We can help
reduce tax liabilities and plan for a
tax efficient future

Pre Budget Report

14th December 2009

All in all the Pre-Budget report announced on Wednesday appears to have been fairly neutral.

As expected there were few significant changes in the 2009 Pre Budget Report and it looks as though they won't make the major tax increases until after the next general election. We've summarised some of the main changes announced to give you a brief overview:

End of 15% VAT rate

The VAT rate will go back up to 17.5% as from 1 January 2010. Therefore any invoices raised from this date onwards will need to include the higher VAT percentage.

Corporation Tax

To soften the blow to small companies, the Chancellor announced he would postpone a planned rise in the corporation tax rate to 22% until April 2011, This higher rate was due to come into effect from April next year, but the SCR will stay at 21% to "provide further support" to 850,000 small businesses, Mr Darling said.

The 28% main rate of corporation tax is untouched and therefore the marginal rate for profits between £300K and £1.5M will remain at 29.75%.

Note that there were no changes to the rate of capital gains tax.

NIC rates to increase

As well as the 0.5% increase they announced in the 2008 Pre Budget Report, they've proposed a further increase of 0.5% from April 2011. From 2011/2012, this increases the main rate of Class 1 and 4 NICs by a further 0.5 per cent to 12 per cent and 9 per cent respectively. This also means that all employees earning over £43,875 face an uncapped 2% NIC charge on all their earnings over this level.

In this sense, the pre-Budget report is kinder to limited company contractors than umbrella company contractors, as the additional half a per cent rise in National Insurance will have an impact on umbrella workers, who already pay a fair amount of NI, however Limited Company directors will be largely unaffected as most income is taken by way of dividend.

Income tax rates and thresholds to stay the same for 2010/2011

The rates of income tax (20%, 40%) will remain the same as will the personal allowances (ie basic personal allowance will still be £6,475). The new 50% income tax rate will still apply on earnings above £150,000. The new dividend tax rate of 42.5% will also still apply on dividends above £150,000.

Bank payroll tax

With effect from 9/12/09, where bank or building society employees are awarded discretionary bonuses of greater than £25,000 before 5 April 2010 employers will have to pay an additional 50% tax on the excess above this threshold. This will not be a deductible expense in calculating the company's taxable profits.

Reducing tax relief on pensions if earning over £130,000

The Government will keep to its plan of reducing the pensions tax relief for high earners.
Alistair Darling, said in his Pre Budget Report speech: "I announced in the Budget that we would reduce pension tax relief for people with incomes over £150,000.I want to do this as fairly as possible and treat individuals the same regardless of whether they receive their pay as current salary or as a future pension benefit, and prevent tax avoidance. So I have decided to include employer pension contributions in the definition of income for this tax measure. No one with an income below £130,000 will be affected."

This will affect some high earners that used salary sacrifice schemes to reduce their earnings to below the £150,000 threshold by having employers make a large pension contribution in lieu of salary.

The Chancellor also added the state pension would rise by 1.5% in 2011.

Changes to workplace pension reform

The Chancellor announced changes to the plans for workplace pension reforms.

Instead of reaching the 3% level of employer contributions in October 2016, this has been delayed by one year to October 2017. The 1% employer contribution will therefore now continue until October 2016, and the 2% employer contribution will apply from October 2016 to October 2017, with 3% applying thereafter. Automatic enrolment will still start as planned in October 2012.

IHT nil rate band to be frozen

The inheritance tax threshold, for individuals, will be frozen at £325,000 (£650,000 for married couples / civil partners) for the tax year 2010/2011. This overrides the original planned increase to £350,000 announced in Budget 2006. This may provide a need to review your inheritance planning.

Clarification of the furnished holiday rules

Furnished holiday lettings will be taxed as standard rental properties as from April 2010 as previously announced. The report did clarify some of the previously unexplained issues eg any losses will be carried forward against rental profits and capital allowances can be claimed on pre 2010 expenditure.

Conclusion

Overall, the report was not too negative for freelancers as it did not feature any new clampdown on employment status, 'income shifting' or umbrella companies operations.

Back