Moneyworks - The 2009 Budget

The Chancellor of the Exchequer, Alistair Darling made a number of important announcements in this year's Budget. Whilst the announcements were, in the main, targeted at high earners earning over £150,000 per annum, all categories of taxpayer are covered. The following is an outline of the main changes, with a look at how they could affect you.

Individual Savings Accounts

An Individual Savings Account (ISA) is a tax efficient savings vehicle available to all UK residents over the age of 18 (16 for the cash element of the ISA). There are two types of ISA - cash and stocks and shares. Currently, the total maximum amount that can be saved in an ISA each tax year is £7,200, of which a maximum of £3,600 can apply to the cash account.

The Chancellor announced that the total maximum amount that can be saved in an ISA is to be increased to £10,200, of which up to £5,100 can be saved in cash. This will be implemented in a two-stage process:

• From 6th October 2009, the new total ISA limit of £10,200 will apply for people aged 50 or over.
• For all other individuals the new limit will apply from 6th April 2010 (next tax year).

If the ISA limit had been increased in line with inflation over the last 10 years' it would currently stand at £9,600 and therefore many people feel that this increase is long overdue. Whilst the increase is modest, it can only be of help to people who rely on their savings for income, as withdrawals from an ISA are free from income tax. 

Assistance for Pensioners

The Chancellor announced a number of measures for the benefit of pensioners. Grandparents of working age who care for their grandchildren will see that work count towards their entitlement for the Basic State Pension. Those reaching state pension age on or after 6th April 2010 will only require 30 qualifying years to claim the full Basic State Pension. The announcement that time spent by grandparents, who are of working age, looking after their grandchildren can count towards entitlement to Basic State Pension may encourage more quality 'family time' together.

The winter fuel allowance is to be maintained for another year at the higher level - £250 for people aged over 60 and £400 for people over 80.

The Basic State Pension will be increased by at least 2.5% regardless of inflation.

From November, the limit on savings pensioners can have before their Pension Credits are reduced is to be raised from £6,000 to £10,000 to help those hit by low interest rates. This higher threshold means that it will be possible to build up more savings before benefits are reduced. The Chancellor said that this would mean an average of £4 extra per week.

Pension Credit is a safety net, which guarantees that a single pensioner over 60 will have their weekly income topped up to £130 and a couple to at least £198.45. Single over-65s can receive up to £20.40 extra or £27.03 for couples.

Raising the limit on savings will also affect other benefits that are assessed in the same way, such as Council Tax Benefit and Housing Benefit.

Stamp Duty

In September 2008, the Chancellor temporarily increased the Stamp Duty threshold from £125,000 to £175,000 until September 2009. In the Budget, he announced that this time limit is to be extended to 31st December 2009, at which point the threshold will revert to £125,000.

At a time when there are signs that the availability of home loans is starting to increase, this is a welcome move, which it is hoped will be of assistance to first time buyers. 

High Earners

The changes announced to income tax will have an impact on anyone earning more than £150,000 per annum. There are also changes to the level of personal allowance available for those earning over £100,000 per annum.

Income Tax Rate

From April 2010, there will be an additional higher tax rate of 50%. This new rate will apply to taxable incomes over £150,000 (for dividends the rate will be 42.5%). An additional issue is that the higher rate will also apply to trusts as the default trustee rate which could have some serious implications for certain trusts.

Personal Allowance

Once a person reaches the £100,000 'adjusted net income' threshold, the personal allowance will be reduced by £1 for every £2 of additional income earned until the allowance is nil. This is similar to how age allowance is reduced and as an example; if an individual has 'adjusted net income' of £105,000 their personal allowance will be reduced by £2,500.

VAT

The pre-Budget Report announced a reduction in the rate of VAT to 15% for a 13-month period from 1st December 2008 to 31st December 2009. From 1st January 2010, the rate will return to 17.5%.

The consensus is that the reduction in VAT has done little to assist the economy. It was therefore widely expected that the rate would be returned to its initial level.

Companies

The Budget did not bring any changes to corporation tax rates but...

A new temporary 40% first-year allowance (FYA) for expenditure on general plant and machinery is to be introduced. The temporary FYA will apply to qualifying spending incurred in the 12-month period beginning on 1st April 2009 for the purpose of corporation tax, and on 6th April 2009 for the purpose of income tax.

Trading Loss Carry Back

Legislation will be introduced to extend the ability of businesses to carry trading losses back from 1 year to up to 3 years against profits of earlier years to get a repayment of tax. The measure will have effect on and after 22 April 2009 for company accounting periods ending in the period 24 November 2008 to 23 November 2010 and for tax years 2008/09 and 2009/10 for unincorporated businesses.

Pensions

Limiting tax relief for high earners

The Government has announced its intention to restrict tax relief on pension savings for people with taxable income of £150,000 or more, to the basic-rate of income tax. This is with effect from 6th April 2011 and as an interim measure, people who will be affected by this announcement are to be subject to 'anti-forestalling provisions', preventing them from maximising contributions prior to 2011.

These rules apply not only to people who earn over £150,000 in the current tax year, but also in the preceding two tax years - 2007/08 and 2008/09. The interim rules are broadly:

• Regular contributions that began before 22nd April 2009 will reduce and potentially eliminate the £20,000 special annual allowance but will not be subject to the special annual allowance tax charge.
• Where regular pension contributions are already more than £20,000pa any further contributions will be subject to the new tax charge.
• Where regular pension contributions are below £20,000pa the new tax charge will only apply on additional contributions in excess of £20,000pa.

The fact that higher-rate taxpayers earning over £150,000 will be subject to these new rules does not mean they cannot make further contributions into their pension, it is just that the tax charge has the effect of reducing tax relief received on those contributions to basic-rate.

Summary

The big losers in this Budget are high earners with the announcement of three measures in the form of a new 50% income tax rate, a reduction in the personal allowance and a restriction on the level of tax relief on pension contributions.

If you are looking for winners in the Budget, the increase in the Individual Savings Account (ISA) subscription limit is a welcome move, as is the assistance that has been announced for pensioners. A number of house buyers should also benefit from the extension in the stamp duty threshold.

It should be remembered that an appropriate specialist should be consulted prior to taking action.

The value of your investment can go down as well as up and you may not get back the full amount invested. Investments in stocks and shares do not have the same degree of capital security, which is afforded with a deposit account. The levels and basis of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

 

Money Works is published by Moneyweb Limited

Summer Issue 2009