2009 Budget Report

There is a lot of information in this year’s budget about what will happen in 2010 and 2011, particularly with regard to Income Tax and pension tax relief. The main changes are:

In 2010 personal allowances will be restricted for those with income over £100,000, the restriction operating as £1 reduction per £2 income, just as is the case with age allowances.
In 2011 a new rate of 50% Income Tax will apply to income over £150,000.
Also in 2011, Income Tax relief will be restricted for those with income over £150,000, gradually decreasing to 20% at £180,000.
The announced changes suggest combined tax planning with bonds and pension contributions may become more exciting. There has been much focus on restricting pension tax relief for those with income over £150,000, with anti-avoidance measures for those who try to beat the deadline with large pension contributions now, but I think the planning for those with income just over £100,000 is more interesting.

Consider the effect of a client on, say, £110,000 salary withdrawing £8,000 from a bond (within the cumulative 5% rule) and then investing that in a pension. This client would effectively obtain 75% tax relief on the £8,000 (60% of £10,000), compared with only 50% relief now (40% of £10,000). This additional relief is purely down to the way this would stop the penal withdrawal of the personal allowance.

Bearing in mind there will be a General Election in 2010, however, can we be certain that the announced changes will actually take place? Especially the 50% “super tax”, which will most definitely not be in place until after the election? So what has changed now? Well, not much really. I will not cover the entire budget, but the bits most likely to be of interest to an adviser are:

The ISA limit has increased to £10,200 – as long as you are over 50! It will then increase to £10,200 for everybody next year. This is more than a 41% increase.

The Inheritance Tax threshold has increased to £325,000, which is just over a 4% increase.

Corporation Tax rates and thresholds remain the same.

Companies and unincorporated businesses can carry back tax losses of up to £50,000 for up to three years rather than only one year, which could be helpful in the current economic conditions. We had already been granted this for just one year in the Pre-Budget report, but now the concession has been extended by a further year.

Personal tax rates are unchanged, although the personal allowances and thresholds have risen. The Personal Allowance has risen by 19%, well above inflation no matter how you measure it. Age Allowances, and the associated threshold at which these allowances are reduced, have all risen by 5%. The 40% Income Tax threshold has risen by just under 4%.

National Insurance has presumably increased by 0.5%. I say “presumably” as this was announced in the pre-budget statement but there was nothing about it in the budget. Above the National Insurance threshold, employers will pay 13.3%. Employees will pay 11.5% between the National Insurance threshold and the Upper Earnings Limit, and 1.5% thereafter. The National Insurance threshold has risen by 4.76% and the Upper Earnings Limit by 9.58%

The opportunity to benefit from credits for the second state pension without making any National Insurance payments is still with us, as the Lower Earnings Limit, at £4,940, is still below the National Insurance threshold, which is now £5,720. Clients who can shift enough salary into dividend in order to fall between the Lower Earnings Limit and the National Insurance threshold may therefore wish to consider this strategy. They should take advice on this to ensure they do not breach Minimum Wage regulations nor create an opportunity for a canny Revenue & Customs inspector to argue the dividend should really be treated as salary.

There is now an Upper Accrual Point for the second state pension. This is set at £40,400. Notice this is below the Upper Earnings Limit, which is now £43,875. Clients with salaries between these two amounts will be paying National Insurance but not getting the benefit of those payments. Such clients should seriously consider reducing their salary to £40,400 – perhaps by using salary sacrifice for pension contributions or by replacing salary with dividends if they are shareholding directors. Again, they should take advice on this, although Minimum Wage is hardly likely to be an issue here even with the long hours most of our clients seem to work!

Finally, clients who take advantage of the favourable rules applying to Furnished Holiday Lettings should be aware that those rules will be repealed from April 2010.

Many thanks to Adviser Breakthrough for the above summary.