The 2009 Budget

This week's Budget is already being heralded as historic for many different reasons, political and economic, as the Chancellor Alastair Darling sets out his prescription to tackle the unfolding consequences of the Credit Crunch.
We outline some of the key changes as we understand them which will have an immediate significance for many of our clients.
The Chancellor's estimates:

• UK economy to shrink 3.5% this year and then to grow annually by 3.5% from 2011
• £700 billion rise in public borrowing over the next 5 years
• Govt borrowing to reach 79% GDP by 2014
• Borrowing to raise £175 billion this year

Individual Savings Accounts

The ISA subscription limit will be significantly increased from the current £7,200 to £10,200 on 6 October 2009. Within this new limit, up to £5,100 can be saved in cash. However, the new limit will be implemented in two stages, and the 6 October 2009 increase will only apply to investors aged 50 and over. All other ISA investors will have their personal ISA limit raised to these levels from 6 April 2010 onwards. Investors aged 50 and over who have already used their £7,200 ISA allowance in the current tax year will therefore be able to top up their 2009/10 ISA by a further £3,000 after 6 October 2009.

Pensions

Abolition of Higher-rate income tax relief from 2011/12 for higher earners

The Chancellor announced that from the 2011/12 tax year higher-rate tax relief will be reduced for those with income of more than £150,000, tapering as the level of income increases, so that those with incomes in excess of £180,000 per annum will only receive basic-rate tax relief. Existing tax reliefs will continue to be available to all whose input amount in a tax year is £20,000 or less. A person's Special Annual Allowance is £20,000 per annum. Employers' contributions and defined benefit scheme accrual are included in the calculation of the £20,000 limit, i.e. it is calculated in the same way as a Pension Input amount for Annual Allowance purposes. Subject to two exemptions, any input in excess of £20,000 will be subject to the Special Annual Allowance Charge of 20%.

Income tax

Various changes have been announced to income tax and can be summarised as follows.
From the tax year 2010/2011:

• An additional rate of income tax of 50% will be introduced for taxable income above £150,000, so from 2010/2011 there will be three main rates of income tax: 20%, 40% and 50%.
• The basic personal allowance will be reduced to zero on a tapered basis for those individuals with 'adjusted net incomes' above £100,000. The reduction will be at a rate of £1 for every £2 above the income limit, similar to the way age-related personal allowances are reduced. 'Adjusted net income' is the total of an individual's income, less certain deductions. The main deductions are: payments made gross for pension schemes, grossed up Gift Aid contributions and grossed-up pension contributions which have received tax relief at source.
• An additional rate of income tax for dividends will be introduced at 42.5%, applicable where dividends are otherwise taxable at the new 50% rate. From 2010/2011, therefore, there will be three rates of tax on dividends: 10%, 32.5% and 42.5%.