March 2008

The Budget 2008

Alistair Darling has delivered his first Budget as Chancellor of the Exchequer. His focus was very much on stability against a backdrop of economic slowdown and turbulence in the global financial budgets.

His 50-minute speech delivered few shocks as Mr Darling said the government would do everything in its power to keep Britain’s economy strong and inflation low, although there was “green” thread running through the Budget.

• Summary of key proposals
  
• Previous announcements
  
• The economy
  
• Personal tax
  
• Income tax
  
• Benefits and working families
  
• Savings
  
• Pensions and retirement
  
• Inheritance tax
  
• Business and enterprise
  
• Company cars
  
• Capital gains tax
  
• Residence and domicile
  
• Capital allowances
  
• Housing and mortgages
  
• Alcohol and cigarettes
  
• Charities
  
• Property, transport and the environment

Summary of key proposals

• The main rate of corporation tax will fall from 30% to 28% from April 2008 and taxes for small companies will be simplified.
• The 18% flat rate of capital gains tax, and a 10% rate for the first £1 million of lifetime gains – known as entrepreneur’s relief – was confirmed as taking effect from 6 April 2008.
• The £30,000 levy on long-term non-domiciles to pay their tax on a remittance basis was confirmed as taking effect from 6 April 2008.
• The 2p rise in fuel duty expected in April will be postponed until October 2008.
• There will be major reform of  vehicle excise duty from 2009, with new bands created as an incentive to manufacturers to produce and drivers to buy the cleanest cars
• Alongside the winter fuel payment, there will be an additional £100 payment to over-80s households and £50 for over-60s households in 2008-09
• Child benefit for the first child will rise to £20 a week from April 2009, a year earlier than originally planned.

Previous announcements

The pre-budget report in October 2007 laid the foundation for the main budget, although several of the proposed changes have since undergone substantial change, notably capital gains tax (CGT) and non-domicile measures.

Below is a reminder of some of the main pre-budget measures proposed in October 2007:

• The nil rate band of inheritance tax (currently £300,000) will become transferable so that the estate of a surviving spouse or civil partner can make use of any unused inheritance tax nil rate band of the deceased spouse or partner.
• An 18% flat rate of capital gains tax will be introduced from 6 April 2008 and taper relief and the indexation allowance will be withdrawn from the same date. The annual personal allowance will remain (currently £9,200).
• Non-domiciled individuals who have been UK tax resident for seven years or more will only be able to use the remittance basis for paying tax on their overseas income if they pay an additional charge of £30,000 a year. Years of residence before 6 April 2008 will be taken into account.
• It was proposed to introduce legislation in the 2008-09 financial year to address “income shifting”, in that the income of one person is diverted to a second person, subject to a lower rate, to gain a tax advantage. 
• The fuel charge multiplier for employees’ “free fuel” will rise by £2,500 to £16,900 from 6 April 2008. This is the sum used as the basis for calculating the taxable value for fuel provided by an employer for private mileage in a company car.
• Renovations and alterations to residential property empty for at least two years will be eligible for a reduced rate of VAT of 5% from 1 January 2008. Previously, property had to be empty for a minimum of three years.

The economy

Mr Darling began with a summary of the world economy. He said that turbulence in financial markets, starting in the United States, had spread globally, posing a major risk to the world economy.

But he said that the UK economy would continue to grow and had the resilience to withstand global shocks. Key points were:

• the economy grew by 3% last year but Mr Darling predicted that this would fall to between 1.75-2.25% this year, rising to between 2.25-2.75% in 2009
• inflation is set to stay steady and Mr Darling would be writing to the governor of the Bank of England to confirm the inflation target as 2%
• borrowing next year will rise to £43bn, falling to £23bn by 2012-13.

Personal tax

It had already been announced that the top-rate income tax threshold will rise to £43,000 from 6th April 2009.

The 10% starting rate is abolished from April 2008, with the basic rate falling from 22% to 20% at the same time.

Mr Darling said that new income tax allowances for people aged 65 and older would take 600,000 pensioners out of income tax. By April 2011, no pensioner aged 75 or over will pay any tax until their income reaches £10,000 a year.

The unusually early pre-Budget report in 2007 meant that changes to the basic personal allowance and starting point for national insurance contributions (NICs) for 2008-09 were not announced until 18 October.

The main rates of employers’, employees’ and Class 4 NICs will remain unchanged. The flat rate of NICs for the self-employed will rise to £2.30 per week while the upper earnings limit for national insurance will rise from £670 to £770.

