 December
2006
Pre-Budget
Report Summary 2006
Summary of the Main Taxation Provisions
This year’s Pre-Budget Report
is almost certainly Gordon Brown’s last as Chancellor.
On this occasion, his March 2006 Budget predictions
for growth and borrowing have proved reasonably accurate,
even if overall borrowing is still at an uncomfortably
high level. While Mr Brown’s speech itself contained
very few surprises, the supporting material issued
by the Treasury and HM Revenue & Customs (HMRC)
revealed a wide variety of important tax measures.
Tax allowances and National
Insurance Contributions
The basic personal allowance and starting
point for national insurance contributions (NICs) will
rise in 2007/08 to £5,225. The main rates of
employers’, employees’ and Class 4 NICs
will stay unchanged. The flat rate of NICs for the
self-employed will rise to £2.20 a week for 2007/08.
A full list of the 2007/08 income tax allowances and
NIC rates and thresholds is set out at the end of this
summary.
Tax credits
The main elements of working tax credit
will rise broadly in line with inflation in 2007/08,
but the first income threshold for working tax credit
will remain frozen for the third year at £5,220
and there will be no increase in the childcare element.
The child element of child tax credit
will increase by 4.5% to £1,845 in 2007/08. However,
the family element of child tax credit and baby addition
will remain unchanged at £545 for a fourth year.
For those claimants who are not entitled
to working tax credit, the first income threshold (at
which child tax credits, other than the baby and family
element, start to be withdrawn) will rise to £14,495.
The second threshold (at which the baby and family
elements start to be withdrawn) is again unchanged
at £50,000.
Alternatively Secured
Pensions
Several important changes will apply
to alternatively secured pensions (ASPs) from 6 April
2007. ASP is a form of pension fund withdrawal available
to pension scheme members from age 75, which was introduced
with effect from April 2006.
- A minimum income requirement will be introduced
of 65% of the annual amount of a comparable annuity
for a 75 year old. There is currently no minimum
income level.
- The maximum annual income will rise from 70% to
90% of the annual amount of a comparable annuity
for a 75 year old.
- On the death of an ASP member or on the death of
a dependant, a transfer of any remaining ASP funds
to the pension funds of other members of the scheme
(a transfer lump sum death benefit) will become an
unauthorised payment, and will be subject to a tax
charge of up to 70%. This largely puts an end to
the idea of using ASPs to pass pension assets between
generations.
- It will no longer be possible to make pension payments
for up to ten years under a guarantee from an ASP
fund.
The Finance Bill 2007 will also introduce
measures to prevent other pension income options, such
as scheme pensions paid by small self-administered
schemes, being used to pass on pension fund assets.
These measures will also take effect from 6 April 2007.
Pension term assurance
A consultation with the pensions industry
will explore changes to the pension term assurance
regime in time for the next Budget. The government
believes that the existing rules are being exploited
to obtain tax relief for pure life cover. Any changes
will not affect personal policies entered into before
6 December 2006 or existing employer arrangements.
This might signal the end of stand-alone personal pension
term assurance.
Other pension measures
There will be a number of ‘technical
improvements’ to the pensions tax framework,
eg revising the rules on ill-health pensions to allow
them to be reduced rather than only stopped in full,
as now. The amendments will be included in the Finance
Bill 2007, but most will have effect from 6 April 2006.
Individual Savings Accounts and
Personal Equity Plans
The following changes are to be made
to personal equity plans (PEPs) and individual savings
accounts (ISAs), as previously announced:
- The lifetime of ISAs is to be extended indefinitely.
- The overall annual investment limit for ISAs will
be ‘at least £7,000’.
- PEPs will be brought within the ISA regime and
the PEP rules scrapped. However, there will be no
compulsion on providers to merge accounts.
- The distinction between Mini-ISAs and Maxi-ISAs
will disappear, but the monetary limits for the two
components will remain.
- Transfers from an ISA cash component into the stocks
and shares component for past tax years will be possible
without affecting the current year’s investment
limits.
- Child Trust Fund accounts will be able to roll
over into ISAs on maturity.
The intention is to implement all
of the changes ‘as soon as possible’, with
the exception of the Child Trust Fund measure.
Real Estate
Investment Trusts
A range of legislative and regulatory
revisions will be introduced to make it easier for
a newly-established company to become a UK Real Estate
Investment Trust (REIT). For example, a company will
no longer need to have its shares listed on a recognised
stock exchange on the date it gives notice of conversion
to a REIT, provided it expects to be listed by the
time it joins the REIT regime. The measures will have
effect on or after 1 January 2007.
Other REIT changes will be introduced
in response to problems identified in the implementation
of the new tax regime, for example ensuring that charities
are exempt from tax on distributions from REITs.
If an investment-related pension scheme,
such as a self-invested personal pension, holds 10%
or more of a REIT (either alone or with associates),
it will be treated as having an indirect holding in
any taxable property held by the REIT. The measure
is designed to prevent REITs being used to sidestep
the anti-avoidance rules relating to pension scheme
investment in residential property.
Construction Industry Scheme
The new construction industry scheme
to be introduced on 6 April 2007 will have a standard
deduction rate of 20%, instead of the present 18%.
