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This is a special review of the Pre-Budget report (PBR) which was announced on 9th December. We focus on how it affects contractors, the good and bad news as well as what opportunities there are for freelancers and contractors.
National insurance will rise by a further 0.5% in April 2011 on top of the already proposed 0.5% increase mentioned in the April 2009 budget. Both increases will only begin in April 2011. This will especially affect any contractor who pays themselves a salary above approximately £15,000 (especially those contractors caught by IR35) who will see a 1% increase in their employee Nics and 1% increase in their employer Nics.
Note that the level at which individuals will start paying national insurance will also rise by £570, which Alistair Darling said would compensate 15 million people on low incomes. Remember that dividends and pension contributions do not incur any Nics now or post the Pre-Budget Review, but timing is important with regards to paying dividends (see below) as well as pension contributions, which should be made prior to your company year end. Paying employer gross contributions into your pension is still a very tax efficient way of extracting monies from your company.
The PBR kept income tax thresholds (together with other tax thresholds) the same for April 2010 as they are this tax year. Remember though that the Budget of April 2009, it stated that from 6th April 2010, a new 50% income tax rate comes into effect for anyone earning £150,000 or more. A new top rate dividend tax of 42.5% will also apply above this threshold. However, alongside the new tax band, several other unpleasant tax increases also come into play for those earning £100,000 or more. If you are intending to draw large amounts of monies in the form of dividends in the near future, you may consider doing this prior to April 2010.
If your income exceeds £100,000, the basic personal allowance will be withdrawn at the rate of £1 for each £2 your income exceeds £100,000. Given that the personal income tax allowances will remain at their present level (of £6,475), you will lose your allowance completely when your income exceeds £112,950. As you will be taxed at 40% on income between £100,000 and £112,950, whilst progressively losing your personal allowance, the marginal tax rate in this banding can be up to 60%.
The inheritance tax (IHT) nil rate band will remain at £325,000 for 2010/11, instead of rising to £350,000 as legislated for in the Finance Act 2007.
Anti-avoidance measures were announced that are aimed at certain trust-based schemes which were designed to reduce or eliminate the value on which IHT is charged on transfers. The measures apply from 9 December 2009. Any allowances or tax bands that do not rise year on year are in effect stealth taxes. If you are caught by IHT, speak to an independent financial planner as well as a specialist Will writer who is a member of the Institute of Professional Will Writers.
Tax relief on pensions will be reduced for people earning more than £130,000 a year from April 2011. The rules that currently limit pension contributions tax relief (‘anti-forestalling’) have been changed with immediate effect; the revisions include a new income threshold of £130,000, reduced down from £150,000. The anti-forestalling rules do affect contractors whose relevant income is above £130,000 (which includes salary, dividends and other forms of income).
It is important to note that this level of income can be income earned in this tax year or any of the previous two tax years. If you think that you are caught by these rules or would like clarification given your personal circumstances, you should absolutely get advice from an authorised independent financial adviser as the rules are extremely complicated.
Good news that the rate of capital gains tax will remain at 18% together with the individual allowance of £10,100. If you have any disposals to make from assets subject to CGT, it is important to be sure of the timing of such disposals and to use any other allowances available.
The Government has confirmed the ending on 31 December 2009 of the temporary increase to £175,000 of the zero rate threshold for residential property. The threshold will fall back to £125,000 or £150,000 for disadvantaged areas.
The standard rate of VAT will return to 17.5% from 1st January 2010.
Good news for contractors operating through a limited company – The Small Companies’ Tax Rate of corporation tax remains at 21% for the 2010-11 tax year, deferring the increase to 22% until 1st April 2011. Remember that you can reduce your corporation tax bill by making any relevant employer gross pension contributions which are normally classed as an allowable expense to your business.
There was not mention of this in the PBR, which has to be a good thing for contractors operating under a limited company. Income shifting is the moving of income from one member of a couple, who pays tax at a higher rate, to the other who pays either no tax or a lower rate. Although this issue may be off the radar of the government and HMRC at present, it could re-arise in the future. Be sure to speak to your accountant if this affects you.
Taxpayers who open offshore bank accounts in certain jurisdictions will be required to report them to HMRC. A range of anti-tax avoidance measures have been announced with immediate effect.