Benefits and working families

Mr Darling continued the previous years’ Budget emphasis on eradicating child poverty by 2020. He said that a further £1.9bn would be invested over the next three years to relieve child poverty.

The weekly rate of child benefit for the eldest child will rise to £20 from April 2009, a year earlier than had already been announced.

Mr Darling also announced that the child element of Child Tax Credit will rise by £50 a year from April 2009. This element is already rising by £150 a year to £2,080 from April 2008.

He said that a key element of eradicating child poverty was to encourage parents into work. Measures to achieve this include disregarding child benefit in calculating income for housing and council tax benefit from October 2009, improving work incentives for many of the lowest-paid families. A working family with one child, on the lowest incomes, will gain up to £17 a week.

From late 2008, a new Employment and Support Allowance will replace the current system of incapacity benefits for new claimants, which will be accompanied by a new work capability assessment from October 2008. All existing incapacity claimants will be required to take the work capability assessment from April 2010.

Mr Darling said he would be encouraging energy companies to spend up to £150m to reduce the cost of paying for fuel through pre-payment meters.

Savings

Mr Darling confirmed the reform to the Individual Savings Accounts (ISAs) announced in 2007. From April 2008, more than 17 million ISA savers  will be able to invest a total annual limit of £7,200 - £3,600 in cash and £3,600 in stocks and shares.

He also announced the launch of the first Savings Gateway accounts by 2010, a scheme designed to encourage people on low incomes to save. The two-year accounts will be offered by banks and building societies and at the end of the account, the government will match money saved in the accounts, which will be open to people on a range of benefits and tax credits.

Pensions and retirement

Under the government’s minimum income guarantee, single pensioners will receive £124.05 and couples £189.35 from April 2008.

Mr Darling announced that the there would be an additional £100 payment alongside the winter fuel payment to over-80s households and £50 for over-60s households in 2008-09. The winter fuel payment is £300 for over-80s and £200 for over-60s.

Inheritance tax

It had previously been announced that the inheritance tax threshold for 2007-08 threshold would rise to £300,000.

For the tax year 2008-2009 it rises to £312,000, in 2009-2010 to £325,000, and in 2010-2011 to £350,000.

Business and enterprise

Mr Darling confirmed that the main rate of corporation tax will fall from 30% to 28% from 1 April 2008. The small companies’ rate will rise from 20% to 21%.

He emphasised the contribution of small and medium-sized enterprises, which he said employed 13 million people, to the UK economy and announced proposals to make it easier for small firms to comply with legislation.

Mr Darling did not mention proposals on income shifting – a tax minimisation arrangement common in husband and wife and other family businesses – during his Budget speech, but the government will introduce legislation to deal with this in the Finance Bill 2009.

Measures to benefit businesses include a 20% increase in funding to the Small Firms Loan Guarantee Scheme, which supports firms that find it difficult to access conventional finance. From April 2008, the scheme will also be open to all small firms, rather than those that are more than five years old.

Mr Darling said that the upper limit for an investor under the Enterprise Investment Scheme, which provides a range of tax reliefs for investors who subscribe for qualifying shares in certain companies, would rise from £400,000 to £500,000 a year. There would also be a £12.5m contribution to a capital fund for businesses run by women.

Mr Darling also announced that measures would be taken to encourage more SMEs to benefit from public sector contracts. An independent review would take place, with the aim of achieving a 30 per cent target within the next five years.

Company cars

A new emissions-based approach will replace the existing capital allowance regime for business cars, effective from 1 April 2009. Expenditure on the most polluting cars will receive a 10% writing down allowance, with the least polluting attracting a 20% writing down allowance.

The 100% first year capital allowances for the cleanest cars will be extended from 31 March 2008 to 31 March 2013, with the qualifying CO2 emissions threshold will be reduced to 110g/km.

Company car tax rates will be increased on all but the cleanest cars, emitting less than 135g CO2/km or less in 2010-11.

The incentive to drive fewer miles will be strengthened by increasing the fuel benefit charges at least in line with the Retail Prices Index from April 2009. Tax-free mileage allowances (AMAPs) rates and thresholds will remain at the current levels.

Capital gains tax

Mr Darling confirmed that an 18% flat rate of capital gains tax and a 10% rate for the first £1 million of lifetime gains – known as entrepreneur’s relief – would take effect from 6 April 2008. Taper relief and indexation allowance will be abolished from the same date.

