2009 Budget Review

April 2009

This year's Budget announcement was made by Alistair Darling at 12.30 on April 22; it was unusually late in the year due to the general economic situation and the hosting of the G20 summit in London. Contractors largely escaped the attention of the Chancellor. The two main items of note are the increases in taxes on high earners applying from next year and further delays in action against so-called ‘income-shifting'.

 

Higher Income Earners to Suffer from 2010

Those contractors whose taxable income is over £150,000 will suffer a new 50% income tax rate above that amount (42.5% on dividends) from April 2010.  In addition, for incomes over £100,000, every two pounds earned will reduce the personal allowance by one, until it is fully removed. Higher rate tax relief on pensions for incomes above £150,000 has also been reduced.

This news will hit high-earners harder and sooner than expected. The Chancellor had originally proposed in last November's Pre Budget Report (PBR) that the new higher rate be 45% and that the personal allowance be halved between £100,000 and £140,000 and then removed altogether above the latter figure. He had also stated in the PBR that these changes would take place from April 2011; they now come into effect a year earlier.

According to the Professional Contractors Group (PCG) the upper rate change will affect 10% of their membership (the vast majority of whom contract through their own limited companies) while the personal allowance changes above £100,000 will affect 40% of PCG members.

 

Income Shifting

In the PBR, Alistair Darling announced that the proposed Family Business Tax (income shifting) rules would be deferred and this was re-stated in the Budget.  This was good news for many contractors. While this issue may well be revisited in the future, the status quo remains, for now. You should note however, that the existing settlement legislation remains in place.

 

Personal Allowance & NIC Changes

Several changes to income tax and National Insurance Contributions (NICs) were confirmed. Personal allowance and NICs thresholds have changed from the 2009/10 tax year. The personal allowance increased by £440 from £6,035 to £6,475. The income level at which the 40% higher rate tax band comes into effect increased from £34,800 to £37,400.

The threshold at which NICs begin moved up £5 from £105 to £110 per week, while the upper threshold (at which employee contributions become 1%) rises from £770 to £884 per week.

Contractors will see some small gains from these changes. Those whose taxable salaries are below the 40% rate tax band, can expect to be approximately £150 p.a. better off. While those whose salaries are over £37,400 will gain about £280 compared to the current tax rates-the extra gains made from the increased 40% tax band, are largely offset by the corresponding increase in the NICs upper threshold.

The Tax-free ISAs annual limit has risen to £10,200 (£5,100 of which can be saved in cash) for over 50s this year and will do so for everyone else next year.

 

Compliance

A number of detailed changes were made under the heading, ‘Protecting Tax Revenues'. It seems HMRC are more determined than ever to attack established tax-avoidance schemes and nip new ones in the bud.

As HMRC get more aggressive about the pursuit of tax-avoiders they have been granted the power to ‘name and shame' some tax payers who have under declared their tax liabilities. So not only do contractors operating through non-compliant structures risk getting slapped with a huge tax bill plus interest, they could have their reputations smeared to boot.

There is a new ‘disclosure opportunity' for offshore bank account holders. This gives those currently in non-compliant schemes the chance to return to legitimate ways of minimising their tax liabilities, whilst the planned attack on non-disclosing contractors should make new offshore schemes even less attractive.

 

Other Changes

The proposed increase in corporation tax from 21% to 22% was again delayed.

The loss carry back rules have been extended. This scheme allowing small firms to reclaim taxes paid in the last three years against current losses is unlikely to have a significant impact on contractors operating their own limited companies because extremely few claim to operate at a loss.

The business payment support service was extended; this allows small businesses to pay their taxes over a deferred timetable agreed with HMRC.

VAT will, as planned, return to 17.5% from the temporary 15% rate on January 1, 2010.

The Tax-free ISAs annual limit has risen to £10,200 (£5,100 of which can be saved in cash) for over 50s this year and will do so for everyone else next year.