Last updated: December 9, 2009 10:59 am

What the pre-Budget report means for you

Q&A: UK Pre-Budget Report 2009

A widely expected tax on bankers’ bonuses as part of an onslaught on the wealthy has been announced by the Chancellor, Alistair Darling, in his last Pre-Budget Report before the UK general election.

National insurance contributions are going up even more. All employer, employee and self-employed rates of NI will rise by an additional 0.5 per cent from April 2011. VAT, which was temporarily cut to 15 per cent, will go back up to 17.5 per cent as planned, on January 2010. And the inheritance tax allowance will be frozen at £325,000 for the next year.

The government is going to do more to rein in the cost of funding the main government occupational pension schemes. By 2012, contributions by the government to public service pensions for teachers, local government, NHS and the civil service will be ”capped”, to save about £1bn a year, Mr Darling said. He said that public sector workers would also have to make bigger contributions to their pensions.

To explain the details of the report and what it will mean for you and your pocket, John Whiting answers questions on the pre-Budget report

Mr Whiting has recently become the first tax policy director of the Chartered Institute of Taxation following a long career with PwC, working on most areas of taxation including many years of involvement with employment taxation.

Mr Whiting is a former president of the Chartered Institute of Taxation.

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My boiler is very old and has just broken. Can I take advantage of the boiler scrappage scheme that was announced yesterday? Chris Walsh, Birmingham

John Whiting: Sadly we have yet to see the details of the scheme. These are to come out after discussion with the industry and the scheme will be launched ‘at the earliest opportunity in 2010’. So waiting until the scrappage scheme arrives may mean a cold Xmas/New Year! But maybe you can get it fixed and persuade it to limp along until the details appear?

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I’m a banker, living in London, and am seriously thinking about leaving the UK and going to live somewhere else where I don’t have to pay as much tax! Can you tell me where I should go? Alex, London

JW: There are almost as many tax rates around the world as there are countries – perhaps more given the state/canton taxes that happen in some places. The key message is to investigate carefully – even if the tax rates sounds seductively low, what other levies do they have (eg Belgian social security at c35 per cent)? What are the costs and the benefits that you receive there? If you go to a low/nil tax area, do you really want to live there – and can you work there (eg many ‘tax havens’)? What about the family – do they really want to go there?

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I own a property in cornwall that I let out as a holiday home and I understand there have been some new tax rules introduced in yesterday’s pre-budget report. Does this mean that I will have to pay more tax now? And is there anything I can do to reduce my bill? Caroline Ellis, Richmond.

JW: At the moment there are rules that give a better tax treatment to properties that qualify as ‘furnished holiday lettings’ (FHL). There are various criteria for that but yours may well qualify. The main impact is that if you make a loss on the letting, you can offset the loss against other income; when you sell the property, if you make a capital gain it can be ‘rolled over’ by buying another property.

These FHL rules are being abolished from April 2010 so such lettings will be taxed in the same way as ordinary lets – the main point being that if you make a loss, all you will be able to do is to carry forward that loss to offset against a profit in the next year. There will be no CGT rollover either.

It is possible that people with a lot of FHL properties who do a lot of work to carry on their business will be able to establish that they have a full-blown trade (and so get the old FHL tax benefits) but that will not be easy.

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I’ve heard a rumour that VCTs are being targeted. Do you know anything about this and if so then how have they been affected by the pre-Budget report? Piers Anderson, Reigate

JW: There have certainly been some rumours around, but there was no significant change to VCTs in the PBR. There were some detailed changes to the rules as they apply to the VCT consequent on fitting in with Euro-rules. These include:

- The company mustn’t be ‘in difficulty’

- The trade doesn’t have to be wholly or mainly in the UK – it just needs some activities here

- The shares can be traded on any EU regulated market, not just the UK

The first is a restriction, the others are improvements.

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Please explain the situation regarding pension contributions for this tax year. Does the £130,000 limit applies? Is it on contributions made by employers only? Thanks, Eshan, London

JW: This could be a very long answer! The starting point is that from April 2011, tax relief on pensions contributions is restricted for those with incomes of £150,000 or above. Such relief is intended to be 20 per cent, though there will be some transitions. One of the points that we heard about in the PBR is that employers’ contributions will be counted in assessing whether contributions need to be restricted.

Clearly, one way round this restriction would be to pay a lot of contributions in the period running up to April 2011. Thus we get some ‘anti-forestalling’ legislation, with a new tax charge to recover 20 per cent tax relief for those who may pay excess contributions. That ‘excess’ is measured against the regular contributions the individual normally makes. The reach of this provision is not just to those with incomes above £150,000 but can catch people who have income above this level in one year (say 2009/10) but not in another year (say 2010/11). But the PBR also said that if the income in 2010/11 in this example isn’t above £130,000 (excluding employer contributions) then the tax clawback won’t bite.

