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Budget 2007: Key tax measures at a glance

20th Mar 2007
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"No return to boom and bust" is on the agenda according to the chancellor, but with 81 budget notes there have been some major changes announced to simplify income tax, tinker with corporation tax and overhaul the capital allowances system for long and short life assets.

Major new announcements, with links into tax features

Income tax
Major simplification measures include:

  • 10% starting rate band to be abolished from 2008
  • basic tax rate cut from 22% to 20% by 2008
  • Top rate band of income tax to rise to £43,000 by 2009
  • Confirmation of the Carter proposal that the SA enquiry window will be aligned with the filing date.

National insurance
Upper earnings limit raised by £75 by 2008 and aligned with higher rate threshold by 2009

Company tax
Tax-motivated incorporation:

  • The small company corporation tax rate will be raised in stages commencing with a 20% rate in 2007, 21% in 2008 and 22% by 2009.
  • Dividends: "The government will continue to monitor the level and extent to which labour income is extracted by dividends" 5.113

Managed service companies (MSCs)

  • Proposed provisions to apply to scheme promoters in order to target the legislation more specifically
  • PAYE to be applied to all payments received by individuals on or after 6 April 2007, as announced in PBR. NI will be due from date to be specified when Finance Bill receives Royal Assent
  • Approach to the proposed transfer of debts legislation to be modified and take effect from January 2008
  • Travel expenses to be restricted for those engaged via MSCs as previously announced.

Mainstream corporation tax

  • The mainstream rate of corporation tax will be cut from April 2008 to 28%.

    Capital allowances
    Major modernisation of capital allowances:

    • Allowances on long life assets to increase from 6% to 10% from 2008
    • 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    • Phased removal of IBAs and ABAs by 2011, but balancing adjustments will be withdrawn from today.
    • An annual investment allowance of £50k p.a. to encourage small business to invest to grow from 2008, following consultation, to replace first year allowances (FYA)
    • 50% FYA to remain in place for 2007/08
    • Reducing the short life writing down allowance from 25%to 20%
    • From 2008/09 a payable tax credit for losses incurred on "green technologies" - subject to consultation on proposed design and scope
    • The business premises renovation allowance announced in 2005 will apply to all expenditure incurred on or after 11th April 2007 to encourage renovation and conversion of vacant business properties.

    Research and development

    • 2008/09 (subject to state aid approval) the enhanced deduction for small companies to increase from 150% to 175%
    • Payable credit to remain broadly the same
    • Large company deduction increases from 125% to 130%

    Capital gains tax
    The annual exemption to be raised to £9,200

    Inheritance tax
    The threshold is to be raised from £285,000 to £350,000 in 2010/11.

    Pre-owned asset tax

  • New legislation is proposed to allow a late election for IHT treatment to apply instead of the pre-owned asset regime. This means that if you have missed making an election under the pre-owned asset rules you can apply for IHT treatment instead.

    Stamp duty land tax (SDLT)

    • Payment of SDLT will no longer be due when a land return is submitted, but on the return's due date instead. The measure will apply to transactions taking place on or after the date that the Finance Bill receives Royal Assent
    • Proposals not to link SDLT rates in certain exchanges of property between connect persons - the rate will apply to each of the properties instead
    • A general SDLT relief for disposal of surplus school land
    • Relief from SDLT for new zero carbon homes to apply from 1st October 2007.
    • Relief from SDLT for companies who under go certain reconstructions and acquisitions when overall share ownership remains unchanged. A company which purchases its own shares will no longer be regarded as a shareholder for the purposes of the overall ownership test. This would seem to apply to few transactions in practice.

    Investments

    • Change in recognition of stock exchanges and definition of "listed" for tax purposes.
    • Increasing ISAs limit to £3,600 in April 2008
    • A non-repayable tax credit to apply to foreign dividends

    Foreign property ownership

    • Changes to legislation in 2008 to ensure that individuals purchasing property overseas via a company will not suffer a benefits charge as "shadow directors".
    • Transitional rules to ensure that individuals will not be caught prior to changes

    Trusts
    Certain changes to amend trust reform measures.

