Individuals

Please click the below bookmarks for further information.

How  Darling's tax and National Insurance package will impact on everyone's pay packet
How high earners and trusts will end up paying for the Government's tax cuts
Hikes in 'sin taxes' offset VAT rate cut
Reprieve for 'gas guzzling' motorists on road fund licence increases
Limits frozen for private pension pots from 2011
HMRC Powers: more change ahead

How Darling's tax and National Insurance package will impact on everyone's pay packet

The Pre-Budget Report went some way to compensate lower earning individuals for the loss of the 10p tax band from 6 April 2008, which left many low income families out of pocket. This was done by permanently increasing the personal allowance from 6 April 2009 by an inflationary amount of £310 and an additional £130 to give a total allowance of £6,475 for people aged under 65. There will be no changes in the rates of income tax which will remain at 20% and 40% for 2009.The Chancellor also reiterated promises to realign the lower threshold below which no primary National Insurance is due to the same level as the personal allowance for income tax purposes. This will take effect in 2011/12.

However, the major announcement was that, from 6 April 2011, the main National Insurance rates are to increase by half a percent for both employed and self employed individuals, to 11.5% and 8.5% respectively. At the same time, Employer's National Insurance will also increase by 0.5% to 13.3%. National Insurance on benefits will also go up by the same amount. The higher rates of National Insurance for both employees and self employed individuals will also increase to 1.5%. To further compound the problem, the basic/higher rate income tax threshold will also be frozen in 2011/12. This means that the above inflationary increases in these amounts given now will be compensated for by future freezes.

These changes will affect almost every employee from the lowest to the higher level. The scale of the net increase in Treasury funds, and the corresponding cost to the taxpayer is huge, an estimated £4 billion in 2011/12.

"With an attempt at a Churchillian makeover, Darling has presented this Pre-Budget Report as helping low income earners and families in times of deep economic uncertainty. The raised personal allowance announced in May cost £2.7 billion but did not help all those affected by the abolition of the 10p tax cut. The new measures see the Chancellor positioning himself as supporting hard-working taxpayers and to helping them face the recession, which is expected to deepen next year," says Francesca Lagerberg, Head of Grant Thornton's National Tax Office.

"While these significant tax giveaways are hoped to have a quick impact on the economy, voters are expected to pay back these tax cuts soon after the next general election, not just hitting out at high net worth individuals but impacting low income earners too. The increase in National Insurance Contributions which will take effect from April 2011 with 0.5% increase could sting low income earners when they are getting back on their feet. This may prove to be a Pre-Budget Report of short term gain and long term pain," ends Lagerberg.

How high earners and trusts will end up paying for the Government's tax cuts

Alastair Darling, as widely predicted, announced a number of 'fiscal loosening' measures aimed at easing the tax burden on low and middle income earners. However, in order to balance the books, this modern day Robin Hood really is taking from the rich to give to the poor.

The changes are taking place in two stages.

First, from 6 April 2010, the personal allowance for those earning over £100,000 will be restricted. For those earning between £100,000 and £140,000, the personal allowance will be restricted by £1 per £2 of income over £100,000, until a maximum reduction of one half of the full personal allowance is reached. For those earning over £140,000, the personal allowance will be further reduced at the same rate to zero.

Given the Chancellor's prediction that inflation will fall to 0.5%, and his pledge to increase the personal allowance by £130 above inflation, the estimated 2010/11 personal allowance is £6,645. This will fall to £3,325 when earnings  reach £106,650 and will be wiped out at an income level of £146,650.

Secondly, to rub salt into the wound, from 6 April 2011, a new top rate of income tax of 45% will be introduced on income above £150,000. A new top rate for dividends of 37.5% will also be introduced leaving three rates of tax applicable to dividends, 10%, 32.5% and 37.5%.

Thirdly, National Insurance Contribution (NIC) rates will increase by ½% on all levels of profits and employment income.

Finally, after the onslaught of the Finance Act 2006, and the fall out from the new remittance regime, trusts will also be subject to further misery. For trusts where nobody has a right to the income as it arises, such as discretionary trusts, dividend income will be taxable at 37.5% and other income at 45%.

Francesca Lagerberg, Head of Grant Thornton's National Tax Office says: "The combined increase of income tax and NIC means that higher earners will suffer an effective tax rate of 46.5%; in the global war for talent this must damage the City's ability to attract and retain the brightest and best and over time is likely to erode the UK's competitive position.

"The increase in the tax rates for trusts from 2011 is also going to add to the feeling among the wealthy that the Government is asking them to foot the bill for the financial turmoil engulfing the markets."

