This Budget was delivered against a background of the Government's recent admission that taxes had increased since Labour took office, and predictions that Gordon Brown would make his changes with an eye to the next election.
The most striking part of the speech dealt with public spending a huge increase in NHS funding over the next four years, among other promises. Even so, there were plenty of changes to taxation, some mentioned in the speech, and some only described in the pack of press releases, which are published when the Chancellor sits down.
This booklet sets out the major proposals from the speech and the press releases, together with some of the changes to come on 5 April 2000, which have already been announced.
Contents
Personal Income Tax
Pensioners
Employees
Savings
Capital Gains Tax
Stamp Duty
Inheritance Tax
Business Tax
Corporation Tax
Value Added Tax
Other Measures
Tax Tables
Significant points
· Income tax rates and allowances only increased by inflation
· Increase in CGT taper relief for business assets
· Big increase in tax on free fuel for use in company cars
· No significant change to IHT
· 100% first year allowances on computers for small businesses
· Increase in stamp duty on properties over £250,000
· New employee share schemes introduced
Personal Income Tax
Tax rates and allowances (Table A)
The following changes apply from 6 April 2000:
· basic rate cut from 23% to 22%;
· personal allowances and the thresholds for basic rate and higher rate increased slightly.
The benefit of these two changes combined is in the region of £360 for a higher rate taxpayer. However, this is offset by the following changes, which were announced last year:
· married couple's allowance abolished (cost of £197 per couple);
· MIRAS abolished (cost of £240 on an 8% loan of £30,000 or more).
The overall effect is complicated by the different rates which now apply to dividends, interest and other income, but the impact on a married couple with a mortgage and one significant earner is a tax increase overall of about £80 for the year. If both partners have significant income, there is a tax cut of some £285.
Future changes
The children's tax credit, which will be introduced in 2001/02 to replace the married couple's allowance, will be increased from the originally announced £416 to a maximum of £442 where neither partner is a higher rate taxpayer.
Pensioners
The Chancellor announced a number of measures to benefit pensioners:
· an increase in the winter allowance paid to all pensioners from £100 to £150;
· inflation based increases in the age-related personal allowances;
· an increase in the "minimum income guarantee", which is set at £82 pw for single pensioners and £127 pw for couples (more for those over 80);
· retention of the married couple's allowance for those over 65 on 6 April 2000;
· exemption from the television licence fee from I November 2000 (and refunds for those with unexpired licences) for those over 75:
· a review of the rules which restrict income support on account of savings;
· retention of tax relief (at a fixed 23%) on loans taken out before 10 March 1999 to buy a "home income plan".
The Chancellor gave figures for the overall effect on "the average pensioner household" but it is hard to tell what that is. There is little doubt that this package will significantly benefit pensioners, particularly those on lower incomes.
Employees
Company cars (Table C)
The car benefit rates and rules remain the same as for 1999/2000. However, more details have been given of the new system which will apply from 6 April 2002. The rules appear particularly complicated, but the overall idea is:
· to raise no more tax overall;
· to base the tax charge on the car's emissions of carbon dioxide.
It is therefore likely that the tax on smaller, more efficient company cars will go down, and that on "gas guzzlers" will increase. This could be significant for anyone changing their company car in the next few years.
The fixed charges on the provision of free or subsidised fuel for private motoring have been increased by over 40%, making it extremely unlikely that this is a worthwhile benefit. Unless an employee drives a very large number of private miles, it would be much cheaper to buy the petrol than to pay the tax on the free petrol.
Employee share schemes
A new "all employee share scheme" will be available to company employers from 6 April 2000, to give tax-efficient incentives to their employees.
The existing "tax-approved" employee share option schemes will be retained into the future, but "approved profit sharing schemes" will have to transfer to the new regime (or lose their tax advantages) by April 2002.
Enterprise Management Incentives
A new scheme will allow small companies to grant options worth up to £100,000 each to up to 15 key employees. They will only be taxed once the shares are sold, when CGT will be due rather than income tax, and taper relief (from the time the options were granted) will reduce the charge.
Class IA National Insurance Contributions
As announced last year, employer's NIC at 12.2% will apply to most benefits in kind from 6 April 2000. This will greatly reduce the tax efficiency of such benefits, which should be reviewed as a matter of urgency if this has not already been done.
Savings
Pension contributions (Table B)
The "earnings cap" for personal pension contributions and occupational scheme benefits is set at £91,800 for 2000/01 (1999/2000: £90,600). The maximum contributions for different ages are set out in the table.
There will be very significant changes to relief for personal pension contributions from 6 April 2001, including abolition of the "carry forward of unused relief " and restriction of the "carry back" of pension premiums to an earlier year. However, the maximum contribution for a year will be set according to the highest level of earnings in the previous five years, and it will be possible to obtain tax relief on some pension contributions without having "relevant earnings". Anyone who is contributing to a personal pension scheme, or who is thinking of starting one, should review the situation in good time.
