Post Election Budget 2010

Personal Tax

The personal allowance

For those aged under 65 the personal allowance will be increased by £1,000, from £6,475 to £7,475 for 2011/12.

By increasing the personal allowance by £1,000 the government states that 880,000 people will be taken out of tax altogether. However, there was no mention of a transferable personal allowance for married couples/civil partnerships. For 2010/11 onwards those with adjusted net income over £100,000 have their personal allowance withdrawn by £1 for every £2 of adjusted net income above the income limit. Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.

Tax rates

There are no changes announced to the main rates of tax for the current or future years. In particular, the new 50% rate (42.5% for dividends) remains for those with taxable income above £150,000.

To ensure that the majority of higher rate taxpayers will pay the same total level of income tax and National Insurance Contributions (NICs) as previously planned, the government will reduce the basic rate limit by £2,500, and the upper earnings and profits limits for NICs by £1,650, based on current estimates of the Retail Prices Index. These changes will take effect for 2011/12.

The existing basic rate limit is £37,400. The exact figure of the basic rate limit for 2011/12 will be confirmed in the autumn.

The higher rate threshold (the point at which 40% tax begins to be paid) will remain frozen until 2013/14.

Trust rate

For 2010/11, the trust rate, which mainly applies to discretionary trusts, was increased from 40% to 50% and the trust dividend rate from 32.5% to 42.5% and these changes remain.

National Insurance Contributions (NICs)

The NIC rates and limits were broadly frozen for 2010/11 at the 2009/10 figures.

Changes to the rates of NIC and thresholds are proposed from April 2011. As announced by the previous government the NIC primary threshold (the point at which NICs are payable) will increase and a further 1% will apply to the rates applicable to employers, employees and the self-employed. The main rate of Class 1 (employee) NIC will be 12% and the Class 4 rate will be 9%. The employer rate will increase to 13.8%. The additional rate of Class 1 and 4 contributions payable will be increased from the current 1% to 2%.

The upper earnings limit and the upper profits limit will continue to be aligned with the income tax higher rate threshold (which is being reduced in April 2011).

The government will introduce two measures for employers:

the level at which employers start to pay NICs will increase by £21 per week above indexation from April 2011
a three-year scheme will be introduced to exempt new businesses in targeted regions from up to £5,000 of Class 1 employer NICs, for each of the first ten employees hired in their first year of business.

Whilst the government needs the additional income from the rise in the NIC rates, there is a clear attempt to avoid a 'jobs tax'. In addition, there is an intention to prevent those on low incomes from suffering from the NIC rises.

Tax credits

A whole series of changes are announced to the tax credits system. From April 2011:

the second income threshold for the family element of the Child Tax Credit will reduce from £50,000 to £40,000
the first and second withdrawal rates for tax credits will increase to 41%
the baby element will be removed from the Child Tax Credit and, from April 2012, the 50 plus element will be removed from the Working Tax Credit
the level of in-year rises of income that will be disregarded from calculations of tax credit entitlement will decrease from £25,000 to £10,000 and, from April 2013, this will be reduced to £5,000.

In April 2011, the child element of the Child Tax Credit will increase by £150 above indexation and, in April 2012, it will increase by £60 above indexation.

From April 2012:

the period for which a tax credit claim and certain changes of circumstances can be backdated will be reduced from three months to one month
a disregard of £2,500 will be introduced in the tax credits system for in-year falls in income.

Tax credits were a core feature of the previous government's strategy for helping low income families. Whilst the new government wishes to continue with the principle: 'Spending on tax credits has increased from £18 billion in 2003 to £30 billion this year. This is unsustainable.'

Child Benefit

From April 2011, both rates of Child Benefit will be frozen for three years.

There had been much discussion whether Child Benefit would survive, particularly for those on higher incomes.

Removal of higher rate relief for pension contributions from 6 April 2011

Some time ago the Labour government announced its intention to remove higher rate relief on the pension contributions of those with high income, broadly £130,000 or more.

This announcement has led to complex rules being introduced from April 2011 onwards, with even more complicated anti-forestalling rules for the years 2009/10 and 2010/11.

Whilst there are no changes to the rules for 2009/10 and 2010/11, the government is looking at simpler ways of achieving a similar result from 2011 via consultation with interested parties.

Provisional research suggests an annual allowance in the region of £30,000 - £45,000 might deliver the necessary tax yield. Relevant issues for the government to consider include:

options to ensure that basic rate taxpayers are not subject to the restriction and to support cases caused by one-off ‘spikes’ in pension accrual
how pension accrual in defined benefit schemes would be valued
whether and how there could be flexibility for individuals over paying any charges that arise
how compliance and delivery would operate in practice.

Requirement to buy an annuity

From April 2011 the rules that create an obligation to purchase an annuity by age 75 will be replaced with age 77. A consultation on the detail of this change will be launched in the near future.

Furnished Holiday Lettings

The tax treatment of Furnished Holiday Lettings (FHL) has been advantageous for many years. Provided that certain conditions are met, FHL are treated as a trade. This can be preferable to the tax regime for normal let property in a number of specific areas, as the rules and reliefs for trades are often more generous.

The government has announced that these rules will continue unchanged for 2010/11, with a consultation into possible future changes starting in the summer.

Budget 2011 - Personal Tax

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Brooks Green