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tax credit, the first income threshold (at which child tax credits other than the baby and family element start to be withdrawn) will rise to £13,910. The second threshold (at which the baby and family elements start to be withdrawn) is again unchanged at £50,000.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.

Pensions

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

 

2005/06

 

£

Personal allowance (age under 65)

4,895

Personal allowance (age 65-74)

7,090

Personal allowance (age 75 and over)

7,220

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

5,905

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

5,975

Married couple’s allowance* – minimum amount

2,280

Age allowances income limit

19,500

* 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

 

2005/06

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

1.6%

Married women’s reduced rate

4.85%

Employers’ secondary class 1 rate

12.8% on earnings above £94 a week

Employers’ contracted-out rebate, salary-related schemes

3.5%

Employers’ contracted-out rebate, money-purchase schemes

1.0%

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

Links

http://www.hm-treasury.gov.uk/pre_budget_report/prebud_pbr04/prebud_pbr04_index.cfm

http://www.inlandrevenue.gov.uk/news/index.htm

© 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.

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