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The Pre-Budget Report 2005 “R ea d My Li ps: No New Ta xes” G eorge Bus h 1988 T his is a s ummary of the announcements of the C hanc ellor in his 9 th pre -budget delivered on 5 D ecember 2005 . T he information in the s ummary reflects our unders tanding of the C hancellor's propos als . N o ac tion s hould be taken without obtaining appropriate profess ional advic e. TA X A VOIDA NCE Tax avoidance was a central iss ue. Mos t of this was aga inst partic ularly aggressive schemes and s pecific action is being taken to c ounter many of the sc hemes reported to HMRC . T here will be c hanges to the 2004 disclos ure regime for tax avoidance whic h are aimed at helping HMRC to detec t and res pond to tax avoidance quickly. T his regime will be extended to all inc ome tax, c orporation tax and c apital gains tax. Various measures were announced to c ounter tax avoidance through c ompanies c reating artificial capital losses , stock lending, relief for c orporate intangible ass ets and c apital losses on dis posals of rights c onferred by certain insurance polic ies . Meas ures will als o counter inherita nc e tax avoidance by the use of sec ond- hand interests in foreign trusts , as well as the avoidanc e of tax on pre -owned assets . HMRC has s aid that it will monitor schemes for avoiding inc ome tax and national ins uranc e contributions on remuneration, es pec ially during the bonus - paying season. A ny ens uing legis lation may be backdated to 2 D ecember 2004 . PERSO NA L TA X Basi c A llowa nces T he basic personal allowanc e and starting point for national ins urance c ontributions will rise in 2006 /07 to £5 ,035 . T he rate s of employers ’, employees ’ and class 4 NICs will s tay unc hanged. T he flat rate of NIC for the self-employed will remain at £2 .10 a week for 2006 /07 . T he 2006 /07 inc ome tax allowanc es and NIC rates and thres holds are as follows : 2006/07 (£) Pers onal allowanc e (age under 65 ) 5 ,035 Pers onal allowanc e (age 65-74 ) 7 ,280 Pers onal allowanc e (age 75 and over) 7 ,420 Married couple’s allowanc e* (aged less than 75 and born 6 ,065 before 6 A pril 1935 ) Married couple’s allowanc e* (age 75 and over) 6 ,135 Married couple’s allowanc e* – minimum amount 2 ,350 Age allowanc es income limit 20 ,100 * T ax relief for the married couple’s allowa nc e is given at the rate of 10% , and is only available where at least one s pous e was born before 6 A pril 1935 . T he same allowances and c onditions apply for civil partners . National i nsura nce contri butions 2006/07 L ower earnings limit, primary class 1 £84 a week U pper earnings limit, primary class 1 £645 a week P rimary thres hold £97 a week Secondary thres hold £97 a week E mployees ’ primary c lass 1 rate 11% of £97 .01 to £645 a week 1% above £645 a week E mployees ’ c ontrac ted- out rebate 1 .6% Married women’s reduc ed rate 4 .85% E mployers ’ sec ondary class 1 rate 12 .8% on earnings above £97 a week E mployers ’ contrac ted-out rebate, s alary- related sc hemes 3 .5% E mployers ’ contrac ted-out rebate, money- purc has e 1 .0% sc hemes Class 2 rate £2 .10 a week Class 2 s mall earnings exc eption £4 ,465 a year Class 3 rate £7 .55 a week Class 4 rates 8% of £5 ,035 to £33 ,540 a year 1% above £33 ,540 a year Class 4 lower profits limit £5 ,035 a year Class 4 upper profits limit £33 ,540 a year Tax cre dits T he T ax C redit sys tem has been amended to limit overpayments and mitigate s ome of the worst effec ts of the s ys tem. O ne of the s ignific ant flaws in the c urrent s ystem is that awards are made provisionally and then revis ed after the end of the tax year, but this c an leave claimants with s ignificant debt when either their inc ome inc reases s ignific antly one year on another, or there is a c hange in their pers onal c ircums tances . T he inc ome dis regard is intended to s mooth the effec t of c hange in income by dis regarding an inc rease in income for the purposes of revis ing a tax c redit award after the year end. A t pres ent the income dis regard is £2 ,500 per annum, s o claimants with income increases of less tha n this amount from one year to another will not have to repay tax c redits already rec eived as a result of the inc reas e in their inc ome. H owever, it is intended to inc reas e the income disregard to £25 ,000 for 2006 -07 and s ubsequent years . T his means that most c laimants will not be fac ed with a repayment on rene wal, and for thos e with inc ome inc reas es in excess of this amount, only the excess over £25 ,000 will affect the prior year’s tax c redit c laim. As previously announced, the c hildcare element of working tax c redit will rise in 2006 /07 to 80% of c os ts up to £ 175 a week for a s ingle child (ie a payment of up to £140 a week) and £300 a week for two or more c hildren (ie a payment of up to £240 a week). T he level of c hildc are cos ts c overed will remain unc hanged, but the other elements of working tax c redit will rise in line with inflation. The firs t inc ome thres hold for working tax c redit will be frozen at £5 ,220 . The c hild element of child tax c redit will increase by 4 .4% to £1 ,765 in 2006 /07 . H owever, the family element of c hil d tax c redit and baby addition will remain unc hanged at £545 for a third year. For those claimants not entitled to working tax c redit, the firs t income thres hold (at whic h c hild tax c redits other than the baby and family element start to be withdrawn) will ris e to £14 ,155 . T he sec ond thres hold (at whic h the baby and family elements s tart to be withdrawn) is again unc hanged at £50 ,000 . Child Trust Fund Child T rus t Fund accounts c ame into being on 6 A pril 2005 . T he intention is for a child to have s ome savings when they reach the age of 18 . Any c hild born sinc e 1 September 2002 will receive at least £250 . T hos e from low income families will receive £500 . T he government has s tated that there will be a further universal payment when the c hild reaches s even years old (again there will be a larger