Hikes in 'sin taxes' offset VAT rate cut

The Chancellor announced a VAT rate cut of 2.5% to bring the VAT rate down to 15%, while simultaneously increasing tobacco excise duty and alcohol duty by amounts that outstrip this reduction. The VAT and alcohol rates will change from 1 December 2008, but tobacco prices went up from 6pm on 24 November 2008.

These increases will mean the overall cost of tobacco and alcohol products will rise, rather than fall, hitting consumers and related industries alike.

The Chancellor has taken the moral high ground here, hitting 'sin taxes' hard. The cost of alcohol has risen especially sharply. While the VAT rate cut is temporary, HM Treasury is banking on the 'booze and cigarettes' increases being permanent. These measures will raise approximately £1bn per year and are a major plank in the Chancellor's attempts to balance the books.

Coming on the heels of last year's smoking ban, the leisure industry, especially the struggling pubs sector, will not be toasting these measures.

Reprieve for 'gas guzzling' motorists on road fund licence increases

'Gas guzzling' motorists saw a temporary reprieve in the 2008 Pre-Budget Report. Reforms announced in the March 2008 Budget to incentivise the manufacture and encourage the purchase of more fuel efficient cars were reconsidered to soften the blow to motorists.

The original proposals to increase the number of vehicle excise duty (VED) bands to discriminate between those cars that are tax efficient and those which are environmentally unfriendly will still be introduced from April 2009. However, to reduce the pressures on motorists, the rates of duty will not increase by more than £5 for any car. It is not until April 2010 that the Government's 'green incentives' will benefit cars with low carbon dioxide (CO2) emissions. However, even the most inefficient of cars will not see an increase of more than £30 in 2010. A new 'first year' rate or 'showroom tax' was also to be introduced from April 2009 and this has been deferred until April 2010.

However, the reprieve is only temporary. For those considering the purchase of a new car, it is still worth thinking 'green'. The Government is introducing first-year rates for newly purchased cars in 2010, offering no VED in the first year of use for those cars with CO2 emissions under 130g/km, whereas the highest emitting cars will suffer a charge of £950. To further increase savings, anyone thinking of purchasing a car this weekend should reconsider   from 1 December 2008, the drop in VAT rate will save almost £150 on a £7,000 car.

Limits frozen for private pension pots from 2011

The lifetime allowance and annual allowance for individuals' pension contributions will be frozen from 6 April 2011 for five years, rather than rise in line with inflation as was anticipated. From then on, the maximum amount individuals can contribute each year into their pension is £255,000. A 40% tax charge is levied on amounts contributed in excess of that limit. Furthermore, the maximum pension pot value cannot exceed £1.8m without suffering a punitive rate of tax when taking pension benefits.

The lifetime allowance, introduced as part of the pension changes in April 2006, represents the value of an individual's pension pot. The rate of charge for lump sum pension benefits taken above this level is 55% and 25% on retained pensions. This will be seen as another attack on the rich who will face an increase in their tax liability from 2011 onwards from their funds growing while the allowance remains static.

HMRC Powers: more change ahead

With the broadening of powers at HM Revenue & Customs' (HMRC's) disposal, introduced primarily in the Finance Act 2008, many professionals were concerned that there were no corresponding regulations binding HMRC's behaviour. Following a comprehensive consultation process earlier in the year, the Pre-Budget Report has confirmed that a Taxpayers' Charter will be given specific legislative authorisation in the Finance Bill 2009.

A fresh consultation will begin in January to establish the wording of the Charter. It is proposed that the Charter be short, simple, easy to understand and easily accessible, with a single Charter setting out high level principles that will be linked to service standards and that will cover the rights and obligations of the taxpayer. HMRC and the Department for Work and Pensions are looking for a joint launch of the respective Charters in 2009.

Although the paper deadline for filing 2007/08 personal Self Assessment returns was brought forward to 31 October 2008, the fact that no late filing penalty is levied when any tax due is paid by 31 January 2009 is now considered inconsistent with encouraging taxpayers to file on time. The Pre-Budget Report announced a consultation aimed at modernising the penalty system for late filing, and interest accruing on overpaid and underpaid tax. We expect to see legislative proposals in the Finance Bill 2009.

HMRC has announced a new service for businesses in temporary financial difficulty who are unable to meet their tax bills. This new service is not currently in place for individuals. The Pre-Budget Report announced a consultation proposing changes to make it easier for taxpayers to pay their liabilities on time, including recommendations that penalties should be suspended where a taxpayer has entered into a 'time to pay arrangement'.

The promise of a Taxpayers' Charter enshrined in statute is a vindication of the efforts made by professional bodies in lobbying the Government for equal rights for taxpayers. Grant Thornton has been part of this consultation process and we are delighted that the recommendation to give the Charter 'statutory teeth' has been adopted.

We also welcome the proposed consultations as they will allow vested parties with specialist knowledge to share information with the Treasury before legislation is enacted.