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Budget Comment March 2004

Gordon Brown has been waging war on contrived tax advice for some time now. He has:

  • introduced a ‘Benefit in Kind’ Income Tax charge where a donor retains a benefit in a gifted asset.
  • legislated against certain Film Partnership transactions
  • announced that tax avoidance scheme details will have to be provided to the HM Revenue & Customs
  • stopped rollover of gains on property into Trust

Now he has started on relatively standard tax advice. He has:

  • prevented owners of companies with a low profit from paying dividends and paying no tax
  • announced that distorted ‘spouse’ dividends will come under greater scrutiny
  • increased the rate of tax paid by Trusts (34% to 40%)
  • beefed up the funding to the HM Revenue & Customs compliance departments

It all means that we need to tighten up the records kept of transactions as they happen – not some time afterwards. As we mentioned last year, this particularly relates to dividends.

The Budget was relatively quiet in all areas other than small business. The two main changes come in the treatment of Dividends and Capital Allowance.

Dividend

Where a company makes distributions to shareholders who are individuals, a minimum rate of Corporation Tax of 19% must be applied to that distributable income. This is not such a big deal – remember most companies will have already paid this amount of Corporation Tax whether they make a distribution or not.

The new rate will apply to distributions made after 1 April 2004. No further details exist as to how this will operate in practice, for example how profits will be matched for the purposes of computing the charge. It seems that the basic idea is to deny the 0% rate band to those who wish to enjoy their profits by way of dividend. We will have to wait for the Finance Bill for the full details.

What we do know is that companies with profit over £50,000 are unaffected. This new measure is not as penal as many commentators were predicting and it does not alter the conclusion that in most cases carrying out a business through a limited company is still tax efficient.

Capital Allowances

First Year Allowances have been increased from 40% to 50% for expenditure incurred after 1 April 2004 for companies or 6 April 2004 for other businesses. At the same time the 100% First Year Allowance for computer equipment will be withdrawn.

The other main area of change relates to Pensions

Pensions

There are currently eight different tax regimes governing pensions, each with its own complex rules limiting the amount an individual can contribute to a pension scheme and the consequent benefits a scheme can pay out.

Under simplification all these controls will be removed. In their place will be a single set of rules that will apply to all registered pension schemes. Benefits that schemes pay out will be decided by scheme design and not by Revenue regulations.

The new rules will only affect individuals with substantial pension entitlement where their fund is worth over £1.5 million and will apply from 6 April 2006. Transitional arrangements will protect pension rights built up before that date.

The chart of new Rates and Allowances is, as always, set out below.

Rates and Allowances for 2004 and 2005

Rates and allowances for income tax, corporation tax, capital gains tax, inheritance tax and the pension schemes earnings cap are set out below.

2003-04 (£)

2004-05 (£)

Increase (£)

Income tax allowances
Personal allowance
Personal allowance for people aged 65-74
Personal allowance for people aged 75 and over

4,615
6,610
6,720

4,745
6,830
6,950

130
220
230

Income limit for age-related allowances

18,300

18,900

600

Married couple’s allowance for people born before 6 April 1935
Married couple’s allowance –aged 75 or more
Minimum amount of married couple’s allowance
Blind person's allowance

5,565

5,635

2,150

1,510

5,725

5,795

2,210

1,560

160

160

60

50

Capital gains tax annual exempt amount:
Individuals etc
Other trustees

 

7,900
3,950

 

8,200
4,100

 

300
150

Inheritance tax threshold

255,000

263,000

8,000

Pension schemes earnings cap

99,000

102,000

3,000


Taxable bands 2003-04 (£)

Taxable bands 2004-05 (£)

Starting rate 10%

0 – 1,960

Starting rate 10%

0 – 2,020

Basic rate 22%

1,961 – 30,500

Basic rate 22%

2,020 – 31,400

Higher rate 40%

Over 30,500

Higher rate 40%

Over 31,400


Corporation tax profits 2004-05 (£)

 
Starting rate Zero %

0 – 10,000

Marginal relief

10,001 – 50,000

Small companies’ rate 19%

50,001 – 300,000

Marginal relief

300,001 – 1,500,000

Main rate 30%

1,500,001or more

The main rate of corporation tax for 2004-05 will be 30 per cent.
National Insurance changes from 6 April 2003

2003/2004

2004/2005

 Class 1 Employees
On first

£89 pw

Nil

£91 pw Nil
Between

£89 - £595 pw

11%

£91 - £610 pw 11%
Over

£595 pw

1%

£610 pw 1%
Employee's contracted-out rate 1.6%   1.6%
Married womans
reduced rate
4.85% of £89.01 to £595 pw, 1% above £595 4.85% of £91.01 to £610 pw, 1% above £610
 Class 1 Employers
On first

£89 pw

Nil

£91 pw Nil
Over

£89 pw

12.8%

£91 pw 12.8%
Employers' contracted-out rebate, salary related schemes 3.5%   3.5%
Employers' contracted-out rebate, money purchase schemes 1%   1%
Class 2 Self employed
Flat rate £2 pw   £2.05 pw
Small earnings exception 4,095 pa   4,215 pa
Special Class 2 rate for share fisherman £2.65 pw   £2.70 pw
Special Class 2 rate for volunteer development workers £3.85 pw   £3.95 pw
Class 3 Voluntary
 Flat rate £6.95 pw £7.15 pw
 Class 4 Self employed
On profits between £4,615 - £30,940 pa 8% £4,745 - £31,720 pa 8%
  above £30,940 1% above £31,720 1%
Stamp Taxes

Transfers of property (consideration paid)

Rate
All land in the UK
Land in disadvantaged areas
  Residential Non-residential Residential Non-residential
Zero £0-60,000 £0-150,000 £0-150,000 All
1% Over £60,000 – 250,000 Over £150,000 – 250,000 Over £150,000 – 250,000  N/A
3% Over £250,000 – 500,000 Over £250,000 – 500,000 Over £250,000 – 500,000  N/A
4% Over £500,000 Over £500,000 Over £500,000  N/A
New leases (lease duty)

Duty on the premium is the same as for transfers of land (except that special rules apply for premium where rent exceeds £600 annually). Duty on the rent is charged on the Net Present Value (NPV). The rates indicated apply to the amount of NPV in the slice, not to the whole value.

Rate
Net Present Value of Rent Rate
  Residential Non-residential
 
Slice of NPV
Zero £0 - £60,000 £0 - £150,000
1% Over £60,000 Over £150,000

The rate of stamp duty / stamp duty reserve tax on the transfer of shares and securities is unchanged at 0.5% for 2004-05.