Pre-Budget Report 2009

Many thanks to Standard Life's Technical Solutions team who've summarised the key points from the latest Pre-Budget Report, which I've copied below. There are some key points that are very likely to affect many dentists such as the change in National Insurance and the change in pension forestalling rules.

National Insurance
National insurance to increase by 1% for both individuals and employers from April 2011, up from the 0.5% already announced – the additional rise is expected to raise £3 billion a year. The changes to National Insurance rates were originally announced in the pre-Budget report 2008 as increasing by 0.5%. Today it was confirmed that the rates will be increased by an additional 0.5%. The employer's and employee's National Insurance rates will therefore be increased by 1%. This means that the employee's NIC rate will be 12% up to the UEL and 2% thereafter. The employer's NIC rate will be increased to 13.8% on all earnings above the secondary threshold. A similar increase will apply to class 4 NIC rates for the self-employed.

Pension anti-forestalling rules changed – tax net extended to catch those with relevant income of £130,000 or more
In his 2009 Pre-Budget Statement, the Chancellor announced that the scope of the pension anti-forestalling rules introduced from 22 April 2009 will be extended from 9 December 2009 to cover those with relevant income of £130,000 or more (from £150,000 previously).

The Finance Act 2009 introduced special annual allowance rules from 22 April 2009 to cap tax breaks on pension provision for high income individuals with relevant income of £150,000 or more.

In his 2009 Pre-Budget Statement, the Chancellor announced that these rules will be extended from 9 December 2009 to cover those with relevant income of £130,000 or more. There are, however, some differences in how the rules apply to those with relevant income in the £130,000 to £149,999 bracket:

• The extended special annual allowance rules will only apply to pension provision made after 8 December 2009;
• An individual's protected pension input amount will be based on their normal regular pension provision in place on 8 December 2009;
• Salary or bonus sacrificed in return for employer pension contributions will only be included in the calculation of the individual's relevant income where the sacrifice agreement was entered into after 8 December 2009.

The Chancellor also announced a related change increasing the rate of the special annual allowance tax charge from 20% up to 30% in some circumstances from 6 April 2010 to reflect the introduction of a 50% rate of income tax.

The precise tax charge for a high income individual on pension provision above their special annual allowance will depend on the rate(s) of income tax they pay. The tax rate applied, known as the "appropriate rate", will be based on the difference between their income tax rate and the basic 20% rate of income tax.

Further information is available in PBRN18, PBRN19, and the Technical Note available on the HM Treasury website.

Higher-rate Tax Relief post 2011 – tax net extended to catch those with relevant income of £130,000 or more
In his 2009 Pre-Budget Statement, the Chancellor announced that from April 2011, those with relevant income of £130,000 or more will now face a tax charge on any pension provision made by them or on their behalf

The promised consultation document and draft legislation on the longer term changes to restrict pension tax breaks for high earners have now been published. The thrust of the consultation, which will run until 3 March 2010, is that from 6 April 2011 anyone with relevant income of £130,000 or more will face a tax charge. We are currently analysing these publications and we will be providing more detail on this in the next few days. In the meantime, the consultation is available here.

IHT nil rate band frozen
It had previously been announced that the IHT nil rate band would increase to £350,000 for transfers made on or after 6 April 2010.

This increase to the nil rate band will not now happen. Instead, the nil rate band will remain at this year's level of £325,000 for a further year.

IHT revisions to counter avoidance schemes
Draft legislation to target two specific trust based IHT avoidance schemes has been published.

Under the first scheme a client was able to avoid IHT by purchasing a trust interest which had not previously fallen inside the scope of UK IHT such as an excluded property trust interest. From today, where such an interest has been purchased it will form part of the purchaser's estate.

The second scheme involves trusts in which the settlor, or the settlor's spouse or civil partner, retains (or purchases) a future trust interest (a reversionary interest). The draft legislation provides that there will be a transfer for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT.

The legislation will be included in Finance Bill 2010, backdated to be effective from 9 December 2009. This shows that the government is ready to take action against schemes that are towards the more aggressive end of the tax planning scale.

Tackling offshore evasion
HMRC are still concerned about the impact of offshore tax evasion on the public finances and are to consult on a number of measures to rectify this.

HMRC are aware that despite recent attempts put an end to tax evasion via offshore accounts, there remains a significant number of individuals who refuse to disclose information relating to such accounts.

HMRC will be consulting on a package of deterrents and new tools to help them tackle offshore tax evasion. This includes a notification requirement for certain new offshore bank accounts and a new tough approach to penalties for offshore non-compliance.

Reforms to the information HMRC receives on non-resident trusts may also be considered