The individual capital gains tax annual exemption is increased from £9,200 to £9,600 from 6 April 2008.

Residence and domicile

Key changes to proposals to residence and domicile reforms announced in the pre-Budget Report include:

• Income and gains from offshore trusts will only be taxed when remitted to the UK, even if they come from UK assets.
• The annual £30,000 charge on non-domiciles resident for more than seven of the last 10 years will not be paid by children and should be creditable against foreign tax.
• People with unremitted offshore income and gains of under £2,000 are exempt from the £30,000 charge and changes in personal allowances.
• Day counting tests for residence have been amended so that physical presence in the UK at midnight counts as a whole day but are modified for those in the UK in transit.

Mr Darling said that the rules in the area of residence and domicile will not be substantially revisited for the rest of this Parliament or the next.

Capital allowances

Changes will be introduced to Capital Allowances for 2008/9:

• Allowances on long life assets to increase from 6% to 10%.
• Integral fixtures to become as long life assets and subject to 10% allowance from 2008, subject to consultation.
• Phased removal of IBAs and ABAs by 2011.
• A new annual investment allowance (AIA) of £50,000pa spent on plant and machinery to replace first year allowances (FYA) for all businesses.
• A payable tax credit for losses incurred on "green technologies" - subject to consultation
• Extension of capital allowances to expenditure on building regulations.

Housing and mortgages

Mr Darling said that from April 2008 key workers, such as teachers and nurses, would be able to borrow up to 50% of the cost of a property through shared equity schemes, instead of the current 75%. Stamp duty on shared ownership homes will not be payable until people own 80% of the property.

He said he wanted to extend the opportunities for homebuyers to take out long-term, fixed rate mortgages, and that these should be more flexible, to protect them from fluctuating interest rates.

Mr Darling said that these mortgages would help to reduce some of the risks involved in taking out mortgages, particularly for first time buyers and people on low incomes, and that he would develop this further in the pre-Budget report in the autumn.

He also announced that sites for 70,000 new homes had been identified, in addition to 40,000 already under construction, and that there would be money for the Housing Corporation to build 70,000 affordable new homes each year.

Alcohol and cigarettes

From 6pm on Budget day, cigarettes will rise in price by 11p a packet and a packet of five cigars by 20p. The 5% VAT rate on smoking cessation products will continue after 30 June 2008.

From Sunday 16 March, there will be an additional 4p duty on a pint of beer, 3p on a litre of cider, 14p on a bottle of wine and 55p on a bottle of spirits. Duty will continue to rise on alcohol at 2% above inflation for the next four years.

Charities

Although the basic rate of tax will be 20% in 2008-09, Gift Aid – tax relief on donations to charities - will be paid at a transitional rate of 22% from 2008-09 to 2010-11, providing charities with additional Gift Aid worth around £300m over three years.

Property, transport and the environment

Mr Darling announced that five-year carbon budgets would be introduced, with the first set alongside Budget 2009.

In 2006, the government announced that changes to building regulations would mean that by 2016, every new home would be zero carbon. Mr Darling extended this to non-domestic buildings, such as offices and shops, from 2019.

Until 2012, all new zero carbon homes up to £500,000 continue to 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.

Transport measures include a rise in fuel duty by 2p, although this has been deferred from April to October 2008. The main road fuel duty rates will rise by 1.84p per litre on 1 April 2009 and by 0.5p per litre above inflation on 1 April 2010.

Mr Darling said he would also be setting aside funding to test proposals on road pricing, to reduce congestion and vehicle emissions.

Vehicle excise duty will rise by £5 per year, except for cars with a CO2 emission level of 120 g/km or below, where there will be no increase. There will be a £100 increase for cars with CO2 emission level of 226 g/km and above.

Mr Darling said manufacturers needed to be encouraged to reduce CO2 emissions to 110g/km by 2020. In 2009, there would be major reform of vehicle excise duty, with the highest rates for the most polluting cars and from 2010-11, the lowest emission cars will pay no tax in first year. The most polluting cars will pay a first year rate of £950 in 2010-11.

Capital allowances for business cars will encourage businesses to choose the lowest emission vehicles for their fleets.

Mr Darling also announced that he would introduce legislation in 2009 to introduce charges for single use carrier bags if retailers did not take voluntary action to do so. He said this could cut the 12bn bags used each year in the UK by 90%.