UK: Pre-Budget Report - 2 December 2004 - Summary Of The Main Taxation Provisions

Last Updated: 19 January 2005
Article by Kelly Noel-Smith and Elliot Goodman

Originally published December 2004

This year’s Pre-Budget Report was widely viewed as the last before a general election next May. Gordon Brown sprinkled his announcements with several sweeteners for particular groups, including increased lump sum payments for older pensioners, a minor improvement for ISAs and a substantial rise in the upper limit of working tax credit childcare payments.

The Pre-Budget Report includes a further raft of measures against tax avoidance, taking advantage of the new rules in the Finance Act 2004 that require the disclosure of schemes.

Tax Allowances and National Insurance Contributions (NIC)

The basic personal allowance and starting point for national insurance contributions will rise in 2005/06 to £4,895. The rates of employers’, employees’ and class 4 NICs will stay unchanged. The flat rate of NIC for the self-employed will rise to £2.10 a week for 2005/06. A full list of the 2005/06 income tax allowances and NIC rates and thresholds is set out at the end of this summary.

Child Tax Credit

The child element of child tax credit will increase to £1,690 in 2005/06. However, the family element of child tax credit and baby addition will remain unchanged at £545 for a second year. For those claimants not entitled to working tax credit, the first income threshold (at which child tax credits other than the baby and family element start to be withdrawn) will rise to £13,910. The second threshold (at which the baby and family elements start to be withdrawn) is again unchanged at £50,000.

Working Tax Credit

The childcare element of working tax credit will rise in 2005/06 to 70% of costs up to £175 a week for a single child (ie a payment of up to £122.50 a week) and £300 a week for two or more children (ie a payment of up to £210 a week). The proportion of childcare costs covered will increase to 80% from April 2006.

The other elements of working tax credit and the first income threshold for the credit will rise in line with inflation.

Civil Partnership Act 2004

The Pre-Budget Report confirms that same sex partners with a civil partnership agreement will be treated as married couples for tax purposes. The necessary legislation will be included in the ‘first available Finance Bill’.

Individual Savings Accounts (ISAs)

The government will consult about extending to 2009 the current £7,000 maximum investment limit, with the cash ISA limit remaining at £3,000.

Child Trust Fund

The government is to consult on whether £250 is the right amount for the second payment to child trust funds when children reach the age of seven. A payment of £500 is proposed for lower income families.

Property Investment Funds (PIFs)

The government has said that it will not introduce any legislation on PIFs in 2005. A further discussion document will be issued by the time of the 2005 Budget.

Collective Investment Funds

The government has confirmed that it intends to bring forward a ‘modernising package’ for collective investment funds such as unit trusts and OEICs. This would include changes designed to target ‘private unit trusts’, where a single investor holds at least 10% of a fund.

Corporation Tax

An Inland Revenue Technical Note on Corporation Tax Reform, including draft legislation, has been issued for consultation. Its topics include:

  • The schedular system The reform would create a new source of income for all of a company’s ‘operating business’ with one set of computational and loss relief rules.
  • Taxation of capital assets In the last Budget, it was announced that capital allowances would not be replaced by commercial depreciation relief. The Note therefore looks at ways of developing the existing capital allowances system, including modernising the treatment of cars.
  • Leasing The proposed reform will revise the treatment of leased plant and machinery, ‘to ensure that the choice between different forms of finance is driven by commercial rather than tax considerations’.

International Accounting Standards (IAS)

The steady alignment of taxation and accounting standards is already affecting business taxation, and the adoption of IAS from 1 January 2005 is likely to have a major impact. However, the government wants to defer the tax effect of most of the transitional adjustments until the impact is clearer.

Small Business Taxation

The Treasury has published a discussion paper, ‘Small companies, the self-employed and the tax system’. The paper, which was widely expected, briefly describes the existing tax system for small businesses, but contains no proposals for reform. Instead, it invites comments on a variety of areas including targeting incentives, segmenting owner-managers from other company owners for tax purposes and how trade-offs between the tax treatments of different business structures can be managed.

In a separate announcement, the Chairman of Inland Revenue and Customs revealed the establishment of a new small business unit. This will have the long term aim of creating a single return for small businesses as well as an integrated audit system for direct and indirect taxes.

