March, 2008: The 2008 Budget Report

Today, Alistair Darling delivered his first Budget proper.  Those hoping that Darling would take this opportunity to stamp his personal authority over the office of Chancellor will have been somewhat disappointed: a great deal of what was announced today effectively simply confirmed, with some minor amendments, things which we already knew.  However, it would be wrong to say that Darling’s role is merely to act as caretaker to the office vacated by Gordon Brown – despite the Budget’s somewhat bland first appearance, there were some interesting shows of strength from The First Lord of the Treasury’s second-in-command.

As mentioned, much of what was announced today had actually be announced previously, and so, to provide some sort of perspective, as far as possible in the following analysis changes announced in previous Budgets have been identified thus - [Budget 07], [Budget 06] etc., whereas changes announced in previous Pre Budget Reports are identified as follows - [PBR 07] etc.

Income Tax and National Insurance

For the 2008/2009 tax year the Personal Allowance will rise from £5,225 to £5,435.  The higher-rate threshold, meanwhile, will rise from £34,600 to £36,000.  Both of these changes represent slightly-above-inflation increases of 4.0% and together mean that, for the first time, someone with a ‘standard’ tax code will need to earn in excess of £40,000 pa before they become subject to higher-rate tax.

The most significant change to Income Tax for 2008/2009 is that the basic rate of tax, currently 22%, falls to 20%, and at the same time, the Starter Rate of tax, currently 10%, gets abolished [both these measures, Budget 07].  So from 6th April there will be just three rates of tax applicable to earnings: 0%, 20%, and 40%.

Exceptions to this 0%/20%/40% rule will include a 10% rate for those whose only source of income is savings income of less than £2,320 pa [Budget 07], and a continuance of the 10%/32.5% rule for dividends.

A welcome concession has been created for charitable donations made under the Gift Aid scheme.  As things stood, charities would have lost out as the rate of basic rate tax recovery on donations fell from 22% to 20%.  However, the Chancellor has announced that, at least for the next three years, charities will continue to recover tax at the ‘old’ rate of 22%.  Whilst this is to be applauded, eyebrows will doubtless be raised over the Treasury’s assertion that correcting the impact of the change will provide “charities with additional Gift Aid worth £300 million over three years…”

From 2009/2010, the intention remains to synchronise the Upper Earnings Limit (for NI calculations) with the higher-rate threshold [Budget 07].  For 2008/2009 there are no changes to the rates of NI.

Capital Gains Tax

The threshold for Capital Gains Tax rises from £9,200 to £9,600 in 2008/2009.

However, the far more significant change to Capital Gains Tax from 6th April is the change from the existing system of tiered rates, ranging from 5% to 40%, to a single flat rate of 18% [PBR 07].

A flat rate by definition does not require much by way of further elaboration, but the Treasury has taken the opportunity today to provide greater clarification of the eligibility criteria for claiming Entrepreneurs’ Relief; this relief will create a concessionary 10% rate of CGT for the first £1m of profits realised during an individual’s lifetime (post 6th April), where the disposal relates to:

- A sole trader (either the business itself, or the selling-off of assets in the event of cessation)

- A partnership (either the business itself, or the selling-off of assets in the event of cessation)

- Shareholdings in a “personal” trading company or group of companies - defined as a company or group of companies in which the individual is either an officer or an employee AND where that individual holds at least 5% of the ordinary/voting shares

Note that businesses involved in furnished holiday letting will be eligible under the Entrepreneurs’ Relief concession, but not any other type of property letting business.

Inheritance Tax

For 2008/2009 the Inheritance Tax (IHT) Nil-Rate Band rises to £312,000 [Budget 06] – or to £624,000 in the case of married couples and civil partners [PBR 07].  There is no change to the rate of IHT, at 40%, nor is there any change to any of the various gift exemptions.

