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Pre-Budget 2008 Budget 2009 – four months early!
Monday, December 1st, 2008
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The Chancellor of the Exchequer, Alistair Darling, presented his Pre-Budget Report to Parliament on 24 November 2008.
Many of the increases to tax and NICs rates and thresholds are linked to the annual increase in the Retail Priced Index at September 2008, i.e. 5.0%. The Government anticipates that the RPI in September 2009 will be negative.
Income Tax changes from April 2009
There are no changes to the basic and higher rates of income tax.
From 6 April 2009, the personal tax allowance will increase from £6,035 to £6,475, an increase of £440. A 5% increase would have taken the allowance to £6,345, but it is being increased by an additional £130. The emergency tax code will be 647L.
The basic rate limit, which was reduced from £36,000 to £34,800 from September 2008, will increase to £37,400, i.e. a 5% rounded increase to £36,600, plus a further £800. The extra £800 is part of the process, announced in the 2007 Budget, to align
- the annual higher rate tax threshold (i.e. the sum of the personal allowance and the basic rate limit),
- the annual Class 1 NICs upper earnings limit, and
- the annual Class 4 upper profits limit.
The process will be completed in April 2009, at which time all three thresholds will be aligned at £43,875. The effect for employees is that they will stop paying basic rate tax and full-rate NICs at the same level of earnings. The following Table shows how the alignment will have been achieved.
* See NICs changes from April 2008, below.
Increases to all of the different tax allowances from April 2008 were also announced. They are all in line with inflation.
* The tax relief on the married couple’s allowances is restricted to 10%.
Income Tax changes from April 2010
The Government expects the RPI at September 2009 to be negative, and if this is the situation, there will be no statutory increases to tax allowances. The annual indexation rules in section 57 of the Income Tax Act 2007 only make provision for increases to the allowances – they are not reduced if the RPI is lower than it was the previous September.
From 6 April 2010, new income limits will apply to the basic personal allowance. This will have the effect of wiping out the benefit of the personal allowance for a relatively small proportion of high earners. The income limits will not apply to the age-related personal allowances.
The limits will be set at £100,000 and £140,000. If an individual’s gross annual income is
- up to £100,000, there will be entitlement to the full allowance.
- between £100,000 and £140,000, the allowance will be reduced by £1 for every £2 above £100,000, up to a maximum of half of the full allowance.
- over £140,000, the allowance will be further reduced by £1 for every £2 above £140,000, up to a maximum of the full amount of the allowance.
To illustrate – if there is no increase in the personal allowance from April 2010,
- on earnings between £100,000 and £106,475, the personal allowance will taper from £6,475 down to £3,238, and will stay at £3,238 on earnings between £106,475 and £140,000
- on earnings between £140,000 and £146,475, the personal allowance will taper from £3,238 down to nil, and will be nil where earnings are above £146,475.
Income Tax changes from April 2011
From 6 April 2011, a new additional higher tax rate of 45% will be introduced and will apply to all taxable income, including savings income, above £150,000. We should expect therefore to see the return of tax code D1, in addition to D0.
The basic rate limit will be held at its 2010/11 value in 20011/12.
NICs changes from April 2009
There are no changes to any Class 1 NICs rates.
The lower earnings limit (UEL) and the earnings threshold (ET) will increase from 6 April 2009 according to statutory rules, based on the 5% increase to the RPI in September 2008. The increase to the upper earnings limit (UEL) is no longer tied to inflation (see note below). The Table shows the new values for 2009/10, some of which are subject to confirmation, and the new fixed Upper Accrual Point (UAP) is included.
* These values are specifically defined in statute. All other values are calculated according to statutory uplift and rounding rules.
+ These values are subject to confirmation.
1 The weekly LEL is set at the rate of the basic state pension and rounded down to the next whole pound. The pension rate for 2008/09 is £90.70, giving an LEL of £90. The pension rate for 2009/10 is £95.25, giving an LEL of £95. From (likely) 2012/13, the link with pensions will be removed and increases will be at the discretion of the Treasury, subject to Parliamentary approval.
2 The alignment between the earnings threshold and the personal tax allowance was lost in September 2008 when the personal tax allowance was increased to £6,035 – equivalent to £116 per week. They will not be realigned until 2010/11. See NICs changes from April 2011, below.
3 Up to the 2008/09 tax year, the UEL was normally increased in line with inflation but was limited by legislation to an amount that could not exceed 7½ times the ET. The National Insurance Contributions Act 2008 repealed this link with the ET with effect from the 2009/10 tax year and increases are at the discretion of the Treasury, subject to Parliamentary approval. The increase from April 2009 to £43,875 aligns the UEL with the higher rate tax threshold, i.e. the level at which earnings become liable for higher rate tax. See Income Tax changes from April 2009, above.
NICs changes from April 2011
No specific NICs changes were announced to be effective from April 2010.
From April 2011, all Class 1 NICs rates will be increased by 0.5%. The full employee rate will, therefore, increase from 11% to 11.5%; the full employer rate will increase from 12.8% to 13.3%. The Class 1A and Class 1B rates will also increase to 13.3%.
At the same time, the NICs earnings threshold, which went out of alignment with the personal tax allowance in September 2008, will be realigned with whatever the personal allowance is from April 2011.
Other changes
VAT: The standard rate of VAT is reduced from 17.5% to 15% for goods and services supplied, or for acquisitions made, on or after 1 December 2008. The reduction will apply for a 13-month period. It will return to 17.5% from 1 January 2010.
Pension Schemes: The lifetime allowance for tax-relieved savings in a registered pension scheme will increase from £1.5 million to £1.8 million from 2010/11. The annual allowance for annual pension contributions will increase from £215,000 to £255,00 from 2010/11. The new limits will apply for a further five year, i.e. up to and including the 2015/16 tax year.
Disabled company car drivers: Disabled company car drivers with automatic cars are entitled, under current legislation, to use the CO2 emission rating of the equivalent manual car to calculate the car benefit charge. From April 2009, this provision will be extended so that the list price of an equivalent manual car may also be used in the calculation where it is lower than that of the automatic car.
Tax avoidance schemes: When the user of a tax avoidance scheme receives a scheme reference number (SRN) from the scheme promoter or co-promoter, the use must, under current rules, first report the receipt of an SRN to HMRC when it is received. This requirement is to be changed so that an SRN must first be reported in the tax return for the tax year in which the scheme is implemented. The requirement to continue to report the SRN each year the scheme is in use will not change.
HMRC Charter: HMRC is to have a Charter that provides a clear statement of the principles governing its relationship with citizens and businesses. A clause giving the Charter explicit legislative authorisation will be included in the 2009 Finance Bill. A new consultation will begin in January 2009 on the wording of the Charter and a joint launch of Charters for both HMRC and DWP is planned for 2009.
P38(S) procedures: New PAYE procedures for working students will be introduced from April 2011.
Abuse of travel expenses rules: Following the consultation Tax relief for travel expenses: temporary workers and overarching employment contracts, the Government has decided to leave the current rules unchanged. However, in the light of evidence from the consultation confirming poor levels of compliance in this area, HMRC intends to refocus its efforts to ensure that the current regime is properly applied. If compliance does not improve, the Government may return to this at a later date.
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