2003 Budget preview: National Insurance rises

It is clear that Chancellor, Gordon Brown will need to raise more from the coming Budget than he probably expected a few months ago. We have falling profits in the corporate sector reducing the tax take from companies. We have lower than expected growth rates. And now, of course, we have the Iraqi war where every day sees missiles and bombs costing thousands of pounds each raining down on Iraq and the prospect of troop deployments lasting months if not years.

Ahead of next Wednesday's (April 9) Budget it is useful to recap the measures that have already been announced and speculate on what else might happen.

National Insurance

The main change for the tax year 2003/4 is the increases in National Insurance, which were announced last year. The rate for employers will rise from 11.8% to 12.8% on all salary over the threshold level – currently £4615 pa.

For employees the basic rate on salary between the lower threshold of £4615 and the upper threshold of £30420 also rises by 1%, from 10% to 11%. However, 2003/4 also sees a new form of National insurance surcharge that sees employees paying 1% NIC on all salary above the upper threshold level.

This means that, for a freelancer whose income is all subject to IR35, with gross fees of £40,000 they will pay around £560 more NIC a year. A contractor with gross fees of around £60K pa will be paying about £890 more NI a year and one on £80K gross fees will pay around £1200 more NIC.

According to the Adam Smith Institute, who devised the 'tax freedom day', the date in the calendar when the average taxpayer has earned enough to pay off their taxes and can start earning for themselves, in 2003 this day will come 3 days later, that is on 8 June 2003 to celebrate. This delay stems mainly from the effect of the NIC increases from 6 April 2003.

New tax credits

The Chancellor’s final social welfare reforms take effect from 6 April 2003, when the new Working Tax Credit (WTC) and Child Tax Credit (CTC) are integrated within the UK tax system and administered by the Inland Revenue.

WTC provides assistance to workers in low-income households and is available whether or not there are children in the household. Typically, employees will receive the WTC from their employer as part of their pay packet.

CTC replaces the existing Children's Tax Credit and other family benefits and allowances. It is usually given to those who are responsible for at least one child. It will be paid directly into the bank account of the carer, along with the existing child benefit.

What many may not have appreciated is just how far up the income scale the tax credits reach. Although it started life as a 'means-tested' benefit CTC will now be paid to those with income up to around £58,000 in the tax year. In the current market many freelancers should be able to qualify. The Revenue has been widely publicising the new benefit in recent months because they depend upon the taxpayer actually claiming it. Claimants can apply on the Revenue’s web site.

100% allowances for small company computers and software

It was announced a week or so ago that an avoidance loophole involving lease software rights was being closed with immediate effect. The 100% allowance for purchases of computer software and hardware by small companies is due to end at the end of the 2002/3 tax year. However the Chancellor may be planning to leave the allowance in place – hence the need to close the loophole.

Employee Benefit Trusts

Last autumn’s pre budget report saw new anti-avoidance provisions introduced to restrict the use of EBTs. These will have impacted considerably on umbrella companies that relied on EBTs as the main tool for reducing the tax bill for freelancers who were likely to be caught by IR35. Some commentators are predicting that there might be further changes to EBT provisions.

Other predictions?

Possible sources of additional revenue could include:

Raising VAT rates by 0.5 to 1%. - with inflation currently low the Treasury may be prepared to risk raising prices in this way.

Stamp duty.- changes here might also help cool the property market

Inheritance tax – the Chancellor is keen on raising taxes in areas where the impact may not be immediately apparent to taxpayers.

Treatment of company losses – Companies currently have large trading and capital losses being carried forward. Some experts have suggested that this might be an area for changes to restrict the uses companies can make of these losses.

VAT on new house sales – several commentators are predicting VAT of perhaps 5% on new house sales

Environmental taxes on plastic bags – there are also predictions that we could see the introduction of a similar tax to that which seems to be proving successful in Ireland