Small Firms Loan Guarantee (SFLG)

The government has accepted the proposals in the Graham Review into the SFLG scheme, which included an increase in the lending and turnover limits.

Business Angels

Sophisticated and high net worth individuals who invest in small and growing firms (‘business angels’) will be able to certify themselves as exempt from the Financial Services Authority’s rules that restrict the ability of businesses to promote investment opportunities.

University Spin-Offs

A recent change in the tax treatment of share options has prompted a sharp drop in the numbers of university spin-off companies. Legislation is to be introduced which will effectively restore the previous situation under which gains from spin-off share options were subject to capital gains tax rules, not the income tax regime.

Maternity Pay

The period of paid maternity leave will be increased from six to nine months from April 2007, with a long term goal of increasing the term to twelve months and giving the mother the right to transfer a proportion of her paid maternity leave to the father.


The Finance Act 2004 introduced the legislative framework for the simplified pensions regime, due to start from 6 April 2006. As a result of representations, there will be ‘a package of supplementary measures’ and ‘further modifications’ introduced in the Finance Bill 2005.

The earnings cap for 2005/06 will be £105,600. For interim regime (1987-1989) occupational scheme members, the remuneration cap that is used in tax-free cash calculations will increase from £100,000 to £105,600 in 2005/06.

Company Car Taxation

From 6 April 2006, the 3% scale loading will apply to all diesel cars registered on or after 1 January 2006. Diesel cars that meet the Euro IV emission standards and were registered before 1 January 2006 will be exempt from the 3% loading.

The government also intends to align the VAT fuel scales with the company car fuel benefit scales, subject to European Commission approval.

Anti-Avoidance: Employee Remuneration

Legislation will be introduced to counter income tax and NIC avoidance schemes in which earnings are paid in the form of shares and other securities. The measures will be effective from 2 December 2004.

The Paymaster General has also issued a statement giving notice that future schemes ‘…designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs…’ will be closed down with effect from 2 December 2004 ‘where necessary’.

These measures are expected to increase government revenue by £500m in 2005/06.

Other Anti-Avoidance Measures

A number of other anti-avoidance measures were announced, many of which were the result of the disclosure of tax avoidance schemes rules introduced in the summer. The areas affected include corporation tax avoidance schemes using stripped corporate bonds, manipulation of the Controlled Foreign Company rules, the exploitation of Double Tax Relief and capital gains tax avoidance through the uncommercial use of options.

Film scheme and partnership tax avoidance has been addressed again, with a range of measures, including one to prevent accelerated tax relief being claimed twice for the same film (‘double dipping’).

Income tax – personal and age-related allowances 2005/06





Personal allowance (age under 65)


Personal allowance (age 65-74)


Personal allowance (age 75 and over)


Married couple’s allowance* (aged less than 75 and born before 6 April 1935)


Married couple’s allowance* (age 75 and over)


Married couple’s allowance* – minimum amount


Age allowances income limit


* Married couple’s allowance given at the rate of 10%, and only available where at least one spouse was born before 6 April 1935.

National insurance contributions



Lower earnings limit, primary class 1

£82 a week

Upper earnings limit, primary class 1

£630 a week

Primary threshold

£94 a week

Secondary threshold

£94 a week

Employees’ primary class 1 rate

11% of £94.01 to £630 a week

1% above £630 a week

Employees’ contracted-out rebate


Married women’s reduced rate


Employers’ secondary class 1 rate

12.8% on earnings above £94 a week

Employers’ contracted-out rebate, salary-related schemes


Employers’ contracted-out rebate, money-purchase schemes


Class 2 rate

£2.10 a week

Class 2 small earnings exception

£4,345 a year

Special class 2 rate for share fishermen

£2.75 a week

Special class 2 rate for volunteer development workers

£4.10 a week

Class 3 rate

£7.35 a week

Class 4 rate

8% of £4,895 to £32,760 a year

1% above £32,760 a year

Class 4 lower profits limit

£4,895 a year

Class 4 upper profits limit

£32,760 a year


© RadcliffesLeBrasseur

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.