2008 Pre Budget Report
Summary of tax changes in the Pre Budget Report
This was promised to be a tax cutting 'bonanza' but it's not quite lived up to expectations at least not for the majority of our site members. Here's some of the key changes and amendments focusing on what will effect our members.
We'll look at the effect of the changes in detail over the next couple of weeks.
It's worthwhile noting there were no changes to the rules specifically for non doms (there've been enough changes already), to capital gains tax, inheritance tax or relating to residence.
Changes to the personal allowance
There are some big changes to the personal allowance.
We look at the effects of this in this article: The new personal allowance rules.
Basic rate limit
The basic rate limit for 2009/10 will be increased from £34,800 to £37,400. This puts the point at which higher rate tax is payable at £43,875 as from 6 April 2009. This is a whopping increase of £3,040 from the current tax year.
The downside to this is that as the NIC upper earnings limit is to be aligned with this new rate there will be an increase in the amount of NIC's due to the increase.
New Super Tax
From April 2011 there will be a new 45% tax rate for anyone with earnings of over £150,000 per year. This won't just apply to earned income but there will also be provisions to catch dividends that are caught by the £150,000 threshold. Dividends will be taxed at 37.5% if within this tax band.
As with all of the measures we'll be looking at this in detail with the implications for extractions from companies etc. The new effective dividend tax rate on dividends above the £150,000 limit will be 30.55% (compared to 25% for higher rate dividends).
We've looked at the new super tax in these articles:
How the new super tax may work and how to avoid it
The 2008 PBR and Non Doms:How will the changes impact on you?
Increase in NIC rate
From April 2011 the NIC rate will be increased by 0.5%. In other words the new NIC rates will be:
Tax exemption for dividends from an overseas subsidiary
UK companies could use offshore companies to trade overseas and avoid UK tax.
Provided the offshore companies were controlled from overseas and were carrying out an overseas trade there would be no UK tax on the profits. This assumes that the offshore company wasn't caught by the controlled foreign company ('CFC') rules.
The problem with this was that in many cases this was only a deferral. If the profits of the offshore company were to ever be transferred back to the UK there could either be:
In either case there could be a UK tax charge. A dividend from the offshore company to the UK company would be subject to UK corporation tax. On a liquidation of the offshore company corporation tax would be due on any capital gain. If the subsidiary had a nominal share acquisition cost this would charge the entire profits to UK tax. Therefore the offshore sheltering was more apparent than real.
New changes were announced in the PBR for medium and large companies so that such overseas dividends were free of UK tax. Note that this excludes small companies.
Controlled Foreign Company rules to be amended
They're to introduce changes to the CFC rules to adopt a more 'territorial' approach. Essentially this looks to mean that any overseas subsidiaries that genuinely earns profits overseas would be taxed overseas and not in the UK.
This sounds too good to be true and we'll need to wait for the draft legislation in December.
Corporation Tax Rates
The rate of corporation tax for small companies (ie profits of less than £300K if no associated companies) was due to increase to 22% from April 2009. This has been postponed now and the small company tax rate will remain at 21%.
Offset of losses
Under the current rules trading losses can only be carried back for 1 year for offset against the profits in the previous accounting period.
The Chancellor has extended the loss relief for losses of up to £50,000, and will now allow losses to be carried back by up to 3 years. This is for a period of 1 year only.
This means that rather than the unutilised losses being carried forward they'll be offset against profits that have been generated in the past. This will then generate a tax repayment of tax suffered (as well as repayment supplement ie interest).
Spreading of tax payments
The Revenue are to allow business taxes (ie corporation tax, VAT and income tax) to be spread over a longer period to give small businesses flexibility in terms of payment. There's a dedicated phone line for assistance.
Pension limits
These are to remain the same indefinitely. So as from 2010/11 the lifetime allowance of £1.8 million and the annual allowance of £255,000 will continue to apply, with their rates held constant, for a further five tax years, i.e. up to and including the tax year 2015/16.
Income shifting
Good news on this. Given the difficult economic conditions the income shifting rules that were designed to catch dividends from husband & wife companies have been put on hold. There's no timetable for them to be introduced so they've effectively been put on the back burner.