BUDGET 2006 – A SUMMARY OF THE TAXATION PROVISIONS

Introduction

This was the Gordon Brown’s tenth, and in all probability his last, Budget speech, with the Chancellor reminding us that “the Government’s economic objective is to build a strong economy and a fair society, where there is opportunity and security for all”.

The Chancellor reported that inflation was on target at 2 per cent and he forecast that growth would be 2 to 2.5 per cent in 2007-2008. He also reported that he had met the “golden rule” on borrowing and the economy was on course for a £15 billion surplus for the economic cycle ending in 2010-2011.

The “headline-grabbing” figures in this year’s Budget were:

• The proposed sale of £30 billion of assets by 2010 including the Tote and the government’s stake in British Energy.
• The closing of  a loophole on the avoidance of Inheritance Tax by the creation of trusts.
• A big rise in education spending to £440 million next year.
• An increase in the road fund duty on petrol-guzzling cars.

All in all, this Budget was regarded by many as being fairly neutral, with the Chancellor continuing with his steady-as-she-goes approach to the economy.

Personal
Tax rates
The starting rate limit and basic rate limits for income tax have been increased in line with indexation to £2,150 and £33,300 respectively.

Allowances and reliefs
Personal allowances
As announced in the Pre-Budget Report, the personal allowance for those aged under 65 will increase to £5,035. For those aged 65 and over the personal allowance will increase to £7,280 for those aged 65-74, and for those aged 75 or over to £7,420. Other allowances will be increased by indexation.

Reliefs

Venture capital trusts

The maximum permitted annual investment for tax relief will remain at £200,000.

Enterprise investment schemes

The maximum permitted annual investment for tax relief has been doubled from £200,000 to £400,000.

Isas
The limits as to how much can be invested each year in an individual savings account (Isa) will remain at £7,000 for share maxi-Isas and £3,000 for cash mini-Isas and these limits will now remain until 2010.

National Insurance Contributions
National Insurance (NIC) rates and thresholds for 2006/07 were announced in the 2005 Pre-Budget Report. The starting point for employers’, employees’ and self-employed NICs in 2006/07 will increase in line with inflation to £97 per week. NICs are not paid on earnings or profits below this amount. The upper earnings and profits limits for NICs will increase from April 2006 from £630 to £645 per week (£33,540 a year). For the self-employed the rate of Class 2 contributions will remain at £2.10 a week.

Capital gains tax
The annual exemption amount is set at £8,800 for the tax year 2006/07 for individuals and £4,400 for most other trusts. For individuals, the amount chargeable to capital gains tax is added to the income liable to income tax and is treated as the top part of that total. Capital gains tax is charged at the following rates: below the starting rate limit at 10 per cent, between the starting rate limit and basic rate limit at 20 per cent, and above the basic rate limit at 40 per cent.

Inheritance tax
The value of estates above the inheritance tax (IHT) threshold is taxed at 40 per cent. For the tax year 2006/07 the inheritance tax threshold has been increased above RPI to £285,000 (2005/06: £275,000).

The inheritance tax threshold will increase to £300,000 in 2007.

There was a great deal of lobbying prior to the Budget for the Chancellor to take more drastic action to reduce the inheritance tax burden, which is seen by many as an unfair form of taxation. The main argument against the present IHT thresholds is that an individual’s house is taken into account in valuing his or her estate for IHT purposes. With the dramatic increases in house prices over recent years, many more individuals are now caught in the IHT net.

This lobbying would appear to have fallen on deaf ears, and indeed the Chancellor has taken steps to recoup more IHT by outlawing trusts set up to enable beneficiaries to avoid IHT. These trusts, commonly referred to as “accumulation and maintenance trusts”, have now been made subject to a triple tax which will effectively make them redundant. Not only was this measure hidden in the small print of the Budget but, even worse, the measure will be retrospective (ie all trusts will be affected, no matter when they were created), with the result that those who have set up trusts will now have to unravel the work done, incurring further legal and other professional fees.

Pensioners
Pensioners were hit by the Budget in that the government will not repeat its payment of the £200 council tax rebate which it made last year. In addition, the winter fuel payment has been frozen meaning that altogether the average pensioner will be £265 worse off this year.

On the plus side, the state pension for single pensioners and married couples will rise to £84.25 and £134.75 a week respectively. In addition, the Chancellor announced free national bus travel for pensioners and additional assistance in insulating their homes.

Miscellaneous taxes

• Vehicle excise duty for small, environmentally friendly cars has been reduced to zero whilst those vehicles that emit the greatest pollution will pay as much as £210 per annum.
• Duty on a pint of beer will be increased by 1p a pint and on wine by 4p a bottle. The duty on whisky, champagne, other sparkling wines and cider has been frozen.
• Tax on a packet of 20 cigarettes will increase by 9p, on a packet of five cigars by 3p and there have also been increases on hand-rolled and pipe tobacco.

Pensions
Whilst the new personal pension regime was announced some time ago and will take place on 6th April (‘A-Day’), it is worth pointing out that from that date there are no restrictions on the number or type of approved personal pension schemes. From 6th April tax is charged on the value of the pension contributions made that exceed the annual allowance (£215,000 for this year) or relevant earnings. Tax is also charged if the value of the pension at retirement exceeds the individual’s lifetime allowance (£1,500,00 this year).

 

Business

Corporation tax
The corporation tax starting rate is 0 per cent. The small companies’ rate is 19 per cent for taxable profits between £0 and £300,000. Marginal relief eases the transition for companies with profits between £300,001 and £1,500,000. The fraction used in the calculation of this marginal relief is 11/400.

Capital allowances
The Chancellor announced some welcome new for small businesses. This was the increase in first year allowances for small businesses on the purchase of most plant and machinery, to 50%.

Company cars
Car benefit charges
There have been no changes in relation to the treatment of company car benefits. The starting point for the measurement of carbon dioxide emissions which is expressed in grams per kilometre remains at 140g/km.

Provision of fuel
The flat rate benefit of £14,400 remains the same as last year. H M Revenue and Customs has announced new rates for the VAT scale charges on the provision of fuel for private mileage and these new rates must be used from the start of the first accounting period beginning on or after 1st May 2006.

Stamp taxes
The rate of stamp duty on the transfer of shares remains unchanged at 0.5%. The threshold at which stamp duty land tax becomes payable in relation to residential property outside disadvantaged areas is increased from £120,000 to £125,000. All other thresholds remain the same.

The increased threshold will affect those who purchase homes and many would argue that the increase is not enough, especially in view of the increase in house prices over the years. Indeed, it is difficult to find houses with a selling price of under £125,000 in some regions, which means that few will escape paying some stamp duty.

Value added tax
The VAT rates remain the same as last year.

Registration and de-registration thresholds
From 1st April 2006, the registration threshold for VAT is increased from £58,000 to £59,000 and the de-registration threshold from £60,000 to £61,000.

Special VAT schemes
The maximum turnover level for the cash accounting scheme remains at £660,000 but the threshold for the annual accounting scheme has been more than doubled from £660,000 to £1,350,000. The increase in the threshold should encourage more businesses to use this scheme.

There have been no changes made to the thresholds of the flat rate scheme.

If you would like to discuss the contents of the Budget in more detail, or have any queries relating to your personal or business taxation, please do not hesitate to contact us.

For further information, please contact us on 0141 429 1700 or email ca@tbdunn.co.uk.

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