A 2009 budget guide for UK freelancers and small businesses

Here is a 30 second summary of the budget changes affecting freelancers and small businesses. You will find more details regarding changes that affect businesses below.

• The introduction of a 50% rate of income tax for those earning over £150,000
• Higher rate tax relief for pension contributions reduced
• The favourable tax regime for furnished holiday lettings withdrawn from April 2010
• Some businesses will benefit from an extension of loss relief and a limited increase in capital allowances
• Individuals will be able to put more into ISA's
• Otherwise tax breaks are thin on the ground
• HMRC plan to 'name and shame' those that evade tax

For Individuals

INCOME TAX

The 50% rate of income tax will apply from 6 April 2010 on income above £150,000. This replaces the proposed 45% rate, which was going to come in a year later on 6 April 2011. Dividend income above £150,000 will be taxed at 42.5%.

The tax free personal allowance (£6,475 for 2009/10) will be tapered down to nil for those individuals who have taxable income of £100,000 or more from 6 April 2010. So once you have taxable income of about £113,000 you will completely lose the benefit of the tax free personal allowance.

If you have a significant amount of funds retained within your own company you may consider withdrawing some of those funds in the current tax year while the highest rate of tax is only 40%, or 32.5% on dividends, and you have full use of your personal allowance.

PENSION CONTRIBUTIONS

Pension contributions currently attract tax relief at your highest rate of tax however much you earn. This tax relief is thus worth more to those who pay tax at 40%, than basic rate taxpayers. With the increase in the top rate of tax to 50% from 6 April 2010 the tax relief on pension contributions would become even more valuable.

The Government has foreseen this and plans to restrict the tax relief given on pension contributions for those who pay tax at 50%. From 6 April 2011 the tax relief will be tapered down from those earning over £150,000 so that those earning £180,000 or more will only get the basic rate tax relief on all their pension contributions.

The delay until 2011 in changing the tax relief would offer a window for pension planning, but that window has been blocked immediately for those earning £150,000 or more. If such an individual increases their current pension contributions beyond their normal contribution level, and those total contributions exceed £20,000 per year, a penalty rate of tax will apply.

SAVINGS

The Chancellor has made two adjustments to help savers and pensioners who have been hit hard by the reductions in interest rates:

• The ISA savings limits are to be increased to £10,200, and £5,100 for the cash-only element of the ISA. These new limits come into effect on 6 April 2010 for most savers, but savers who are aged 50 on more on 6 October 2009 will be able to take advantage of the new limits from that date.
• The amount of capital disregarded when making a claim for pension credit, and certain other benefits will be increased from £6,000 to £10,000 from November 2009. Savers who lost money when their bank went into liquidation will generally be compensated under the Financial Services Compensation Scheme (FSCS). This scheme returns the capital that was lost and an amount in respect of lost interest. The savers will now be taxed on the compensation received in respect of the interest lost, as if that amount was interest payable by a bank.

CAPITAL GAINS

The annual capital gains exemption for 2009/10 has been set at £10,100 for individuals and £5,050 for most trusts. This exemption remains in place irrespective of the levels of gains made in the tax year. The rate of capital gains tax for 2009/10 is set at 18% for all taxpayers. These two measures mean that most individuals pay far less tax on capital gains than they do on earnings, savings, dividends or profits.

Small Business Tax

LOSSES

Businesses that make trading losses can generally carry back the loss to set against profits made in the previous accounting period. This one-year carry back facility was extended to three years last November, but only for sole-trader or partnership accounting periods ending in the year to 5 April 2009 (2008/09), or for company periods ending in the year to 23 November 2009.

As the recession is now expected to last longer than first thought, this loss relief extension will now apply to the following accounting periods:

• For unincorporated businesses: the periods ending in the tax years 2008/09 and 2009/10.
• For companies: the periods ending in the two years to 23 November 2010. For each loss making period an unlimited amount of loss can be carried back one year, but a maximum of £50,000 can be carried back to the previous two years. The losses must be used against the profits of the later period first.

If you are having difficulties paying the tax due on the profits made in the earlier accounting period, which will be partly or wholly cancelled out by losses made in the current year, you can ask HMRC for time to pay the tax due. The HMRC officers should now take into account the expected loss that will be carried back, but they may want to talk to your accountant to verify the scale of the loss.

CAPITAL ALLOWANCES

All businesses can now claim 100% capital allowances for plant and machinery purchased each year under the Annual Investment Allowance (AIA). The AIA is generally capped at £50,000 per year for each business or group of companies. Any expenditure in excess of the AIA cap goes into the relevant capital allowance pool and receives tax relief at either 10% or 20% per year. Now for one year only the excess expenditure, which is not covered by the £50,000 AIA limit, can qualify for a 40% first year allowance. This 40% allowance will cover plant and machinery purchased in the year ending on 31 March 2010 by companies, or to 5 April 2010 by unincorporated businesses, but not cars, integral features, long life assets or leased equipment.

VAT

RATES

The Chancellor confirmed that the standard rate of VAT will revert to 17.5% on 1 January 2010. If businesses try to avoid the VAT rate increase by paying early or by invoicing early at the current rate of 15%, they will have to pay a supplementary charge of 2.5%.

REGISTRATION LIMIT

The compulsory VAT registration threshold will increase by just £1,000 to £68,000 on 1 May 2009. The turnover threshold, below which a business may apply to be deregistered for VAT, will increase to £66,000 on 1 May 2009.

Chris Thomas, One Accounting Ltd