payment for lower inc ome families ). C ons ultation is ongoing regarding issues s uc h as the timing of the payment, fairness , simplic ity and public awareness . Family and friends are als o encouraged to contribute to the fund, as up to £1 ,200 a year c an be paid to eac h account, and there is no tax to pay (either inc ome tax or capital gains tax) on any interest or gains made on this money. Statement of A ccount You'll be able to understand your s tatement of account. T he of the s tatement of acc ount you rec eive ou tlining your tax liabilities is to be redes igned s o that taxpayers c an unders tand it! INHERITA NCE TA X T here was a time, not s o many years ago, when Inheritance T ax (IHT ) was a c oncern only of the very wealthy. H owever, inc reas ing house pric es have brought more and more people within the IHT net. A rguably, people's homes s hould be exempted from this tax, as they are from Capital G ains Tax, to reduc e the burden. H owever, the C hanc ellor's approach has instead been to inc rease the IHT thres hold (ie the amount below whic h no tax is due). T he nil rate band for 2006 /07 is £285 ,000 . BUSI NESS TA XES Corporation Tax - Fi rst £10,000 prof it no longer tax f ree T he rate of corporation tax for s mall companies will be a s ingle band of 19% from 1 April 2006 . T he 0% rate fo r the firs t £10 ,000 of undis tributed profits will be abolis hed following the large number of s elf-employed people who decided to incorporate to reduce their liability to tax and national ins urance c ontributions . This may be a hard pill to s wallow for thos e trapped in inc orporation. H owever, there are s till tax and other advantages to incorporation but they have been reduc ed a little. First Yea r Ca pital A llowa nce s First year capital allowanc es for s mall businesses will be extended to 50% in the year from 1 A pril for c ompanies and 6 A pril 2006 for unincorporated businesses . T he government intends to introduce at s ome point a new range of first year allowanc es for c ars that will depend on their carbon dioxide (CO 2 ) emiss ions . T his would build on the existing 100% first year allowanc es for cars with very low emissions . Work i n progre ss -The i mpa ct of accounti ng standards A welc ome c hange will impact on businesses – mainly in the s ervice s ector – that will have to pay more tax on work in progress as a result of gu idance by the Accounting Standards Board in a c ircular known as UITF A bstrac t 40 . T he Financ e Bill 2006 will contain measures enabling most bus iness es to spread any extra tax c harge over three years . T hos e businesses that are mos t s everely affec ted will be able to s pread the c harge over six years . Film taxation N ew incentives for c ulturally British films will replac e the exis ting reliefs from 1 A pril 2006 . Films c osting £20 million or less will be allowed an enhanc ed deduc tion of 100% of allowable producti on cos ts with a payable cas h element of 25% . Films c osting over £20 million will be allowed an enhanced deduc tion of 80% with c as h payable of 20% . Goodbye to Form 42 T he need for FO RM 42 on mos t new incorporations is to be removed. T he form was us ed to report the iss ue of new s hares when companies are formed and was jus t an administrative burden with no purpos e. CA PITA L TA XES Planning Gain Supple ment (PGS) Cons ultation is proceeding on the introduc tion of a Planning Gain Supplement, a tax on gaining plan ning permission. T he bas is for c alc ulation would be the difference between the land value with full planning permission and the land value in its c urrent use. T his would be multipli ed by the rate of P GS. A nnua l Ex e mptions T he annual exemption for 2006 /07 is inc reased to £8 ,800 (trustees - £4 ,400 ). VA LUE A DDED TA X VA T A nnua l A ccounting T he turnover thres hold at whic h c ompanies c an qualify for the VAT annual acc ounting scheme will be increased to £1 ,350 ,000 fr om A pril 2006 . T he government will also raise the Cas h Accounting Sc heme turnover thres hold to the s ame level, s ubject to the agreement of the E uropean Commission. PENSIO NS SIPP's - i nve stme nt in reside ntial prope rty attacked T he government will remove the tax advantages for self- invested pers onal pensions (SIPPs ), s mall s elf-adminis tered sc hemes (SSASs ) and all other forms of self-inves ted pensions that inves t direc tly in res idential property and certain other ‘prohibited assets ’, s uc h as fine wine, art and antiques . I ndirec t investments , eg unauthorised unit trus ts , that are a close proxy for direc t investment in prohibited assets will be treated in the same way as direc t investments . A ny attempt to invest in prohibited ass ets will attract tax penalties on the member (at 40% ) and on the pens ion sc heme. I f the value of the prohibited ass et(s ) exceeds 25% of the scheme value, the sc heme may be de- regis tered and s uffer a 40% tax c harge on its total value. T he pensions indus try had been led to believe s uc h inves tments would be allowed and many would have planned to do s o. T he government ‘is minded’ to allow investment in s uc h assets through ‘genuine diverse c ommercial vehic les ’, s uc h as real es t ate investment trusts (REIT ) but will monitor their use to ens ure that the funds are not used to c ircumvent the new rules on prohibited assets . T he rules will generally take effect from 6 D ecember 2005 , s ubject to trans itional reliefs . Recy cli ng of tax-f ree lump sums From 6 A pril 2006 , new legislation will remove the tax advantages of rec ycling lump s ums drawn from pens ion schemes to make further pens ion c ontributions . This c hange will not affec t lump s ums drawn in the normal c ours e of taking pension benefits . A number of other minor technical changes were als o announced. NEXT STEP: Pleas e c ontact us or as k a ques tion if you have any queries on the pre- budget report or would like to disc uss how the pre -budget affec ts your own circ ums tanc es .
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