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Budget: not much to smile about

Today the Chancellor set out his plans; they made grim reading. Those on low incomes have the least reserves to weather bad times and although efforts were made to reduce the impact of the continuing recession on the most vulnerable, many will continue to struggle.

The Chancellor admitted that he did not have much money to give away or to re-distribute. Many of the measures to help those on the lowest incomes had already been announced, mainly in the Pre-Budget Report (PBR) last November.

Pre-announced

The measures we already knew about starting this April:

  • Increased personal allowances for 2009/10; £6,475 under 65, £9,490 (65-74) and £9,640 (75+); blind person’s allowance up to £1,890
  • Increased married couple’s allowance to a maximum of £696.50 off your tax bill (75 and over)
  • The level at which employees start to pay national insurance contributions up £5 to £110 a week and similar increases for the self-employed.
  • Small inflationary increases across tax credits generally, except for child tax credit where there was an increase of £75 per year above inflation
  • Child benefit went up by £1.20 a week for the eldest child and by 25p a week for others; these increases were in force from January 2009
  • Full state pensions increased from £90.70 to £95.25, whilst pension credit levels rose to £130 a week for a single pensioner and to £198.45 for a couple
  • Special treatment which allows disabled company car drivers driving an automatic car to use the lower list price of an equivalent manual car to work out the benefit charge
  • A Health in Pregnancy Grant of £190.

New Budget Day measures affecting those on low incomes

New measures announced which impact upon those on low incomes include:

  • Pension credit
  • Unemployment issues
  • Savings exemptions
  • Temporary visitors to the UK
  • Working tax credit
  • Help for the smaller business
  • HMRC Charter
  • Inheritance tax record keeping
  • Child Trust Funds
  • Health checks
  • The increased squeeze on public finances

What the new measures mean

Pension credit

Pension credit rules deem claimants to have income of £1 for every £500 of savings over £6,000 thus limiting the entitlement to pension credit. This limit will increase from November this year to £10,000 so entitling many more people to claim and to receive a greater award. The trouble with pension credit is that millions who are entitled do not claim it.

Unemployment issues

The PBR announced additional funding for Jobcentre Plus to provide support for those who find themselves out of work, as expected the Budget has allocated an additional £1.7 billion to the Department for Work and Pensions to provide further support.

Those aged 18-24 who have been claiming Job Seekers Allowance for at least 12 months will be guaranteed a job, work placement or work related skills training for at least 6 months. This will start in January 2010.

For those who have lost their job, there will be a one-off increase in the level of Statutory Redundancy Pay from £350 per week to £380.

Child Tax Credit claimants will receive an extra increase to the child element from April 2010 of £20 above indexation.

The Budget also announced that access to the Savings Gateway, due to launch in 2010, will be extended to include those who receive Carer’s Allowance.

Savings exemptions

Hundreds of thousands of people on low incomes (mainly pensioners) overpay tax on savings income, through not knowing they can register to receive interest gross or being unaware they can claim a repayment. HMRC receives data from banks and building societies each year telling them how much interest customers have received and how much tax has been deducted. Whilst HMRC tend to match this data against the records of their wealthier customers to find out where not enough tax has been paid, they do not identify as a matter of course those who have paid too much.

However a new taxback campaign targeted at pension credit recipients is to take place. If this is so, we had pressed for such an initiative and heartily welcome it, although we would have wished the target audience to be more than just pension credit recipients.

The annual investment limit for individual saving accounts was increased to £10,200 (from £7,200), up to £5,100 of which can be saved in cash. These higher limits will be available to people aged 50 and over from 6 October 2009 and available to all from 6 April 2010.

Temporary visitors to the UK

Changes were announced from 6 April 2008 in the tax treatment of temporary visitors to the UK. However, these were impractical for those on low incomes, such as migrant workers or students and we identified this fact even before the law was enacted. We are pleased to see that our views have now been listened to, albeit rather late, and the new provisions (backdated to April 2008) will enable most temporary visitors to remain within the PAYE system, rather than self-assessment. This will be done by allowing certain types and levels of income outside the UK to be ignored provided that they are taxed in an overseas territory (up to £10,000 of employment income or £100 of savings income). There will still be complexity, but much less than there would have been.

Working tax credit

The four week run-on for Working Tax Credit, currently given to those whose working hours fall below 16, has been extended to cover those who lose entitlement due to a move to part time work. Legislation will also be introduced to make it clear that the four week run-on should include the childcare element.

