 March
2007
Budget
Report Summary 2007
Introduction
Gordon Brown has delivered his
eleventh, and what is expected to be his final, Budget. This year’s measures
contained a few shocks, with the Chancellor’s tax cut provoking an uproarious
reaction from Labour and Conservative benches alike. The Budget has been described
as ‘substantial’,
no surprise if Mr Brown has his eye firmly on Number Ten.
But what does the 2007 Budget mean for you, your family and your business?
We have summarised the key issues for you here to help you understand how the
changes will affect you.
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Summary of Key Proposals
- The main proposal this year is a 2p cut in the basic rate of income tax.
However, the Chancellor also scrapped the 10p lower rate, which is likely
to leave most people no better off.
- Fuel duty will rise by 2p but will be delayed for six months, while road
tax on ‘gas guzzling’ vehicles will rise to £300 this year.
From 2008 that will rise to £400, but the least polluting cars will
have their road tax cut to £35. These measures are to protect the environment
and tackle climate change.
- Corporation tax has been cut from 30p to 28p from April 2008.
- The Inheritance tax threshold will rise from £285,000 to £350,000
by 2010.
- There will be further support for families, with the child element of the
Child Tax Credit increasing by £150 per annum.
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Previous Announcements
The pre-budget report in December 2006 laid the foundation for the main budget,
although several of the promised changes have been amended since then, including
the tax rules for contractors working under a managed service company (MSC).
Below is a reminder of the key pre-budget proposals as detailed in this summary:
- An increase in the basic personal allowance and starting point for national
insurance contributions (NICs)
- The main elements of working tax credit will rise broadly in line with
inflation in 2007/08
- Several important changes will apply to alternatively secured pensions
(ASPs)
- Provisions will be made to make it easier for new companies to become a
UK Real Estate Investment Trust (REIT)
- Changes to the tax rules for contractors working for an MSC
- Changes to the VAT partial exemption regime with effect from 1 April 2007
- Six year limitation period for all direct tax claims
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Personal Tax
As part of continuing modernisation, the Government will remove the starting
rate of 10p and cut the basic rate of income tax from 22p to 20p from April
2008, the lowest basic or standard rate of income tax for over 75 years.
This will create a simpler structure of two rates: a 20p basic rate and a
40p higher rate.
Top-rate income tax threshold will rise to £43,000 from April 2009.
In April 2008, the Government will increase the upper earnings limit for national
insurance by £75 per week above indexation and, from April 2009, fully
align it with the higher rate threshold.
The Government’s policy of rewarding saving will continue, through maintaining
the existing 10p rate of tax for savings income.
These reforms mean that there will only be two main rates of income
tax, and that income tax and NICs rates will apply to the same bands of income.
The Government also plans to increase the higher rate threshold for income
tax by £800 a year in 2009.
A significant change for pensioners, as the age-related income tax allowances
for those aged 65 or over and 75 or over will rise by £1,180 above indexation
in April 2008. Mr Brown maintains this will remove a further 580,000 pensioners
from paying tax. In addition, by April 2011 no pensioner aged 75 or over will
pay any tax until their income reaches £10,000 a year.
The pre-budget report had already announced a change to the basic personal
allowance and starting point for national insurance contributions (NICs), which
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.
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Allowances
The December 2006 pre-budget report announced details of personal allowances,
which are:
| 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 |
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Benefits and Working Families
One of the themes of the 2007 budget was ‘building a fairer society’,
with emphasis on benefits and eradicating child poverty.
As announced in the pre-budget report, and to help meet these aims, the child
element of Child Tax Credit will increase by £80 to £1,845 a year,
then rise again in April 2008 by a further £150 a year to £2,080.
From April 2008 the income threshold at which Working Tax Credit is received
in full will increase by £1,200, to £6,420 a year. This will increase
the benefit of work for many low-income households, and reduce the net tax
burden for working families. To help ensure that this and other increases in
tax credits retain their current focus, from April 2008 the Government will
also increase the rate at which tax credit awards are withdrawn by 2 per cent
to 39 per cent.
The weekly rate of Child Benefit for the eldest child will rise to £20
in April 2010, and from April 2009, every mother-to-be will become eligible
for Child Benefit from week 29 of their pregnancy, so that women will be up
to £200 better off by the birth of their first child, and up to £130
better off at the birth of subsequent children.
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What do the personal tax and benefit
changes mean in real terms?
- families with children will be, on average, £200 a year better off,
while those in the poorest fifth of the population will be, on average, £350
a year better off;
- a single earner couple with 2 children, on median earnings – £27,000
per year - will be around £500 a year better off, and the same family
on male mean earnings – £35,900 – will be around £320
a year better off; and
- a lone parent with 2 children, working 16 hours a week at the National
Minimum Wage, will be at least £320 per year better off.