Borrowing will hit £178 billion this year as the recession hammers the public finances, Chancellor Alistair Darling has said. The 2009/10 estimate — equivalent to 12.6 per cent of the country’s entire output — is higher than the £175 billion forecast in April’s Budget, although below the predictions of many experts. The Chancellor took great pride in maintaining his central annual GDP forecast of 1.25% for 2010, and 3.5% for 2011 and 2012, but quickly sidestepped his huge forecast error for 2009, revising his Budget 2009 forecast from minus 3.5% to minus 4.75%, expecting growth to resume by the fourth quarter. We must not forget that the UK is still technically in recession, the longest on record.
Once again, the Chancellor chose to announce a whole host of populist measures which do little to bring public finances back under control. As expected, Darling announced the introduction of a temporary windfall tax on the payouts of bonuses by banks of more than £25,000. A 50% levy will be paid by banks before bankers pay the additional usual taxes which is expected to net the Treasury c. £550 million. From an economic perspective, the PBR’s measures are fairly neutral. More support for lower income families may help boost consumption at the margin, but the re-instatement of VAT at 17.5% and the new 50% top rate of tax are likely to offset most of the gains. Increases to National Insurance for both employers and employees will be a full 1% for both come April 2011 given the original 0.5% rise suggested in April 2009 and the further rise of 0.5% in the PBR. This is set to net the government and extra £3-4 billion in revenues.
Overall, we believe that the Chancellor’s forecast for growth is too optimistic for 2011 and beyond. However, that does not mean public finances are beyond saving. Tough choices will have to be made after the next election which will result in higher taxes and lower spending, ultimately leading to lower economic growth. This is clearly an electoral budget report, with all harsh decisions on both spending cuts and tax increases deferred until effectively after the General Election. Whilst no further increase in this year’s public borrowing requirement is some comfort, the forecast path to gradual deficit reduction has been extended, taking longer and reducing more slowly. This has to increase the chances of the UK’s sovereign credit rating being downgraded. In turn, this reinforces the probability that sterling will remain weak and that, in the face of heavy gilt issuance, gilt yields may rise.
The Bank of England (BoE) will have to walk a difficult tightrope next year as the PBR endorsed its forecast of an inflation spike before falling away again. We remain confident that UK interest rates will remain low for most of 2010, but the risk that rising gilt yields and inflation expectations force the Monetary Policy Committee’s hand has probably increased. Weaker sterling will clearly be of benefit to many UK companies with extensive overseas businesses. This, coupled with low short rates, should ensure that the UK equity market remains reasonably well underpinned, although volatility is likely to rise not least because the electoral battle lines have now been well drawn. The market may well be buffeted in response to every opinion poll movement in the next six months. It is clear that there is no immediate clampdown on spending or increase in taxation, but after the election there will have to be significant further austerity measures. These will fall on all, but the PBR highlighted a clear intention that the majority of tax increases will be aimed at higher earners. This is unlikely to be positive for attracting inward investment or for the City of London, but reinforces our view that the UK economy will remain very sluggish over 2010/11 and hence interest rates will remain low.
There are a number of changes that have been introduced in the pre-budget report and the main changes will come into effect in the next 12-18 months. Every contractor’s personal financial circumstances are unique and as such, we would always recommend that you get professional advice to see how you can potentially benefit from current and future amendments to tax changes. In order to mitigate tax legitimately, it is important to get advice from both a qualified accountant and an independent financial adviser.
If there is a change of Government after the election, some of the announcements in the PBR may be revised or dropped. However, given the Conservative Party’s forceful views on the urgency of reducing the Government deficit, many of the tax raising measures might well survive. The proposals detailed in the Pre-Budget review are in any event subject to amendment before the Finance Act is passed.
The Financial Services Authority does not regulate will writing, school fees planning, taxation and trust advice, and some aspects of buy to let mortgages, overseas mortgages and commercial mortgages.
The content of this blog post is for general information only and is based on our understanding of current legislation and HM Revenue & Customs practice, which is subject to change. It should not be relied on and action which could affect your personal finances and your business should not be taken without professional advice. Please contact an independent financial adviser for specific advice.
Wealth Matters Ltd is authorised and regulated by the Financial Services Authority. We are entered on the FSA register No. 300635 at www.fsa.gov.uk/register/ Registered in England No. 3862593
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