    VAT

    • Changes to turnover thresholds for registration
    • Rate reductions to 5% for a variety of environmentally sustainable improvements and nicotine patches
    • Amendments following ECJ judgements

    Penalties for incorrect returns
    New provisions set for 2008 in line with the consultation proposals in "Powers, deterrents and safeguards" to penalise according to the amount of tax understated and taxpayer behaviour.

    Anti-avoidance measures
    Measures to target specific schemes that HMRC have become aware of from DOTAS reporting - capital loss and gain buying, repros, sale of lessor companies etc.

    Levies

    • Landfill tax will rise by £8 each year.
    • Aggregate levy to rise for the first time
    • Climate change levy to increase

    Employment

    • National minimum wage to increase
    • £2000 training help for training certain new employees

    Cars

  • Fuel duty increases, by increasing top bands, deferred until October
  • Road tax from £220 to £400 on gas guzzling cars
  • Extending bio-fuels incentives/"green" motoring.

    Planning taxes and reliefs

    • No announcements made in connection with the planning gain supplement
    • A new consultations on tax relief for brownfield land regeneration and remediation of waste sites

    Business property

    • Empty commercial property will no longer receive reduced business rates

    Socialising

    • Duty frozen on spirits, but raises 1p on beer, 5p on a bottle of still wine.
    • Consultation announced on gift aid
    • New fund to encourage local organisations

    Welfare

    • Increase in rate of Working and child tax credits, so that NMW will be effectively worth £7.70 p/hr
    • Increase lone parents "in-work" bonus
    • VAT reduction for older people's improvements
    • New shared equity scheme to promote home ownership
    • Child benefit - to be raised by 15% (£17.45 to £20) by 2010
    • Tax credits will wipe out tax liabilities for working couples with children and an income of up to £440 per week
    • Raising age allowances and married allowances for pensions
    • Pension credit guarantee top increase

    Insurance premium tax
    A review of the tax is announced

    Red tape removal
    A new "risk based" approach to employment tribunals to streamline the process for employers

    At a glance: December's Pre Budget Report

    Budget coverage sponsored by

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    Replies (14)

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    avatar
    By evansjez
    23rd Mar 2007 14:23

    NI and Higher Rate Tax
    If the upper earnings limit for NI is to rise by £75 per week above inflation from April 08 and the higher rate threshold for tax is to be aligned with the UEL from April 09 does this mean the higher rate threshold for tax will increase by at least £3,900 above inflation?

    Thanks (0)
    avatar
    By nigelreese
    22nd Mar 2007 08:37

    Charities hit
    Surely a reduction in basic rate of income tax will mean that charities will only be able to reclaim 20% tax instead of 22%.

    Thanks (0)
    Richard Murphy
    By Richard Murphy
    21st Mar 2007 14:48

    Reasoned reactions
    For an anlysis of what the budget means, see this:
    http://www.taxresearch.org.uk/Blog/2007/03/21/the-budget-now-ive-seen-the-figures/

    Thanks (0)
    avatar
    By abelljms
    27th Mar 2007 11:19

    gas guzzlers
    if it looks like a gas guzzler it is one - most of us can spot one when it goes by.....

    I am sure the official defn. drones on about kilos of lead or CO per km travelled.

    Thanks (0)
    avatar
    By AnonymousUser
    22nd Mar 2007 14:37

    Inheritance Tax
    Inheritance tax
    The threshold is to be raised from 3285,000 to £350,000 in 2010/11.


    Really?

    Thanks (0)
    avatar
    By AnonymousUser
    21st Mar 2007 15:08

    20%
    in 2006 2007 the rates were
    17.5% vat
    18% CIS deductions
    19% small co CT
    20% tax on interest
    22% income tax

    These are all converging towards 20% which appears to be a phsycologically correct figure.

    Q: Does this imply that the VAT will head towards 20%?

    Also 12.8% is a bit of an anomoly.

    if the calculation was that precise all those years ago why does it not change? if it was precise then it surely cannot be precise now.

    Why not round up the .8 ? is it because this Chancellor is suprestitious and belives 13% to be unlucky.

    i think we should be told.

    Thanks (0)
    avatar
    By Anonymous
    23rd Mar 2007 09:06

    HI Helen
    Thank you for pointing that out, we have all been working flat out to cover such a huge number of proposals and the odd typo creeps in from time to time when one is tired.