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Savings
Individual Savings Accounts (ISAs) were introduced in 1999 as a replacement
for Tax-Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans
(PEPs). Over 17 million people now have an ISA, with over £220 billion
subscribed since their launch. ISA and PEP savings are supported by an estimated £2.1
billion each year in tax relief.
In order to build on this success, the Government is reforming ISA regime
to be more flexible for savers. The pre-budget report had hinted at a rise
in the annual ISA investment limit of “at least £7,000”, and
the final limit was announced as £7,200 from April 2008, with an increase
in the cash limit to £3,600. This will benefit around 5 million
individuals who are currently making full use of either their cash or overall
investment limits. However, this could mean some savers will have a lower investment
ceiling for their stocks and shares than they do now.
Currently an individual can invest:
- £3,000 each tax year in a cash mini ISA
- £4,000 each tax year in a stocks and shares mini ISA
- Or £7,000 each tax year in a maxi ISA, of which up to £3,000
may be in cash.
But the new cash limit means that someone who chooses to save the maximum
cash each year will only be able to invest £3,600 in stocks and shares
- £400 less than the current limit.
In response to stakeholder views, from April 2008 the Government will also
extend the reform to allow transfers from cash into stocks & shares to
include all cash held in ISAs, not just that subscribed in previous tax years.
In the pre-budget report, Mr Brown had announced that the lifetime of ISAs
is to be extended indefinitely. Other pre-budget changes include:
- 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.
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Pensions and Retirement
In 2004, the Government committed to increasing the standard minimum income
guarantee in line with earnings until 2008. Accordingly, from April 2007, it
will rise to £119.05 for single pensioners and £181.70 for couples.
From April 2007, the Savings Credit will also rise to a maximum of £19.05
a week for single pensioners and £25.26 for couples to reward those who
have built up modest savings for retirement.
From April 2007, the basic state pension will rise to £87.30.
The Government is extending Winter Fuel Payments of £200 for households
with someone aged 60 or over, rising to £300 for households with someone
aged 80 or over, for the duration of this Parliament. Free television licences
will continue for those aged over 75, as will free prescriptions and eye tests
for those aged 60 and over. Pensioners will now be entitled to free off-peak
bus travel.
The Pensions Bill currently before Parliament attempts to introduce reforms
to state pensions following the recommendations of the Pension Commission.
However, there were few substantial changes in the 2007 Budget, with the emphasis
being mainly on supporting the tax relief for pension saving reforms already
introduced in April 2006.
The Government is bringing forward legislation to make changes to the rules
governing Alternatively Secured Pensions (ASPs). This will introduce a new
requirement to withdraw a minimum level of income each year from an ASP fund.
ASP is a form of pension fund withdrawal available to pension scheme members
from age 75, which was introduced with effect from April 2006. These changes
were announces in the 2006 pre-budget report:
- 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.
The facility to transfer funds on death as a lump sum to pension funds of
other members of the scheme will be removed from the authorised payments rules,
with these payments attracting an unauthorised payments charge. The level of
the minimum income will be set at 55% of the level of the annual amount of
a comparable annuity for a 75 year old. Rules will be introduced to deal with
the interaction of inheritance tax and the unauthorised payments charge.
Another change is that the Government will no longer provide tax relief on
individuals’ contributions that are used to fund personal term assurance
policies, as predicted from comments in the pre-budget report. There is no
change for employers, so death-in service benefits and other death benefits
funded by the employer will not be affected by this measure.
A welcome announcement was that the amount of money made available for Financial
Assistance Scheme (FAS) will rise from £2bn to £8bn. This is for
those individuals who lost their pensions when their employers went bust before
2005.
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Inheritance Tax
One of the major budget announcements was that the Inheritance tax threshold
will rise from £285,000 to £350,000 by 2010. This is part of a
staggered increase, with the 2007-08 threshold rising to £300,000.
A new measure will be introduced from 21 March 2007 to ensure that, in certain
situations, people can elect back into the inheritance tax regime after the
normal self assessment deadline, rather than incurring the pre-owned assets
charge.
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Capital Gains
The Capital Gains Tax annual exempt amount is increased from £8,800
to £9,200 from 6 April 2007 and to £18,400 for married couples.
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The Economy
Mr Brown began with a summary of the world economy, which is expected to remain
strong in 2007. Economic growth in the UK has been driven by further increases
in UK business investment, as well as a recovery in the growth of the major
European and Asian economies to which the UK exports.
