 October 2007
Pre-Budget
Report Summary 2007
Introduction
With Gordon Brown now in the top seat, the eyes of
the nation were on Alistair Darling as he delivered
his first pre-budget report. The will-they-won’t-they
speculation surrounding the election, plus some tax
cuts promises from the opposition meant that Darling
had to deliver some potentially vote-winning changes.
Below is a summary of the key issues for you here
to help you understand how the changes will affect
your business, you and your family and what the Government’s
spending plans are for 2008 and onwards.
Personal Tax
The Government’s modernisation of the tax system
continues with several major announcements.
All married couples and civil partners automatically
benefit from double the standard inheritance tax allowance,
and capital gains tax is reformed with the introduction
of a single rate of 18 per cent. More information can
be found on these later in this report.
Other taxation measures include actions to protect
tax revenues and further modernise the tax system.
An emphasis was placed on tackling tax avoidance, including
countering the exploitation of interest relief by individuals,
amending the disguised interest rules to prevent abuse,
and ensuring that scheme pensions and lifetime annuities
are used solely to provide an income for life and not
as a means of diverting tax-relieved pension savings
into inheritance. The details of these measures have
not yet been published.
Alongside reforms announced in Budget 2007, the new
measures announced in this pre-budget mean that by
April 2009 many individuals and families will be better
off. Below are some examples of the effect these changes
will have:
- A single-earner family with two children on male
mean earnings (£35,900) will be £320
a year better off, with the direct tax burden on
the family falling to 20 per cent.
- A single-earner family with two children on median
earnings (£27,000), will be around £540
a year better off;
- A single-earner couple without children on half
median earnings (£13,500) and receiving the
WTC will be £175 a year better off;
- Around 600,000 fewer pensioners will pay income
tax than would otherwise be the case, so that in
total only 43 per cent of pensioners will be taxpayers.
By April 2011, no pensioner aged 75 or over will
pay any tax until their income reaches £10,000;
and
The income tax personal allowances for under 65s and
NICs thresholds and limits, except the upper earnings
and profit limits, will be raised in line with the
Retail Price Index from April 2008.
On the back of a suggestion from the opposition, the
Chancellor plans to raise more money from wealthy individuals
who classify themselves either as non-domiciled or
non-resident. Many people in this category are domiciled
in tax havens such as Monaco but operate their businesses
or employment in the UK. People in this category who
have lived here for more than seven years will pay
a flat rate of £30,000.
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Non Domicile
Residents
A range of reforms will take effect from April 2008.
The main being that UK residents who are non-domiciled,
who wish to continue to be taxed on a ‘remittance
basis’ rather than on their worldwide income
and gains, will have to pay an annual charge of £30,000.
This change is to ensure that these individuals contribute
in respect of the foreign income and gains which they
keep off shore and on which they do not pay UK tax.
The charge will only apply if they have been resident
in the UK for more than seven years.
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Benefits
and Working Families
The Government continues its theme of eradicating
child poverty and proving a better deal for working
and lone parents. An In-Work Credit, which has been
piloted since 2004, will be rolled out nationally from
April 2008. This £40 payment (£60 in London)
is for lone parents who have been on Income Support
for more than twelve months but are now returning to
work, and will be paid for the first year of their
employment.
The incapacity benefits system is being overhauled,
with a simplified Employment and Support Allowance
(ESA) taking its place from 2008. The intention is
to focus on what a claimant can do, rather than what
they cannot do.
Child tax credit will go up in April 2008 by £175
a year, rather than the £150 increase previously
announced, with a further £25 increase in 2010.
All elements of the Working Tax Credit are to be uprated,
in line with the Retail Prices Index (RPI), with the
exception of the childcare element.
The Chancellor confirmed the Budget 2007 measures
to increase the income threshold below which WTC can
be claimed in full by £1,200 to £6,420
and the increase in the withdrawal rate for tax credits
by two percentage points to 39 per cent.
In addition, from April 2008, the disregard of tax
credits in Housing Benefit will increase in line with
RPI.
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Pensions and
Retirement
In an effort to provides security for the poorest
pensioners and rewards those with modest savings, the
Government will increase the Pension Credit standard
minimum guarantee to £124 for single pensioners
and to £189 for couples in 2008-09, a rise of £5
a week for a single person and £7.65 a week for
a couple.