    Thanks (0)
    avatar
    By mykejacobs
    23rd Mar 2007 16:16

    Budget Complification - Time to take Stock
    The 10% starting rate has not been abolished, just restricted to unearned income and capital gains- no simplification there. Capital allowances completely revamped and much reduced. No simplification there either. The childless poorly paid lose if they have taxable income under £18,600; lower paid pension contributors lose as their tax credit will fall from 28.21% to 25% when the basic rate falls to 20%, although top rate taxpayers will still get a 40% tax relief; charities benefiting from Gift Aid will lose a £3.21 credit per hundred pounds of donations as well for the same reason. Small companies lose through a 3% increase in Corporation Tax over 3 years. 190 pages of Budget Notes from the Revenue (sorry HMRC) confirms that all this jiggery pokery will lead to a huge Finance Bill although the nominal tax take will be no different, and you should take account of the extra £2.5 Billion raised in the PBR. Together with an extra £8 Billion of borrowing and a staggering sale of £36 billion of the family silver, this is a bad budget which will complicate the tax code even further and demonstrates that Gordon has completely lost control of the economy. His crowning glory will be increasing NICs for the higher paid by expanding the taxable (sorry NICable) band to £43,000. A sorry tale and not a recommendation for promotion. Beta double minus!

    Thanks (0)
    avatar
    By AnonymousUser
    23rd Mar 2007 10:54

    It's worse than that Gordon.
    include the 12.8% Er's NI, and it's
    (31+12.8)/112.8 = 38.8%
    and
    (41+12.8)/112.8 = 47.7%

    And if you spend any of it on stuff other than food etc, you lose 17.5/117.5 of what's left.

    So from £1.128 you'd get actual value of 50p. as a higher rate tax payer. Effective tax rate = 55.7%

    (I can't count as a rule, so feel free to correct me)

    Outrageous. Bring back the sleazy Tories to cut taxes. Fire anyone in the Public sector earning more than £50k. And seize all the assets of MPs for the duration they're in power, plus 5 years, and house them in monasteries / nunneries....and make them wear sackcloth.

    Thanks (0)
    avatar
    By Donert
    22nd Mar 2007 16:44

    10% starting rate
    Whilst the starting rate will be abolished generally it appears that it will still apply to investment income and capital gains. Is that right?

    Thanks (0)
    avatar
    By gkynaston
    22nd Mar 2007 17:59

    So NI is just another name for income tax
    Does the alignment of the income tax and NI thresholds mean that the government is finally admitting the obvious reality that employees NI is just another name for income tax, with overall rates of 31% and 41%.

    Thanks (0)
    avatar
    By AnonymousUser
    25th Mar 2007 10:52

    National Insurance Tax
    A couple of years ago Mr Brown said in his speech that, in order to fund the increased spending in the NHS, he would increase the "National Insurance tax". I'm not sure if that hit the published speech, I can't remember, but I do remember him saying that whilst I was watching him on the TV.

    However, it is not a tax, never has been a tax and never will be a tax. If it was a tax or ever had been a tax, tax rates would have increased and, since tax rates have not increased, it can't be a tax. Is that clear?

    Thanks (0)
    avatar
    By Richardrussell
    26th Mar 2007 13:35

    Marginal Rates

    I've read so much stuff on the budget over the last couple of days, I forget where I saw it, but it was pointed out that the marginal tax rate for someone on tax credits was actually 72%:

    - income tax 22%
    - national insurance 11%
    - tax credit clawback 39%

    Is that right? If so, it highlights what a bad idea tax credits are as they disincentivise.

    BTW, loved the Rory Bremner sketch on the budget that is advertised on this site, courtesy of the Telegraph, it is excellent and absolutely spot on.

    Thanks (0)
    avatar
    By abelljms
    26th Mar 2007 17:03

    budgie 2007
    i can't believe how seriously so many posh commentators are taking Gordon's latest..

    how about an assessment or comments on what he said purely about 2007/08, as that is what we can be confident is going to happen?
    seems to me that 2008 may never happen? and if it does let's chat about it in march 2008 when it is worth thinking about it.......

    anyway I'll get in to trouble now.......
    http://www.chartered.org/bud2007/bud07%20spring1.htm


    Thanks (0)