Mr Brown’s key points were:
- the economy is expected to grow by 2¾ to 3¼ % in
2007, and by 2½ to 3 % in 2008 and 2009
- inflation is set to remain low and on target in 2008 and 2009;
and
- the public finances remain sound and the Government is
on track to meet its fiscal rules, with borrowing forecast to be £35
billion in 2006-07 and debt lower than in the US, Japan, Italy, France and
Germany.
In the last year investment has grown by 6%, business investment by 7%, and
inward investment by 10%. Business investment is forecast to rise again by
more than 7% this year.
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Companies
Corporation tax will be cut from 30p to 28p from April 2008, prompting a mixed
reaction from businesses. The main rate cut could benefit larger taxpaying
companies, but there has already been dismay among smaller firms that the rate
they pay would rise from 19% to 22% in 2009. Changes to tax allowances are
likely to benefit service sector firms but manufacturers might suffer.
The tax change is intended to stop individuals "artificially" incorporating
themselves as small companies in order to avoid taxation.
Small firms will be able to claim a new 100% relief for new capital investment
up to £50,000, claim a new tax credit for environmental investment, and
the tax credit for research and development (R&D) will rise to 175%.
Another measure is the restriction of tax relief available on empty commercial
properties, to encourage the supply of office, retail and industrial premises.
Companies receiving funding under the Enterprise Investment Scheme (EIS) and
the Corporate Venturing Scheme (CVS) will be subject to an employee headcount
of fewer than 50 and an investment tranche size limit of £2 million per
year. These limits will also apply to companies receiving investments from
Venture Capital Trusts (VCTs) from funds raised on or after 6 April 2007.
From 6 April there will also be new taxes on managed service companies (MSCs)
which will affect around a quarter of a million contractors.
The pre-budget report revealed proposed new legislation under which all those
working through these arrangements will have to pay the same National Insurance
Contributions and tax as employees. However, the budget shows some changes
to this draft legislation, aiming to make it more difficult for the providers
of these arrangements to avoid the new charge. Contractors working through
an MSC could see their tax and National Insurance increase by as much as 50%.
It was also announced in December that 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.
An important pre-budget proposal was a range of legislative and regulatory
revisions 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.
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VAT
The changes to VAT regulations announced in the pre-budget report included
amendments 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.
It was also announced that 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.
New VAT announcements include the news that from 1 April 2007 the Government
will increase the VAT registration threshold in line with inflation from £61,000
to £64,000, maintaining the highest threshold in Europe and keeping up
to a further 6,000 small businesses out of the VAT system.
From 1 September 2007 the period over which businesses must account for VAT
on non-business use of land and buildings will be reduced to ten years.
With effect from 1 June 2007, there will be a change of VAT accounting procedure
(the reverse charge) on domestic business-to-business supplies of mobile phones
and computer chips to reduce VAT fraud.
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Tax Returns
There will be a new approach to penalties for incorrect tax returns. This
will make a clear distinction between those who make a genuine mistake, who
will not incur a penalty, and those who deliberately under-state their tax
liability. This will apply to income tax, corporation tax, capital gains tax,
PAYE NICs and VAT.
The Government had already announced, via the pre-budget report, measures
for limiting the recovery of direct tax paid by mistake, which will now be
six years. 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.
To encourage more on-line filing, the deadline for filing paper returns will
be brought forward to 31 October from 2008.
Requirements for PAYE are to be introduced from 2009, VAT is now expected
from 2010, and company tax returns in 2011. And, to remove the current disincentive
to make payments electronically, the Government intends to change the date
on which cheque payments are treated as made for Corporation tax and VAT.
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Property, Transport and the Environment
The environment played a large part in this year’s budget, and there
are several new initiatives to reduce carbon emissions. For example until 2012
all new zero carbon homes up to £500,000 will be exempt from stamp duty,
with zero-carbon homes costing in excess of £500,000 receiving a reduction
in their stamp duty bill of £15,000.
The government also announced an intention that, by the end of the next decade,
all householders will have been offered help to introduce energy efficient
measures to achieve their cost-effective energy efficiency potential. What
that means in real terms remains to be seen, although the pre-budget report
mentioned 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.
The landfill tax will rise by £8 each year from April 2008.
Transport measures include a rise in fuel duty by 2p in September 2007, while
road tax on ‘gas guzzling’ vehicles will rise to £300 this
year. From 2008 that will rise to £400, but the least polluting cars
(those in Band B) will have their road tax cut to £35.
New measures supporting biofuels will be introduced, including extending the
20 pence
per litre biofuels duty differential to 2009-10.
The pre-budget report outlined a number of changes 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.
It’s clear that the Government is serious about climate change, and
householders will begin to see the financial benefits of switching to sustainable
solutions over the next few years.
Budget proposals may be subject to amendment in the Finance Act. You are advised
to seek professional advice before taking any action as a result of the contents
of this summary.
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