A new higher deduction rate of 30% will apply to unregistered
sub-contractors to enable them to start work and encourage
them to register.
Managed Service
Companies
Managed service companies (MSCs),
sometimes called composite companies, have been used
to bypass the anti-avoidance legislation aimed at personal
service companies, often referred to as the IR35 rules.
A consultation document has been issued, together with
draft legislation, which would make members of MSCs
subject to income tax and NICs in the same way as employees.
Measures will be introduced in the Finance Bill 2007
with effect from 6 April 2007.
Planning Gain Supplement
The government published three consultation
papers on the design and implementation of its proposed
planning gain supplement (PGS). The rate of PGS will
be ‘modest’ and the new tax will not be
introduced earlier than 2009.
Landlord’s Energy Saving
Allowance
A number of changes will be made to
the Landlord’s Energy Saving Allowance from
6 April 2007:
- Its availability will be extended to 2015.
- Qualifying expenditure will be widened to include
installation of floor insulation.
- The present cap of £1,500 will be applied
to each property rather than to each building.
- The allowance will be made available to corporate
landlords who let residential properties.
Microgeneration
The Finance Bill 2007 will confirm
that, where private householders install microgeneration
technology in their home to generate power for their
personal use, they will not pay income tax on any payments
they receive from the sale of surplus power to an energy
company.
Air Passenger Duty
Air passenger duty is to be doubled
for flights made after 31 January 2007. The minimum
rate (eg for lowest class travel within the EEA) will
rise to £10 and the maximum will be £80.
Value Added Tax
There will be changes to the VAT partial
exemption regime with effect from 1 April 2007. Businesses
will have to declare the suitability of their proposed ‘special
method’, for the calculation of VAT liability,
before it is approved by HMRC. The aim is to speed
up the approvals process.
VAT record-keeping requirements for
businesses transferred as a going concern will be brought
into line with other regulatory regimes so that the
seller retains the records, except where the buyer
retains the seller's VAT number.
Six year limitation
period for all direct tax claims
The government will legislate to ensure
that the limitation period for the recovery of direct
tax paid by mistake of law will be six years from the
date of payment. This is consistent with the limitation
period for making claims in respect of direct taxes
paid under assessment as a result of a mistake in a
tax return. The provision will have retrospective effect,
but will not disturb the entitlement of those who have
secured what amounts to a final House of Lords judgment
in their favour before 6 December 2006.
Tax avoidance measures
As usual, HMRC’s notes revealed
a range of anti-avoidance measures, many of which have
been prompted by information supplied under the disclosure
regime. There are six measures aimed at corporation
tax, one aimed at stamp duty land tax and one targeting
capital gains tax.
Income tax – personal
and age-related allowances 2007/08
| |
2007/08 |
| |
£ |
| Personal allowance (age under 65) |
5,225 |
| Personal allowance (age 65-74) |
7,550 |
| Personal allowance (age 75 and over) |
7,690 |
| Married couple’s allowance* (aged
less than 75 and born before 6 April 1935) |
6,285 |
| Married couple’s allowance* (age
75 and over) |
6,365 |
| Married couple’s allowance* (minimum
amount) |
2,440 |
| Age allowances income limit |
20,900 |
* Tax relief for the married couple’s
allowance is given at the rate of 10%, and is only
available where at least one spouse was born before
6 April 1935. The same allowances and conditions apply
for civil partners.
National Insurance
Contributions
| |
2007/08 |
| Lower earnings limit, primary Class 1 |
£87 a week |
| Upper earnings limit, primary Class 1 |
£670 a week |
| Primary threshold |
£100 a week |
| Secondary threshold |
£100 a week |
| Employees’ primary Class 1 rate |
11% of £100.01 to £670 a week
1% above £670 a week |
| Employees’ contracted-out rebate |
1.6% |
| Married women’s reduced rate |
4.85% |
| Employers’ secondary Class 1 rate |
12.8% on earnings above £100 a week |
| Employers’ contracted-out rebate,
salary-related schemes |
3.7% |
| Employers’ contracted-out rebate,
money-purchase schemes |
1.4% |
| Class 2 rate |
£2.20 a week |
| Class 2 small earnings exception |
£4,635 a year |
| Special Class 2 rate for share fishermen |
£2.85 a week |
| Special Class 2 rate for volunteer development
workers |
£4.35 a week |
| Class 3 rate |
£7.80 a week |
| Class 4 rates |
8% of £5,225 to £34,840 a year
1% above £34,840 a year |
| Class 4 lower profits limit |
£5,225 a year |
| Class 4 upper profits limit |
£34,840 a year |
Links
http://www.hm-treasury.gov.uk/pre_budget_report/
prebud_pbr06/prebud_pbr06_index.cfm
http://www.hmrc.gov.uk/pbr2006/index.htm
This guide is for general information
only and is not intended to be advice to any specific
person. You are recommended to seek competent professional
advice before taking or refraining from taking action
on the basis of the contents of this publication.
The guide represents our understanding of the law
and HM Revenue & Customs practice as at December
2006, which are subject to change. These proposals
may be changed in the Spring 2007 Budget and subsequent
legislation.
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