Sorry if that sounds complex but it is – extremely so!

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I’m 55 years old and have been trying to put as much as I can into my pension to sure up my retirement fund. I’m worried that following yesterday’s pre-Budget report I will now receive less tax relief on my pension contributions going forward. Is this the case? George Esmond, London

JW: If your income isn’t above £150,000 you don’t need to worry – the restrictions only apply to incomes above that level.

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Could you please clarify what is the precise impact of the one-off levy on banks bonus payments? In particular, are bonuses going to be taxed a first time at the bank level (50 per cent) and then a second time at the employee level (marginal tax rate)? Also would only cash bonuses be afftected or all type of compensation (including shares, options etc). Many thanks and best regards, Giovanni Malagodi

JW: There are two different taxes here. The first tax is really that on the employees – the usual PAYE/NICs. That is not affected by the new levy. Then the question of the new payroll tax comes in – which is something levied on the payer, the bank, at the rate of 50 per cent (on the amount of the discretionary bonus above £25,000). So if you add 40 per cent income tax, 13.8 per cent NICs and the new 50 per cent levy, you get to a total tax rate of 100 per cent plus on a bonus.

As for what is caught, the Treasury certainly think they have caught everything that is routinely given by way of ‘reward’ with this new charge. I suspect if new ideas that seem not to be caught start being talked about, they will be legislated against when the Finance Bill is actually passed post-March.

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What would be the best sort of trust to set up to avoid the £325,000 threshold impacting on the inheritance I leave to my wife, 20 per cent rate tax payer, and my 6 month old son? I am a 40 per cent rate taxpayer. Although bonuses, not banking, could push me into the planned higher rate. Tony Fry, UK

JW: The problem with trusts these days is that most attract an immediate 20 per cent charge to IHT on values put in above the nil rate band. This follows from the reforms put through in 2006. If you are thinking of trusts to benefit your son, there is also the income tax implication that any income that the trust earns would still be counted as yours.

Beyond that, trusts that are set up other than those that pay all the income to one or more beneficiaries on a fixed basis – ie a discretionary trust – have an income tax rate of 40 per cent in any event (50 per cent post 6 April 2010). Trusts planning needs a lot of care these days (the PBR attacks some trusts avoidance schemes)although they still have their uses as family wealth management arrangements in some circumstances. They certainly aren’t magic tax saving devices any more.

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For obvious reasons; can the ’bank bonus tax’ actually be implemented before most banks make their next bonus payments? James, London

JW: The proposals are that the new tax comes in from yesterday, ie 9 December, and runs to 5 April 2010. Parliament will be asked to pass legislation that brings it into effect in this way (there is draft legislation available) though the final law won’t be passed until after next year’s Budget. But the way Parliament operates means that we have to assume the law will go through as the Government plans.

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Re: bankers bonuses. How do you think the Government defines a bank? A lending institution? Any institution that is FSA regulated? Difficult to define, I would have thought. MagicAldo, London

JW: The draft legislation defines a bank quite carefully, as you might expect. UK and resident foreign banks are covered; it basically targets those who do regulated activities such as accepting deposits, dealing in investments or mortgages; but not insurance nor investment trusts or friendly societies. The Government are also taking the power to add to the list of those caught by statutory instrument – so if they realise they’ve missed someone, then they can add the organisation in – with effect from 9 December.

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I’m hoping you can clarify something for me. The chancellor has put up National insurance but I’m not entirely sure what national insurance goes towards – does it pay for our healthcare? Alan Keane, Essex,

JW: There is a polite fiction that NICs pay for the health service. Some people prefer to think that their NICs – their ‘stamp’ – pays for their pension. Neither of these are true. To all intents and purposes, NICs just go into the general pot of tax revenues that the government uses, though to be fair there is some attempt to keep a national insurance fund going to meet certain expenditure. The Chancellor did talk about the NIC increases paying for hospitals, but there is no ‘hypothecation’ (ie ring fencing) in this way. Paying NICs does bring entitlement to our state pension and there is a very modest earnings related link, but there is no real tie up.

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I’m worried about inheritance tax being so high, should I move my assets into investments taxed as capital gains and which ones should I choose? Elizabeth MacLennan, London

I can’t advise you on investments I’m afraid, but whatever ones you own will be part of your estate for IHT purposes at their value at the date of death. There is no CGT on death, so building up capital growth rather than taking income can make sense, though it all needs to be part of your careful thinking about your wealth planning and evaluating your needs.

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