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.
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.
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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other than the baby and family element start to be withdrawn) will rise to £13,910.
The second threshold (at which the baby and family elements start to be withdrawn)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.
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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.
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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’.
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The government will consult about extending to 2009 the current £7,000
maximum investment limit, with the cash ISA limit remaining at £3,000.
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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.
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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.
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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.
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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’.
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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.
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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.
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The government has accepted the proposals in the Graham Review into the SFLG
scheme, which included an increase in the lending and turnover limits.
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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.
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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.
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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.
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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.
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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.
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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.
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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’).
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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.
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| 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 |
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