Part of the newly-announced anti tax-avoidance measures
will prevent the use of scheme pensions and annuities
to enable inheritance of tax-relieved savings and ensure
that UK tax-relieved pensions funds in overseas schemes
continue to be protected from the Inheritance Tax Threshold.
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Inheritance
Tax
One of the biggest and most talked-about announcements
was the change to the Inheritance Tax Threshold (IHT).
Because there is no IHT paid on assets passing between
married couples or civil partners, anyone leaving all
their assets to their spouse does not make use of their
individual tax-free allowance of £300,000. To
address this imbalance, all married couples and civil
partners will automatically benefit from double the
standard inheritance tax allowance.
In real terms, this means that if a person’s
tax-free allowance is not used on their death, it can
be transferred to their surviving spouse or civil partner,
enabling every married couple or civil partnership
to benefit from double the tax-free allowance (£600,000
in 2007/08) in addition to spouse relief. The IHT allowance
will rise by April 2010 to £350,000 for individuals
and £700,000 for couples.
The Government has also extended this entitlement
to the three million existing widows, widowers and
bereaved civil partners.
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Capital
Gains
A major reform to capital gains tax will be introduced
via a single rate of 18 per cent from 6th April 2008.
The Government aims to ensure a more sustainable system
that is straightforward and internationally competitive
As part of this new system the annual exempt amount
(currently £9,200) will remain in place, but
taper relief and indexation allowance will be withdrawn.
For some entrepreneurs, business creators and private
equity chiefs, who now pay only 10 per cent tax, this
reform represents a steep tax rise. However for many
ordinary investors in the stock market or property
who currently pay up to 40 per cent tax on their capital
gains, this will be welcome news.
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Companies
Changes to the tax system will have an impact on businesses,
particularly in light of new anti tax-evasion measures
and the new capital gains rules.
Other measures include an amendment to the regulations
on the tax treatment of loans and derivatives that
hedge a company’s currency risk from investment
in foreign operations, to ensure only the “hedged” position
is taxed, with effect from 1 January 2008, followed
by more extensive changes in 2009.
The taxation of small unincorporated businesses will
be reduced by £50 million in 2009-10, as the
self-employed already pay income tax and national insurance
contributions on their business profits.
A flaw in the legislation governing the sale of leasing
companies, which is resulting in an unintended tax
charge and could prevent genuine commercial restructuring,
will be removed via legislation with retrospective
effect from 5 December 2005.
The Government announced continued support for business
and the promotion of enterprise, including the allocation
of a total of three rounds of Enterprise Capital Funds
at £50 million per year.
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Company
Cars
Where a car is provided for an employee’s private
use, a taxable benefit arises which is based on the
list price of the car and its CO2 emissions. The percentages
range from 15% to 35% for most cars. There are currently
discounts available for environmentally friendly cars
and from 6 April 2008 there will be a 2% discount for
cars that have been manufactured to run on E85 fuel.
If fuel is provided for private motoring then a fuel
benefit tax charge arises based on the percentage used
for the car benefit and a ‘multiplier’,
which is currently £14,400. For 2008/09 the figure
will increase to £16,900.
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Flight Tax
From 1 November 2009, air passenger duty will be replaced
with a duty payable per plane.
Other transport measures include free off-peak bus
travel to all residents in England over the age of
60 and eligible disabled people from April 2008, and £15
billion of Government funding in the rail network over
five years. The road pricing scheme is also being taken
forward.
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The Economy
The Chancellor warned that there will be more economic
pain because of the world financial crisis.
UK economic growth is predicted to slow from 3 per
cent in 2007 to 2-2.5per cent in 2008, a reduction
from the previous forecast of 2.5-3per cent made in
the Budget 2007.
The current instability is likely to slow growth in
the US and EU, but the Chancellor is optimistic that
the UK would grow faster in 2007 than any other major
economy.
Public finances should still be in a strong position,
especially if growth returns to its forecast level
of 2.5 per cent to 2.75 per cent in future years, but
the Government's public sector overall borrowing would
increase by £4billion in 2008 to £38bn.
The Chancellor seemed confident of long-term improvement,
however, predicting a decline in Government public
sector borrowing to £25bn by 2011/12.
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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