Non-Domiciles

Arguably the biggest most contentious change being brought in for 2008/2009, the new rules governing non-domiciles who have been resident in the UK for at least seven out of ten years will stand largely as originally announced – i.e. any non-domicile meeting this test will be required to declare and pay UK tax on their worldwide income OR pay a flat charge of £30,000 for every tax year in which they wish to elect not to declare or pay tax on their non-UK income and assets [PBR 07].

A number of adjustments to this basic rule have been made, the most significant being:

- The £30,000 charge does not apply to those under the age of 18, even if they meet all other criteria

- The individual is exempted from the £30,000 charge where their total offshore income and gains sum to less than £2,000 for the year

Note that although a concession is created for the under-18s, because husbands and wives are assessed separately for tax purposes, a married non-domicile couple meeting the above criteria will be required to pay £60,000 per tax year.

Corporation Tax

The Chancellor has confirmed that for the 2008/2009 tax year the main rate of Corporation Tax will drop from 30% to 28% [Budget 07], whilst at the same time the Small Companies Rate will rise from 20% to 21% - en route to rising to 22% from tax year 2009/2010 onwards [again, Budget 07].  The original motivation for the rise in the Smaller Companies Rate was “as part of tackling tax-motivated incorporation” and this is further reinforced by the announcement that the Government remains committed to stamping out Income Shifting (shifting income from one person to another where that other person is subject to a lower rate of tax – usually a husband and wife team in a ‘Small Company’) although the Government also goes on to say that the legislative changes necessary to counter Income Shifting will not now be brought in ‘til 2009/2010 at the earliest.

ISAs

With effect from 6th April the annual ISA investment limit rises from £7,000 to £7,200, and within this the annual limit for Cash ISAs rises from £3,000 to £3,600 [PBR 06, Budget 07, and PBR 07(!)].  People who rushed to take money out of their Northern Rock Cash ISAs are eligible to reinvest this money prior to 5th April, with any ISA provider, in addition to (i.e. without affecting) their ISA limits for the current year

Enterprise

From 6th April the limit for an investment into an Enterprise Investment Scheme (EIS) that can qualify for Income Tax relief at 20% rises from £400,000 to £500,000 per tax year.  There are no changes to the limits or reliefs for Venture Capital Trusts (VCTs).

Also, and for the first time since July 2000, there has been an increase in the maximum value shareholding that can be awarded to an employee under an Enterprise Management Incentive (EMI) scheme – up from £100,000 to £120,000 – although as the overall award limit per employing company remains at £3m, this change would appear to restrict, potentially, the maximum number of employees that can benefit.

Oddly, given Labour’s ‘roots’, the government has taken the step of specifically excluding shipbuilding, mining, and steelworks industries from the list of businesses eligible for relief under EIS, VCT, and EMI scheme rules.

As a further ‘Enterprise’ measure, the Chancellor has announced that he has available a fund of £12.5m specifically earmarked for female entrepreneurs – which conjures up images of the strangest edition of Dragons’ Den yet….

Pensions

A quiet year on pensions this year, after all the changes introduced over the last two years.  Some minor tweaking of certain technical rules, but otherwise nothing new, other than agreeing that for those with offshore employer-sponsored pensions, employer contributions will no longer conflict with employee contributions for the purpose of claiming eligibility for personal tax relief.

Tax Avoidance

There is some strong rhetoric buried away in the Press Notices and Budget Notes, but most of the anti Tax Avoidance measures this year appear to be aimed at companies rather than individuals, plus some general speeding up and widening of the Disclosure Rules.  Otherwise much effort seems to be being expended on making HMRC more ‘user friendly’ by streamlining the Appeals process (in due course) and simplifying the various different regimes that exist for levying penalties on late payment of tax.

Self Assessment

Although not specifically mentioned in today’s Budget, it is worth a reminder at this point that although the deadline for submission of the 2007/2008 tax return will remain at 31st January 2009 in respect of electronic filing, it will for the first time be brought forward to 31st October for paper filing [Budget 06].  The Treasury has also announced that, effective this year, HMRC will gear up to be able to accept payment of personal tax liabilities by credit card.