Market Update
The 2009 Pre-Budget Report
9 December 2009
A year ago, in reviewing Alistair Darling’s 2008 Pre-Budget Report, we expressed some surprise at “the muted nature of the response it presented to the economic turmoil that was unfolding: a deferred 5% tax rise here, a short-term 2.5% VAT reduction there – nothing that really addressed the scale of the problem”.
Of course back then, in the heat of the action, no one was really in a position to put accurate numbers on the size of the problem (‘big’ being a sufficiently descriptive estimate at the time), but one year on things are different. Nonetheless, whilst George Osborne’s comment “The bigger the problem, the smaller the response” may be a little unkind, it’s hard to escape the conclusion that today’s Pre-Budget Report was once again a pretty underwhelming affair.
It is of course entirely likely or probable that a more radical agenda might be presented in the spring Budget next year, coming as it will just weeks before a General Election, but today’s Pre-Budget Report seemed to be largely about leaving things untouched – albeit with a noteworthy and highly-targeted exception:
Income Tax and National Insurance
Before turning to the bankers’ bonuses issue, it is worth briefly summarising the general position on Income Tax and National Insurance for next year:
- There will be no change next year to either the Personal Allowance, the Basic Rate Tax Band, or the Higher Rate Threshold (for paying 40% tax). The Personal Allowance will therefore remain frozen at £6,475, Basic Rate Tax (at 20%) will then apply to the next £37,400 of earnings, and 40% tax will kick in on earnings in excess of £43,875. This will be the first time in many, many years that rates and tax bands have remained unchanged from one year to the next (assuming there is some inflation in the system, this is actually a punitive measure)
- However, from April 6th 2010, a new top rate of tax of 50% will apply to taxable income above £150,000
- Also from April 6th 2010, the Personal Allowance will reduce by £1 for every £2 that an individual earns over £100,000. In effect this means that anyone earning more than £112,950 will lose their entitlement to the Personal Allowance altogether
- Similarly, from April 6th 2010, a new higher rate of tax of 42.5% will apply to dividends for anyone whose earnings exceed £150,000
- Finally, all current NI rates will increase by 0.5% (i.e. 50 basis points) for everyone earning more than £20,000 pa from April 2011
Even a small increase in employers’ and employees’ NI rates has a dramatic effect – particularly on business (for whom it represents an additional overhead) and the Treasury (for whom it represents a significant extra stream of revenue) - but our guess is that the real headline grabber will be……
…or to give it its proper title ‘Bank Payroll Tax’.
Effective immediately, all bank bonuses in excess of £25,000 are subject to a special tax, set at 50% and payable by the employer, if paid between now and April 5th.
Note that the special tax has no effect on the individual banking employee’s own tax and NI rates – the individual will simply be taxed on whatever they receive as before (and as the measures apply to bonuses paid prior to April 6th, this means a higher rate tax payer paying Income Tax at 40% and NI at 1%).
For the purposes of the legislation, a banking employee is defined as:
Someone whose duties comprise banking employment and who is either resident in the UK in 2009-10 or performs their duties wholly or partly in the UK.
Banking employment is defined as employment within a UK Bank or Building Society, or financial business or holding company within a UK Bank or Building Society Group, or a UK branch of a foreign bank, where the employee’s duties:
Are wholly or mainly concerned, whether directly or indirectly, with activities regulated by the Financial Services and Markets Act 2000.
The tax itself applies to bonuses “comprising money, money’s worth, benefits and loans”, but not to “regular salary, wages or benefits”, and specifically not to bonuses “where a contractual obligation to pay the bonus arises from a time prior to the announcement”.
In effect, a bank looking to pay bonuses between now and April next must first determine the size of the bonus pool represented by all bonus payments in excess of £25,000, and then either: (i) pay a surcharge equivalent to half that sum to HMRC and then release the bonus pool to the employees in the normal way; (ii) reserve half the pool to pay in tax and then release the diminished remainder of the bonus pool to its employees; (iii) concoct some sort of hybrid of (i) and (ii); or (iv) not pay the bonuses and instead divert the pool back into the business, thereby avoiding completely the 50% charge (albeit at the expense of the goodwill of the employee!)
Pensions
Just to further compound the misery, the availability of pension tax relief - due to be restricted for all those who earn more than £150,000 pa after 6 April 2011, but in practice already heavily restricted in anticipation of that incoming change – will take into account contributions made not just by the employee, but the employer as well. In effect the Government is taking steps to stop people seeking to circumvent the new rules by relying on ‘salary sacrifice’.
The shape of the current pension tax regime is outside the scope of this brief update and will form a topic of its own right in a future Newsletter, nevertheless it’s fair to say that ‘Pension Simplification’ has turned out to be an aspiration rather than a statement of intent…
Capital Gains Tax/Inheritance Tax
Curiously, and yet again, both IHT and CGT escaped any form of attack in the Pre-Budget Report - other than a freezing of the current IHT Nil Rate Band at £325,000, rather than rising to £350,000 in April as originally intended.
It is highly likely that both of these taxes are being held back for major pre-election revisions in the spring Budget.
Corporation Tax
The main rate of Corporation Tax is set to remain at 28%, whilst the planned rise in the Smaller Companies Rate is confirmed as having been shelved and for now will remain at 21% rather than going to 22% as previously planned.
VAT
VAT will revert to 17.5% on New Year’s Day.
Savings
No specific announcements on savings in today’s Pre-Budget Report, although as previously announced the annual ISA limit is to be increased from £7,200 to £10,200 – of which half can be held in cash – with effect from 6th April 2010 (the new limits are already in effect for the over 50s).
Tax Avoidance
In keeping with the Government’s ongoing recent theme, a fair amount of the small-print focus of today’s Pre-Budget Report was on further methods of talking tax avoidance. Most measures appear to target corporate tax avoidance, but there were, unsurprisingly, further specific attacks on offshore tax avoidance. Also included were further moves to expand and improve the efficiency of the DOTAS (Disclosure of Tax Avoidance Schemes) regime, including the intention for Stamp Duty Land Tax avoidance schemes on property transactions of greater than £1m in value to become DOTAS notifiable events by April 1st 2010.
Furnished Holiday Lets
A bit of a footnote this one maybe (along with the Chancellor’s announcements on a reduction in Bingo Tax and the electrification of the Liverpool to Preston railway line), but the special tax rules applicable to Furnished Holiday Lets will be withdrawn with effect from 6 April 2010. These rules were perhaps only ever of interest to owners of Furnished Holiday Lets and anyone studying for tax exams, but nonetheless it will be sad to see them go.
Simon Pimblett
The Route – City Wealth Club