The 'unavoidable Budget'
22 June 2010 |
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When it came to his Budget statement, George Osborne’s ‘unavoidable Budget’ was in some ways not as bad as expected. Capital Gains Tax rates will not rise to 40% or more; higher rate tax relief on pension contributions will not be abolished; VAT will increase, but not until
4 January 2011 and it will not be extended to food, children’s clothes, books, newspapers, etc; holiday homes will continue to benefit from a range of tax breaks.
For companies there are phased reductions in the main corporation tax rate, although for some future reductions in capital allowances will serve to reduce or cancel the benefit. There will be some help with National Insurance for start-ups outside the ‘south east’.
So for taxpayers there were some reasons to be less miserable than anticipated. But non-taxpayers and others on benefits will face significant cuts. To quote the Chancellor: “We are wasting the talent of millions, and spending billions on it in the process …. we need to put the whole welfare system on a more sustainable and affordable footing”. Tax Credits will be reduced for middle income families, Housing Benefit will be curtailed, and lone parents will be expected to find work as soon as their children start school – only Child Benefit is likely to remain untouched, and even that will be frozen for the next three years.
It remains to be seen how restricting the spending ability of those who cannot afford to save, coupled with the prospect of further spending cuts in the Spending Review (to take place on
20 October) will affect the economic recovery.
The highlights as far as tax is concerned are:
- Capital Gains Tax increases to 28% for higher rate taxpayers with effect from 23 June 2010
- VAT to increase to 20% from 4 January 2011
- Entrepreneurs’ relief to increase to £5 million lifetime allowance from £2 million with effect from 23 June 2010
- reduction in corporation tax rates from April 2011 from 28% by 1% a year to 24% by 2014
- small profits corporation tax rate falls to 20% in April 2011 from 21%
- capital allowances rates and the Annual Investment Allowance (AIA) to fall from April 2012.
The main topics are detailed below, click on the area of interest:
Income tax rates and thresholds
For the tax year 2011/12 the income tax personal allowance for persons under 65 will increase by £1,000 to £7,475.
The higher rate threshold for income tax will also reduce by £2,500 based on current estimates of the Retail Price Index. The exact figures for the higher rate threshold will be confirmed in the Autumn.
Capital Gains Tax (CGT)
From 23 June 2010 there will be two main rates of capital gains tax (CGT), 18% and 28%, in place of the single rate of 18% for all gains.
The rate paid by individuals will depend upon the amount of their total taxable income.
Gains qualifying for entrepreneurs' relief will be taxed at a rate of 10%, and the lifetime limit of gains qualifying for entrepreneurs' relief will be raised to £5 million (from the previous figure of £2 million).
Gains of trustees or personal representatives of deceased persons will be charged at 28%.
The annual exempt amount remains at £10,100.
Tax credit and child benefit
- The government will reduce tax credit eligibility for families with household income above £40,000 from April 2011 and make further changes in 2012/13.
- The government has announced the removal of a number of elements from the tax credits system including the baby element (6 April 2011) and the age 50+ element (6 April 2012).
- The government will use the Consumer Price Index (CPI) to up-rate all of those elements of tax credits due to be up-rated by Retail Prices Index (RPI) from April 2011. The child element of the child tax credit will increase by £150 above CPI in 2011/12 and £60 above CPI in 2012/13.
- The rate of child benefit will remain at current levels until April 2014, which will help fund increases in the child element of the child tax credit.
- The backdating provisions have been shortened to one month with effect from 6 April 2012 from the current 93 days and amendments will also be made to the income disregard for income increases from 6 April 2011 and an introduction of a disregard for income falls from
6 April 2012.
- Whilst the government has chosen to continue with the previously announced decision on Working Tax Credits of the over 60s, they have reversed the March 2010 announcement to increase for those with children aged one or two.
Furnished Holiday Letting Relief
The relief will remain for European let properties for 2010/11.
There will be consultation undertaken this summer about changes to the relief from April 2011.
Child Trust Funds
The government announced on 24 May 2010 that it intends to reduce and then stop all government contributions to Child Trust Funds.
