Budget Report

2009/10 Tax Tables

Additional higher rate of Income Tax from 2010

The Chancellor Alistair Darling announced during Budget 2009 that from April 2010 a new rate of Income Tax of 50 per cent will apply to income over £150,000. Also, the Income Tax Personal Allowance will be reduced for those with incomes over £100,000, tapering down to zero.

These changes are to replace the proposed 45 per cent Income Tax rate and the two-stage taper of the personal allowance announced in last November’s Pre-Budget Report.

Budget 2009 at a glance

Were you a winner or a loser?

The chancellor Alistair Darling unveiled plans during his second Budget speech to increase taxes for the highest paid, rein in public spending and substantially increase borrowing to restore the public finances.

The economy is forecast to contract by 3.5pc in 2009, but growth is expected to resume “towards the end of the year” according to the chancellor.

Take a look at our guide and see how your finances could be affected by Budget 2009.

Budget 2009 highlights
The Economy – Growth

The UK economy contracted by 1.6pc in the last quarter of 2008. GDP growth for the year as a whole expected to be -3.5pc.

Growth forecast of 1.25pc in 2010. From 2011, the economy will continue to recover with growth of 3.5pc from then on. In future years the economy will recover towards a trend rate of growth of around 2.75pc.
Inflation is expected to reach 1pc by the end of this year. The Bank of England inflation target remains unchanged at 2pc. RPI inflation is forecast to remain negative, falling to minus-3pc by September, before moving back above zero next year.

The Economy - Borrowing

UK figures for public sector net borrowing will be £175bn this year, 12.4pc of GDP. From 2010, borrowing will fall to £173bn, then £140bn, £118bn and £97bn.

As a share of GDP, borrowing will be 11.9pc next year, 9.1pc in 2011/12, then 7.2pc in 2012/13 and 5.5pc in 2013/14.

UK net debt, including the cost of stabilising the banking system, will as a share of GDP increase from 59pc this year to 68pc next year, 74pc in 2011/12, then 78pc and 79pc in subsequent years. It will stabilise and then begin to fall in 2015/16.

The UK’s current deficit is expected to halve within
four years.

Income tax

New 50pc tax rate introduced for those earning more than £150,000 to take effect from April 6, 2010.

Personal allowances to be fully withdrawn for those with incomes over £100,000 from April 6, 2010.

No income tax increases this year.

Pensions

From April 2011, pension tax relief for those with incomes over £150,000 will be restricted so it is gradually tapered to the 20pc rate.

Basic state pension increased by at least 2.5pc, regardless of the Retail Price Index.

Capital disregard on Pension Credit is to be raised from £6,000 to £10,000 from November 2009.

Education

£250m will be provided this year and £400m in 2010/11 for an additional 54,000 places in sixth form and further education colleges, with consequential provisions for Scotland, Wales and Northern.

Housing

The stamp duty holiday on properties sold for less than £175,000 will be extended until the end of 2009.

An extra £80m is to be given to the HomeBuy Direct, the government’s shared equity mortgage scheme.

An extra £1bn will be provided to help homeowners and boost housing.

A scheme will be introduced to guarantee securities backed by mortgages in a bid to increase lending.

£500m of extra financial support will be provided for housing projects, including £100m for councils to build new energy-efficient housing.

£50m to accelerate the modernisation of housing for military families.

Environment

£435m extra support for energy efficiency measures for homes, businesses and public places.

Additional £1bn to help combat climate change by supporting low-carbon industries and green jobs.

£525m of new support will be given over the next two years for offshore wind projects.

£405m to encourage low-carbon energy and advanced green manufacturing in Britain to drive new technology and investment in small-scale projects.

Most energy-efficient new power stations using combined heat and power (CHP) technology to be exempt from climate change levy.

Jobs

An additional £1.7bn for Job Centre Plus and the New Deal is to be provided.

Additional support for people who have been out of work for 12 months.

From January everyone under the age of 25 who has been jobless for 12 months will be offered a job or a place in training.

£260m of new money allocated for training and subsidies for young people to help them gain skills and experience.

Statutory redundancy pay will increase from £350 to £380 a week.

Welfare

The child element of the Child Tax Credit to increase by £20 from April next year.

£100 extra for child trust fund vouchers for new babies with disabilities, extra £200 for those with severe disabilities.

State redundancy pay to rise from £350 to £380 a week.

Grandparent care for young relatives to count towards basic state pension.

Last year’s increase in winter fuel allowance to be extended for another year, £250 for over-60s and £400 for over-80s.

Savings

Annual Individual Savings Account limit to be increased from £7,200 to £10,200, half of which can be invested in cash. New limit introduced this year for over-50s, next year for all other savers.

Pensioners

Pensioners’ Winter Fuel Allowance is to be kept at the higher level of £250 for over-60s and £400 for over-80s for another year.

Tax avoidance

The aim is to raise £1bn of extra revenue over the next three years by closing tax loopholes and schemes.

Government

Efficiency savings from 2011 are expected to give a further £9bn of additional savings a year by 2013/14.

Financial services

Treasury paper to be published with recommendations for wide-ranging reform of financial services, including action to reduce the impact of the failure of financial firms.

Motoring

A car scrappage scheme introduced from this May to provide motorists with a £2,000 discount on new vehicles bought when they trade in cars over 10 years old. The scheme will end in March 2010.

Other announcements

Alcohol duties increased by 2pc.

Tobacco duty increased by 2pc.

Fuel duty will increase by 2p per litre in September and then by 1p a litre above indexation each April for the next four years.

Higher earners will need to pay more into their pensions

A break from the long-standing principle that an individual receives tax relief on their pension contributions at their highest marginal rate

The chancellor announced during the Budget that from April 2011 the highest level of tax relief will be restricted for those earning more than £150,000 a year, and it will disappear altogether for those with income over £180,000.

