Tax changes for April 2008

These days, some tax changes are trailed well in advance; others appear at relatively short notice. Consequently, it can be difficult to keep in mind what is happening when. We have therefore prepared the following reminder of the more important tax changes taking effect this April; generally, from 1 April 2008 for companies and from 6 April 2008 for individuals.

Business Tax

The full rate of Corporation Tax reduces from 30% to 28% from 1 April. The small companies' rate however increases by a further 1% to 21%.

The basic rate of Income Tax for 2008/09 reduces from 22% to 20%. The starting rate of 10% is however removed for earned income and pensions, although it continues to be available for savings income.

The Upper Profits Limit for Class 4 National Insurance purposes increases from £34,840 per annum to £40,040 per annum, £3,900 above the increase required by indexation.

Agricultural Buildings Allowances and Industrial Buildings Allowances are to be progressively phased out by 2011, reducing from 4% to 3% in 2008/09.

A new Annual Investment Allowance is introduced giving 100% relief for the first £50,000 of capital expenditure on qualifying plant and machinery. The current 50%/40% first year capital allowances for small and medium-sized businesses are withdrawn.

The rate of Writing-Down Allowance applied to plant and machinery in the general pool reduces from 25% to 20%, but the rate applied to long-life assets increases from 6% to 10%.

The rate of Writing-Down Allowance on certain listed features integral to a building becomes 10%. The list includes electrical systems (including lighting systems); cold water systems; space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems; lifts, escalators and moving walkways; external solar shading and active facades.

New rules will counter arrangements whereby company dividends or partnership profits are shifted from one person to another and taxed at a lower rate.

Capital Gains Tax

A new, single rate of 18% applies to disposals by individuals, partners and personal representatives (not companies) on or after 6 April 2008. Taper relief and the remaining indexation allowance are withdrawn.

A new "entrepreneurs relief" taxes the first £1 million of cumulative qualifying gains at a lower rate of 10%. The scope of this relief will be narrower than that of taper relief.

Professional advisers are looking at a number of ways of mitigating the effects of these changes for those contemplating future capital gains if entrepreneurs' relief is either not likely to be available or likely to prove insufficient. For example, accrued indexation allowance may be able to be "banked" by making a no gain, no loss transfer between spouses by 5 April 2008. Whether any action is appropriate and the best course of action depends on individual circumstances; if action is appropriate, however, it has to be taken before 6 April, so specific professional advice needs to be taken quickly by those interested in such planning strategies.

Employment Taxes

The lower threshold for CO2 emissions used in calculating the benefit in kind arising from a company car reduces from 140g/km to 135g/km, which effectively increases the percentage rates applied to the list price in 2007/08 by 1% for 2008/09 (the maximum percentage rate is still 35%).

A new percentage rate of 10% (13%, where the diesel supplement applies) is available for Qualifying Low Emissions Cars - those with CO2 emissions of 120g/km or less.

A discount of 2% to the appropriate percentage rate applies to cars capable of using E85 biofuels.

The "multiplier" used to calculate the benefit in kind arising from the provision of free fuel increases from £14,400 to £16,900.

The Upper Earnings Limit for Class1 National Insurance purposes increases from £670 per week to £770 per week, £75 per week above the increase required by indexation.

Other

The Finance Act 2006 changes to the tax treatment of trusts included a transitional period running until April 2008 to enable those with trusts set up prior to Budget Day 2006 to make changes to prevent them falling completely into the new regime from 6 April 2008.

Vehicle Excise Duty for Band G cars (first registered since 23 March 2006 and with CO2 emissions in excess of 225g/km) increases to £400.

The deadline for filing paper self-assessment income tax returns for 2007/08 becomes 31 October 2008, although the deadline for filing on-line remains 31 January 2009.