year's time.

If you want to know how you can use losses to reduce your tax payments or to get a refund of what you have already paid, we will go through the alternatives for you.

Car allowances

There are important changes to the capital allowance rules for cars from April 2009. Up to then, cars which cost up to £12,000 are put in a pool with other fixed assets and receive 20% writing down allowances; cars costing over that figure are kept separate and the maximum WDA is £3,000. Cars with a rating up to 110g/km currently enjoy a 100% first year allowance.

For new cars bought from April 2009 onwards, the allowances on all cars will be related to the carbon dioxide emissions rating of the car. Very low rated cars will still enjoy the 100% allowance. Cars with a rating up to 160g/km will go into the general pool and receive 20% allowances. Cars with higher ratings will no longer have a £3,000 restriction, but they will go into the special rate pool and will only receive 10% allowances.

There are detailed rules for existing cars and for cars with an element of private use. If you are planning to change cars in the period leading up to the end of March 2009, it will be useful to check on whether you should hurry up or you should wait a few days - we will be happy to run the numbers for you and explain the difference that it will make.

Flat rate VAT

The VAT flat rate scheme allows small businesses to simplify their VAT affairs, and in some cases to save money by paying HM Revenue & Customs less in output tax than they charge to their customers. The reduction in the standard rate of VAT from 1 December 2008 also applies to the flat rates, but individual businesses will have to check - on the HMRC website, or with us - exactly what their new flat rate should be. The VAT charged to customers will drop to 15%, but the VAT accounted for to HMRC may change by a different amount.

The rules on joining and leaving the scheme are also being simplified. In general, a business with taxable turnover of up to £150,000 (excluding VAT) can join, and a business with VAT-inclusive income in the last year of £225,000 has to leave. These conditions are not clear in the law at present, and the changes are welcome.

If you are in the flat rate scheme, you will need to make sure you are aware of the new rates. If you might be interested in joining it, we will be happy to explain how it works and to check whether it would be advantageous to you.

Connected loans

Where companies are connected with each other, there are rules about charging and deducting interest on loans between them. The idea is to make sure that one cannot get a deduction unless the other one is paying tax on the same amount. However, it is possible under the present rules to suffer the opposite where a loan is written off - there is a tax charge for one even though the other is denied a deduction.

The Government has reviewed these rules and has announced some simplifications to remove this anomaly. The rules on loans and write-offs - particularly between connected parties - may still create a tax headache. In uncertain economic times, write-offs are more likely. If you think you will suffer bad debts within a group of companies, we'll help you understand the tax consequences before you act.

Empty properties

The Government is temporarily increasing the threshold at which an empty property becomes liable for business rates. From 1 April 2009, any empty property with a rateable value of less than £15,000 will be exempt. This is supposed to remove the charge from about 70% of empty business properties. The other 30% will still present a headache to their owners, who must consider demolishing them to avoid having to pay.

Big business

The Chancellor announced that large and medium-sized companies will benefit from a new exemption from UK corporation tax for dividends received from their foreign subsidiaries. Few details were given, but it is likely that there will continue to be anti-avoidance provisions to stop companies shifting their profits into low-tax foreign countries and receiving them back as tax-free dividends. The changes are to be included in the Finance Bill 2009.

Tax Administration

Just give us time!

Most businesses in financial difficulties will have HM Revenue & Customs among their creditors. If the taxman insists on payment, the business is likely to fold.

The Chancellor announced the establishment of a new HMRC Business Payment Support Service to allow businesses in temporary financial difficulty to pay their tax bills on a timetable they can afford. Few details have been given - there will be a dedicated helpline to call, but how sympathetic will the person on the other end be? Mr Darling's speech gave the impression that the taxman should be the last creditor to apply for bankruptcy, but only time will tell how this works in practice.

No income shifting change

The long-running saga of the Government's fight against "income shifting" goes on. For some years HM Revenue & Customs have been looking at ways to prevent a high earner transferring income to someone who pays a lower rate of tax on it - typically the high earner's husband or wife. After suffering a defeat in the House of Lords in the Arctic Systems case a year ago, the Government realised that the existing rules were not effective, and they proposed to bring in a sweeping anti-avoidance rule. The professional bodies protested that the proposals were complicated, unfair and unworkable, and Mr Darling announced in March this year that they would be reconsidered and implemented in 2009 rather than in April 2008.

The present economic climate is not considered the best time for introducing something that would surely hurt small businesses, so the Pre-Budget Report includes a promise that the income-shifting proposals will be deferred again - but they will be kept under review.

This is very good news for all those husband-and-wife businesses that could have paid considerably more tax if the proposals had been implemented, and would have had to spend a great deal of time and effort assessing how the rules would apply. It means that, for the moment at least, it is still possible to reduce a tax bill by sharing income with your spouse. We will be happy to advise you on what works and what the taxman can currently object to.

Avoidance schemes

A Pre-Budget Report usually includes a list of tax avoidance schemes that the Chancellor is closing down "with immediate effect". This year there were very few - sales of lessor companies, sale and leaseback of plant, and leasing transactions by film partnerships. Those people who are involved in such transactions are normally warned that they can be closed at any time.

The statement also included changes to the rules governing the disclosure of tax avoidance schemes to HM Revenue & Customs. When someone promotes a tax avoidance scheme to clients, they are supposed to tell the taxman about it and be given a reference number. The client is then supposed to put the reference number on the next tax return. The rule is being changed so that the number should go on the first tax return which is affected by the use of the scheme, which seems to be a sensible amendment.

Other Taxes

Duty calls

The Chancellor was brave enough to include in his speech the bad news that duty on petrol and diesel would go up on 1 December to balance the reduction in VAT - the price of fuel has been going up and down like a yoyo in the last year, but the tax system should not make any difference right now.

Hidden in the press releases that accompany the Chancellor's statement were announcements of increases in the duty on alcohol and most tobacco products - it's not made clear whether they will exactly match the VAT reduction as they are intended to for fuel, but do not expect your Christmas cheer to be that much cheaper this year.

No more SDLT relief

Some commentators predicted that there would be some form of extra relief from stamp duty land tax to stimulate the housing market. Nothing was announced, so the rules remain as they were: there will be no duty on residential property bought from 3 September 2008 to 2 September 2009 for total consideration up to £175,000. The normal rates apply for higher values, and - unless another announcement is made in the March Budget - the 1% rate threshold will revert to its usual level on 3 September next year. That threshold is a consideration of up to £125,000 in general, and £150,000 in "disadvantaged areas of the UK".

Green taxes

The Chancellor had already announced changes to car tax that were supposed to impose big increases for cars with high emissions ratings from next April. In view of the economic situation, Mr Darling has now decided to phase the increases in, with no car suffering a rise of more than £5 next year. The following year (2010/11) the higher polluters may see increases of up to £30, but lower rated cars will suffer smaller increases or may even enjoy a reduction.

The Government has also been reviewing Air Passenger Duty with a view to changing the basis from a tax on each flyer to a tax on each flight. This was intended to encourage airlines to move towards fewer, fuller planes. The Chancellor has decided against this, and has instead announced a new four-tier scale of duties that are still based on the passengers and the distance flown. The new rates represent small increases for economy passengers travelling in Europe, but will add £30 per journey to long-haul business class travellers from 1 November 2009, and a further £60 a year after that.