These higher earners will only receive basic rate relief on all pension contributions, which according to the government will help create a “fair and modern” pension system. In 2007/08 the government allocated almost £30bn for tax relief on pensions last year.

The loss of this higher-rate relief will mean that higher earners are now going to need to pay more into their pensions if they want to keep the same pension contributions levels as before. For example, an employee earning £200,000 a year putting 6pc of their salary into a pension scheme, equates to a contribution of £12,000 a year, and currently would cost £7,200 after higher rate tax relief.

On this salary this person would only receive basic rate tax relief after 2011, so the same contribution would now cost them £9,600 a year, or an extra £200 a month. If they do not want to pay this additional sum, then over a 25-year period this loss of extra tax relief would mean their pension pot is worth £174,469 less. This would give them £974 less a month in retirement.

While this change appears to only impact on the very high earners, it breaks the long-standing principle that an individual receives tax relief on their pension contributions at their highest marginal rate.

Although these changes will not come into effect for two years, the government is introducing emergency legislation into this year’s Finance Bill to stop high earners making large contributions to their pension plans now to gain advantage of this higher tax relief.

Pre-Budget Report 2008

Alistair Darling announced a number of changes in his pre Budget report. See below to see our initial summary of the impact of each of his changes.
Tax cuts to boost economy
If a week is a long time in politics, the eight-month gap between last March’s Budget and the November Pre-Budget Report seems an eternity.

When Alistair Darling presented his first Budget on 12 March 2008, the FTSE 100 Index was at 5,690, the base rate was 5.25% and annual Consumer Price Inflation was 2.5%, comfortably within the Bank of England’s target range. Back then, the Chancellor predicted that net government borrowing would peak at £43bn in 2008/09. This allowed the Treasury to just remain within the ‘sustainable investment rule’ that borrowing should never exceed 40% of GDP.
Today’s picture is very different, thanks mainly to the financial turmoil that has engulfed the global economy since last spring. The Chancellor now expects borrowing to reach £77.6bn this year and £118bn in 2009, before falling gradually to £54bn in 2013. By then, total net government borrowing will have climbed to £1,084bn.
The scale of the borrowings reflects both Mr Darling’s fiscal stimulus, worth £20bn between now and April 2010, and also the recession-induced drop in tax revenues. The measures announced in the Pre-Budget Report are thus a mix of short term tax reductions and longer term tax increases. The main tax proposals include the following:
The standard rate of VAT will fall to 15% for 13 months from 1 December 2008.
The planned increase in the small companies’ corporation tax rate will be deferred for one year.
There will be a temporary extension of the ability of companies and unincorporated businesses to carry back their trading losses against the profits of earlier years.
A temporary exemption from business rates will be available for certain empty properties.
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%.

Income Tax
The Chancellor announced several future changes to income tax:
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.

From 2010/11, the basic personal allowance will be reduced by £1 for every £2 of gross income over £100,000, up to a maximum reduction of half the basic allowance. For example, if a person’s gross income is £104,000, their personal allowance will be reduced by £2,000.

For gross income over £140,000, the amount of the allowance will be further reduced at the same rate until the allowance is extinguished.

From 2011/12, taxable income (other than dividends) above £150,000 will be liable to tax at 45%. The corresponding rate for dividends will be 37.5%.

From 2011/12, the tax rate for trusts will rise to 45%, with the dividend tax rate rising to 37.5%.

Pensions
The lifetime allowance and the annual allowance

For the five years from 6 April 2011, the standard lifetime allowance and annual allowance will be frozen at their 2010/11 levels of £1.8m and £255,000 respectively.

Basic state pension

From April 2009, the basic state pension will rise by 5% to £95.25 for a single person and to £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 annual Christmas bonus for pensioners.

Pension credit

From April 2009, the pension credit standard minimum income guarantee will rise by £5.95 to £130 a week for a single pensioner and by £9.10 to £198.45 a week for pensioner couples.

Business Taxation
Corporation tax
The planned increase of the small companies’ rate from 21% to 22% will be deferred until 1 April 2010.
There will be a change to the tax treatment under the loan relationship rules where a creditor company releases a connected debtor company from a trade debt. For accounting periods beginning after 31 March 2009, the debtor will no longer be taxable on the release of the debt. The rules on late payment of interest between connected companies will be amended to provide certainty of treatment from the same date.

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.

Income shifting
The government has decided not to introduce rules in 2009 to prevent individuals in business saving income tax by transferring part of their income to someone else who is subject to a lower rate of tax – known as income shifting.
Payment of tax
A new HMRC business payment support service will allow any business in temporary financial difficulty to pay any of their tax bills on a timetable tailored to their need. The taxes covered by this provision include VAT, PAYE, NIC, income tax and corporation tax.

Taxation of foreign dividends
Foreign dividends received by large and medium groups on ordinary shares and most other shares will be exempt from UK tax.
There will also be a cap on tax deductions for interest claimed by UK members of worldwide groups, changes to the unallowable purpose rules for loan relationships and consequential changes to the controlled foreign companies provisions.
These changes will be made in the Finance Bill 2009.

Tax avoidance
An anomaly will be corrected in the regulations that deal with the taxation consequences of a change of accounting practice with regard to financial instruments to prevent double taxation or double relief, with effect from 1 January 2009.
Measures are being introduced, effective from 13 November 2008, to counteract two avoidance schemes involving plant and machinery leasing.
Some simplification will be made to the tax rules where an employee acquires employment-related securities or shares for less than market value. The changes will affect transactions occurring from the date of Royal Assent to the Finance Bill 2009.