Individual Savings Accounts
ISAs were introduced from 6 April 1999, with an investment limit of £7,000 for 1999/2000 and f£5,000 thereafter. The £7,000 limit has now been extended to 2000/01 as well.
Enterprise Investment Scheme/Venture Capital Trusts
A number of tax reliefs are available for subscriber shares in certain unquoted ("EIS") companies and quoted Venture Capital Trusts.
Several changes are to be made to make it easier to qualify for the reliefs. Most notable is the reduction in the period for which the shares have to be held to make the reliefs permanent - down from 5 years to 3 years for shares issued after 5 April 2000.
Capital Gains Tax
Annual exemption and tax rates
The annual exemption for individuals has been increased for 2000/01 to £7,200 (1999/2000: (£7, 1 00). The annual exemption for most trusts rises to £3,600 (1999/2000: £3,550).
The rate of CGT is found by adding taxable gains to taxable income and charging at the "marginal rate for interest income" (10%,20%, or 40%). In 1999/2000, the 10% rate did not apply to capital gains.
Taper relief
Business assets owned for over one year qualify for taper relief, which reduces the taxable gain and the effective rate of tax. For disposals after 5 April 2000, the taper relief on business assets is increased to:
· owned over 1 year: 12.5% (was 7.5%) - effective CGT rate 35%
· owned over 2 years: 25% (was 15% - effective CGT rate 30%
· owned over 3 years: 50% (was 22.5%) - effective CGT rate 20%
· owned over 4 years: 75% (was 30%) - effective CGT rate 10%
The maximum relief of 75% was originally only to be attained after 10 years. Only periods of ownership from 6 April 1998 will count (no "extra year" for ownership on 1 7 March 1 998).
Non-business asset taper relief remains at 5% for each year of ownership over 3 years, counting an extra year for an asset owned on 17 March 1998.
The definition of a "business asset" is extended from 6 April 2000 to include:
· all holdings of over 5% of any trading company;
· all holdings of trading company shares held by employees;
· all holdings of unquoted trading company shares.
Employee trusts
To help establish the new employee share schemes, shareholders will be able to "roll over" gains into other investments where they sell their shares to one of the new employee scheme trusts.
Anti-avoidance measures
Several tax avoidance schemes involving the use of trusts have been closed down with effect from Budget Day.
Stamp Duty
Rates
For contracts completed from 28 March 2000, the rates of stamp duty on most property other than shares will be:
Consideration
£0 - £60,000 nil (unchanged)
£60,001 - £250,000 1 % (unchanged)
£250,001 - £500,000 3% (from 2.5%)
£500,001 and over 4% (from 3.5%)
The old rates will apply to a contract which was made on or before 21 March 2000.
The 0.5% rate on shares is unchanged.
Intellectual property
Transfers of intellectual property such as patents, trade marks, registered designs, copyrights and licences in respect of them, are exempted from stamp duty from 28 March 2000.
Anti-avoidance measures
A number of specific schemes, which have been invented or used to reduce or avoid stamp duty, are closed down: some with effect from 28 March, and some from Royal Assent to the Finance Bill (usually near the end of July).
Inheritance Tax
Threshold
The threshold at which IHT becomes payable is increased to £234,000 from 6 April 2000 (1999/2000: £231,000). At this level, it is expected that 23,500 estates - about 4% of all deaths - will pay the tax.
Business Tax
Capital allowances
First year allowances for plant and machinery purchased by small or medium sized businesses have been available at 40% as a temporary measure which was due to end on 1 July 2000. These first year allowances are now made "permanent".
100% FYAs continue to be available where plant is purchased by small or medium-sized businesses for use in Northern Ireland up to 11 May 2002.
100% FYAs will also be available for any small business which invests in computers, software and internet enabled mobile phones in the three years commencing on 1 April 2000.
Pay As You Earn
Employers who pay up to £1,500 on average per month in PAYE and NIC will be able to pay once a quarter rather than each month, providing a cash flow benefit (1999/2000: £1,000 a month).
Filing discounts
Employers who file their end of year PAYE returns for 2000/01 over the internet, and pay their tax electronically, will receive a discount of £50. This will be increased to £100 for any employer who pays Working Families or Disabled Person's Tax Credit to employees.
Sub-contractors
The rate of tax deduction under the Construction Industry Scheme falls from 23% to 18% from 6 April 2000. There are a number of other changes to the procedures for applying for sub-contractors' certificates.
Personal service companies
The so-called "IR35" rules for workers who provide their services through intermediaries (usually called "Personal Service Companies") were not mentioned in the Budget, so they will presumably be implemented as planned from 6 April 2000. This will impose a PAYE and NIC charge on many people who have previously been able to avoid these taxes.
