The Budget included some tax increases that were almost inevitable with a 50% rate of income tax for those earning over £150,000, higher rate tax relief for pension contributions reduced and the favourable tax regime for furnished holiday lettings withdrawn from April 2010. Some businesses will benefit from an extension of loss relief and a limited increase in capital allowances, whilst individuals will be able to put more into ISA’s but otherwise tax breaks are thin on the ground.
As with any Budget further details are likely to emerge in the next few days so please contact us if you have specific queries. Our May Newsletter will also expand on any emerging issues.
Table Of Contents
The tax free personal allowance (£6,475 for 2009/10) will be tapered down to nil for those individuals who have taxable income of £100,000 or more from 6 April 2010. So once you have taxable income of about £113,000 you will completely lose the benefit of the tax free personal allowance.
If you have a significant amount of funds retained within your own company you may consider withdrawing some of those funds in the current tax year while the highest rate of tax is only 40%, or 32.5% on dividends, and you have full use of your personal allowance.
The Government has foreseen this and plans to restrict the tax relief given on pension contributions for those who pay tax at 50%. From 6 April 2011 the tax relief will be tapered down from those earning over £150,000 so that those earning £180,000 or more will only get the basic rate tax relief on all their pension contributions. The delay until 2011 in changing the tax relief would offer a window for pension planning, but that window has been blocked immediately for those earning £150,000 or more. If such an individual increases their current pension contributions beyond their normal contribution level, and those total contributions exceed £20,000 per year, a penalty rate of tax will apply.
– The ISA savings limits are to be increased to £10,200, and £5,100 for the cash-only element of the ISA. These new limits come into effect on 6 April 2010 for most savers, but savers who are aged 50 on more on 6 October 2009 will be able to take advantage of the new limits from that date.
– The amount of capital disregarded when making a claim for pension credit, and certain other benefits will be increased from £6,000 to £10,000 from November 2009.
Savers who lost money when their bank went into liquidation will generally be compensated under the Financial Services Compensation Scheme (FSCS). This scheme returns the capital that was lost and an amount in respect of lost interest. The savers will now be taxed on the compensation received in respect of the interest lost, as if that amount was interest payable by a bank.
– For unincorporated businesses: the periods ending in the tax years 2008/09 and 2009/10.
– For companies: the periods ending in the two years to 23 November 2010.
For each loss making period an unlimited amount of loss can be carried back one year, but a maximum of £50,000 can be carried back to the previous two years. The losses must be used against the profits of the later period first.
If you are having difficulties paying the tax due on the profits made in the earlier accounting period, which will be partly or wholly cancelled out by losses made in the current year, you can ask HMRC for time to pay the tax due. The HMRC officers should now take into account the expected loss that will be carried back, but they may want to talk to us as your accountant to verify the scale of the loss.
Now for one year only the excess expenditure, which is not covered by the £50,000 AIA limit, can qualify for a 40% first year allowance. This 40% allowance will cover plant and machinery purchased in the year ending on 31 March 2010 by companies, or to 5 April 2010 by unincorporated businesses, but not cars, integral features, long life assets or leased equipment.
The disadvantage of pooling the expenditure on cars is that when a car is sold, the disposal proceeds are deducted from any other costs in the pool, but any unrelieved cost of the car remains in the pool to be gradually written-off at 20% or 10% per year. Cars owned at the April start date are treated separately, so the unrelieved cost is given as an allowance when the car is sold. The Government is introducing anti-avoidance rules to prevent businesses taking advantage of the old rules for cars by selling the vehicles at less than market value, or by artificially closing down the company to claim the allowances.
Car Scrappage Scheme
From 1 January 2010 it will be easier to reclaim VAT incurred in another EU country, as the claim will be made directly to HMRC in electronic form.
Stamp Duty Land Tax
Stamp Duty Land Tax is a big expense for leaseholders of flats who wish to acquire the freehold of their property from the landlord. The law is to be changed to allow relief from this tax when a group of leaseholders come together to acquire the freehold of the whole block.
This inheritance tax relief can now be claimed on any qualifying agricultural land or woodlands situated in a country in the European Economic Area (EEA), which comprise the EU countries and a few more. If inheritance tax has been paid on such non-UK property since 23 April 2003 the executors of the estate can claim a refund.
Furnished Holiday Lettings
This year the Chancellor has decided to use the name and shame tactic. The names, addresses, and professions of taxpayers who are found to have deliberately understated their tax liabilities by £25,000 or more will be published on the HMRC website. This will apply to businesses as well and individuals, but only after the case has been closed and the penalties have been agreed. Any taxpayer who makes a full disclosure of the tax due to HMRC will not be named in this way.
Another way of clamping down on tax evasion by large companies is to make the company accountant personally responsible for the accounting system which is used to hide the tax evasion. The accountant will have to pay any penalties for tax evasion personally. This will only apply to companies defined as large by the Companies Act 2006, which is really very large, but it is an interesting new approach.
Finally there will be no escape for tax defaulters. Where HMRC has lost track of a taxpayer who owes them money, an employer or company will be forced to hand-over contact details of that individual.