The general changes to the levels of working tax credit are intended to give a boost low income workers. The changes will be accompanied by a new take-up campaign as existing take-up is extremely low (less than 30% of those eligible where there are no children in the family). The government has set itself a target to increase WTC recipients by 100,000 before April 2011. Part of the campaign will involve a pilot using existing PAYE data to identify potential claimants. We hope that the campaign promotes tax credits more accurately than recent efforts from a range of government departments.

Help for the smaller business

The 2008 Pre-Budget Report announced a limited relief for businesses allowing them to claim relief for 2008/09 losses of up to £50,000 going back three years (usually limited to one year). We are pleased to note that this has now been extended to losses arising in 2009/10, which will help those now feeling the impact of the recession.

Those in business who anticipate making losses in the coming year might also be able to use their forecast of a loss in negotiating time to pay existing tax liabilities. Customers affected are asked to contact HMRC’s Business Payment Support Service on 0845 302 1435 .

Whilst the Chancellor announced a doubling of the general capital allowances rate from 20% to 40% for one year, this is unlikely to be of much help to very small businesses whose annual expenditure on capital items may well be within the new Annual Investment Allowance of £50,000 in any case.

HMRC Charter

The Chancellor confirmed that the legal backing for a new HMRC Charter will be included in the Finance Bill but that consultation on the exact form is continuing. A well-structured Charter will be important, particularly for those who cannot afford professional help, as the drive to collect more tax will put pressures on HMRC to be more forceful. We published our suggested version earlier this week which we think is far more appropriate than HMRC’s draft.

It is pleasing to note that the legislation is to include provision for HMRC to report annually on its performance against the Charter, but we have yet to see the detail behind this requirement. In an apparent slippage from the original timetable, a commitment is given to have the Charter in place by the end of the year, although HMRC plan to launch it this autumn.

Inheritance tax record keeping

In our recent article, we argued that record-keeping requirements for Inheritance Tax should not be aligned with those for other tax regimes. We are pleased to note that it has now been made clear that this alignment will not go ahead.

Child Trust Funds

Parents of children with disabilities will no doubt welcome the announcement of an additional £100 per year to be paid to their Child Trust Fund accounts, increased to £200 per year for children with severe disabilities. These payments will be linked to the child’s receipt of disability living allowance. We trust that the administration process for this will not suffer the problems which, as we reported last year, delayed the additional payments being made into the accounts of children from low income families.

Health checks

The Finance Bill will contain a clause amending the current regulation which prevents the cost of one health screening and periodic medical health checks from being treated as a taxable benefit in kind. This benefit - often offered to higher paid employees - had historically been exempted from a tax charge, but in 2007 the rules were extended so that all employees could receive this tax free ‘perk’ but only where it was offered to them all on similar terms. Whilst the exemption will remain, there is no longer to be any obligation on the employer to offer this to all employees or on similar terms, making it likely that this benefit will be once again only enjoyed by senior staff or that they will receive a more expensive offering than other employees.

The squeeze on public finances

Clearly from the figures announced by the Chancellor today the money allocated to HMRC (and the DWP apart from the employment service part of Jobcentre Plus who receive an additional £1.7 billion of funding) to administer the tax and tax credits systems will continue to be reduced year on year. What this tends to do is to reduce the amount of personalised service on offer from HMRC. The most vulnerable of HMRC customers need more material written in language that they can understand and face to face help to deal with the complexity.

What we would have liked to have been included

Rent a room relief

An increase to rent a room relief (which exempts from tax rent received on letting a room in your own house) and has remained at £4,250 since 1997-98. It increases the supply of private residential accommodation and assists first time buyers to meet mortgage criteria. This relief can also be a useful additional source of tax-free income for foster carers who continue to ‘foster’ a person after the age of 18 but receive no further allowances other than ‘supported lodgings’ or ‘shared lives’ payments.

Small pensions

Following the Pre-Budget Report last November, we reported on the impact of freezing a pensions limit for wealthier taxpayers which will also have an effect on pensioners at the opposite end of the spectrum, with only small pension savings.

Whilst the 2008 Budget also heralded the introduction of rules allowing lump sums of up to £2,000 to be taken out of small “stranded” pension pots in addition to the general cap on cashing in small pensions, we had hoped to see a further relaxation.

Education maintenance allowance

In Scotland the Education Maintenance Allowance can be applied for if you lose your job and your income drops. But this is not so in the rest of the UK where claimants must instead rely upon discretionary grants from local authorities. An opportunity has been lost to ensure that those from poorer families can continue their schooling.

(22-04-2009)

Contact Name: John Andrews (Tel: 0844 579 6700 Fax 0844 579 6701)

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