Research and development
A complex new system of tax credits is introduced from 1 April 2000 for spending on research and development by small and medium sized businesses. £100 of qualifying expenditure will enjoy a £150 tax deduction, so subsidising the expenditure. Businesses that are not yet in profit will be able to obtain a payment from the Inland Revenue in respect of this expenditure.
Corporation Tax
Tax rates
As announced last year, a new "starting rate" of 10% will apply to companies with profits up to £10,000 from 1 April 2000.
For companies with profits from £10,000 to £50,000, an effective marginal tax rate of 22.5% will apply, so a profit of £50,000 is taxed at 20%. On profits above £50,000, the rates remain the same as for the year to 31 March 2000 - 20% up to £300,000, then an effective rate of 32.5% to £1.5m. The main rate of 30% applies where total profits exceed £1.5m.
Groups of companies
Following an important ruling in the European Court of justice, the rules on tax reliefs for groups of companies have been radically revised to remove discrimination against those groups which include foreign companies.
From 1 April 2000, UK companies can be part of a "loss relief" group even if other group companies are foreign, and UK branches of foreign companies will be able to claim or surrender losses from or to other UK group companies. Foreign companies, whose profits are not chargeable to UK corporation tax, will not be able to claim or surrender losses under these rules.
The rules which allow group companies to transfer capital assets without triggering a charge to tax are also extended to include the UK branches of foreign companies within the group, as long as the assets remain within the charge to UK tax (ie are used for the purposes of the UK branch's trade).
Company gains
Companies which sell "substantial shareholdings" of over 30% in another company may soon be able to defer the capital gain in the same way as for sales of other significant assets such as buildings and fixed plant. A consultation has been announced on the possibility of extending "rollover relief" to include this situation.
Corporate venturing scheme (CVS)
A new relief is introduced for companies investing in other companies from 1 April 2000. The rules are complex, and it is not clear how many companies will want or be able to qualify. The reliefs are similar to the EIS scheme for individual investors:
· 20% corporation tax rebate on the amount subscribed;
· rebate becomes permanent if shares held for 3 years;
· gains on CVS investments can be deferred if new CVS shares are purchased (compared with an exemption of gains after 3 years under EIS).
Value Added Tax
Registration thresholds
From 1 April 2000, the level of taxable turnover at which a business is required to register for VAT increases by £1,000 to £52,000 p.a. The level of predicted future turnover at which it can deregister also rises by £ 1,000 to £50,000 p.a.
Filing discount
From April 2001, businesses that file their VAT returns over the internet and pay their tax electronically will be entitled to a rebate of £50.
Reduction for energy-efficient materials
The rate of VAT on energy saving home improvements has been 5% where the work has qualified for a Government grant. This lower rate is now extended to a wider range of energy-efficient measures, and also security improvement for pensioners. It will only apply where the householder pays for the work to be done goods sold for DIY will still carry VAT at 1 7.5%. The new rate applies from 1 April 2000.
Other Measures
Filing discounts
Individuals filing their tax returns over the internet have been promised a tax rebate of £10 from April 2000, although many question whether this will be worth the effort of learning how to do it.
Charitable giving
A number of major changes to the tax treatment of charities and charitable giving were announced in advance of the Budget. One of the most striking is the abolition of the minimum level for tax relief on single donations (£250 up to 5 April 2000). This means that any taxpayer can obtain tax relief on any donation, and charities will be able to recover significant extra amounts from the Inland Revenue.
The payroll giving scheme ("Give As You Earn") has also been improved, with the abolition of the £1,200 upper limit and an extra "top up" donation by the Government where an employee supports a charity in this way. This 10% supplement will run for 3 years.
The "hidden economy"
The Chancellor announced that a "helpline" will be available for those who have not been paying the right tax. From May 2000, they will be able to obtain confidential advice on how to bring themselves within the tax system. If they do not, penalties for non-compliance will be increased. Few details of the carrot, or the stick, have so far been given.
Abolition of withholding tax on investment bond payments
With effect from April 2001, interest on international bonds will be paid without deduction of withholding tax. Various steps are also being taken to encourage the exchange of taxpayer information with other countries, with a view to discouraging tax evasion and avoidance.
The abolition of withholding tax will be hugely important to the City of London in retaining its competitive edge in the area of international bond issues.
Income Tax Rates and Allowances
Table A - Allowances and Reliefs
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Table B - Personal Pensions: earnings cap £91,800 (1999/2000 - £90,600)
|
|||||||||||||||||||||||||||||||||||||||||||||
Table C - Benefits in kind
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
National Insurance Contributions
Table D - Rates and limits for 2000/01
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||