Subject to legislation, the government intends to reduce government contributions at birth, and to stop government contributions at age seven, from August 2010.
The government also intends for HMRC to stop issuing new Child Trust Fund vouchers from
1 January 2011.
Taxation of non-domiciled individuals
The Chancellor has announced that the government will review the taxation of non-domiciled individuals. This reiterates a statement made previously in the Coalition Agreement.
Corporation tax
The main rate of corporation tax will be reduced to 27% in 2011/12, with further reductions to 26% in 2012/13, 25% in 2013/14 and 24% in 2014/15.
The Budget also announces a reduction in the small profits rate of corporation tax to 20% from April 2011.
Capital allowances
The rates of Writing Down Allowances (WDAs) for new and unrelieved expenditure on plant and machinery will be reduced on:
- the main rate pool from 20% to 18% per year
- the special rate pool from 10% to 8%.
The AIA will also reduce from £100,000 to £25,000.
These rate changes will take effect from 1 April 2012 (for corporation tax) or 6 April 2012 (for income tax).
NICs rates and thresholds
For the tax year 2011/12 there is a 1% increase in the national insurance rates from
6 April 2011 as announced in the March 2010 Budget.
The level at which employers start to pay NICs will increase by £21 per week above indexation from April 2011.
The government will announce a three-year scheme to exempt new businesses in targeted regions from up to £5,000 of Class 1 employers' NICs payments, for each of their first 10 employees hired in their first year of business.
Pension contributions tax relief
The government has today (22 June 2010) announced it is considering restricting pensions tax relief from 6 April 2011, by reforming the existing pension savings allowances, principally by significantly reducing the annual allowance (2010/11 £255,000).
It is suggested that the level of a reformed annual allowance may be in the region of £30,000 to £45,000.
These reformed allowances would replace the high income excess relief charge due to come into force on 6 April 2011, which will be repealed.
This is good news for those making pension contributions with income over £150,000. There will no longer be a restriction on the tax relief on the pension contributions, which would have been taken as a tax charge after the tax return had been filed for the year.
Instead we will all be restricted on the amount that can be contributed to our pension scheme in a year to an amount in the region of £30,000 to £45,000.
Maximum age before individuals have to purchase an annuity
The government has announced that it will end the effective requirement to use a pension fund to buy an annuity by age 75 with effect from 2011/12.
In the meantime, those who have not reached the age of 75 by 22 June 2010, will not be required to purchase an annuity until their 77th birthday. This deferment allows those individuals reaching the age of 75 on or after 22 June 2010 to defer their decision on what to do with their pension savings until after new rules are finalised next year.
Basic Rate State Pension
The basic rate state pension will be linked to earnings from April 2011.
The state pension is guaranteed to rise in line with earnings, prices or 2.5% whichever is the greatest.
VAT
From 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%.
Insurance Premium Tax
Also from 4 January 2011, the standard rate is increasing to 6% from 5% and the higher rate from 17.5% to 20%.
Anti-avoidance: geared growth and employment-related securities
A consultation is being undertaken during 2010, on the taxation of employment-related shares and securities, where geared growth arrangements are used.
George Osborne said that the aim of the consultation is to develop proposals to ensure that employment income from employment related securities is subject to income tax and NICs.
Growth shares have been a popular method of rewarding staff which would be subject to Capital Gains Tax rather than income tax currently.
Anti-avoidance: employment income and pensions contributions
The government will be taking action to prevent efforts to avoid income tax and NICs on earnings provided through the use of trusts and other vehicles.
Employers and employees are entering into arrangements using trusts and other vehicles that seek to avoid, defer or reduce liabilities to income tax and NICs on earnings or that seek to avoid restrictions on pensions’ tax relief. Arrangements in some cases seek to rely on the use of complex intermediary structures, some of which may be offshore.
The government is considering options for tackling these arrangements, including those which seek to avoid the restrictions on tax relief for pension schemes, and intends to introduce legislation in due course to take effect from 6 April 2011.
