Tax Assist Budget Summary2011

Editor's Notes

• #3 No changes to existing schedule of deficit reduction to achieve a zero structural deficit by 2014/15 All extracted from the Chancellor’s speech/Budget Red Book/OBR report
• #4 Personal Allowances The major change to income tax for 2011/12 is the £1,000 increase in the personal allowance, which was promised in last June’s Budget as part of the coalition agreement. Other allowances, including personal age allowances, increase by 4.7% - broadly in line with RPI inflation to last September. In 2012/13 the personal allowance is projected to rise by £630, but the basic rate band will shrink by the same amount, so higher rate tax will again start at £42,475 as in 2011/12. For most direct taxes, indexation will be on a CPI basis from 2012/13 – an effective tax increase as CPI is, on average, 0.5% pa below RPI.
• #5 Personal Allowances There was no change in the income threshold at which the personal allowance starts to be withdrawn, as the legislation for this did not incorporate indexation provisions. If you have total income – broadly income after all deductions – of over £100,000, then your personal allowance is reduced by £1 for each £2 excess. As a result, if your total income in 2011/12 will be over £114,950, you will have no personal allowance. For 2012/13 the figure will be £116,210. The rate of tax is 40% up to £150,000, but in the £100,000 - £114,950 band (£116,210 in 2012/13), things are not so simple. Because you lose £1 of allowance for each £2 of income, for each £2 of income you end up paying 40% on £3 – the £2 of income and the £1 of lost allowance. That is an effective tax rate of 60%. A 60% marginal rate can also mean 60% tax relief for pension contributions, provided that the new annual allowance rules (which we examine later) do not bite. It also means it could be worth revisiting the distribution of income between spouses.
• #6 Tax rates Higher rate taxpayers will not benefit from the increased personal allowance in 2011/12 because the basic rate limit is shrinking by £2,400. Thus the higher rate threshold will be £42,475 against the current £43,875. As a result there will be an extra 750,000 higher rate taxpayers from April 2011. In 2012/13 the starting point stays the same because of the cut in the basic rate band matching the increase in the personal allowance. Thus the higher rate taxpayer population will probably grow again. No change to the starting point for 50% tax – that too had no indexation built into the legislation. But the Chancellor said he would examine how much revenue 50% tax raised.
• #7 Individual savings accounts (ISA) limits This year’s increase in the maximum amount that can be paid into an ISA is the first application of the new indexation rules. The number looks odd, but it is chosen to be divisible by £120 (ie £10 a month). The indexation basis was RPI for this year, but will be CPI from 2012. From autumn 2011, a junior ISA will be introduced for children under 18 without a Child Trust Fund. Details are due shortly.
• #8 Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) There are a number of changes to VCTs and EISs prompted by EU State Aid requirements that will come into effect on 6 April 2011. The most significant is that for a VCT at least 70% of its qualifying holdings must be represented by shares. The current minimum is 30% and this will continue to apply for VCT funds raised before the 6 April. The higher minimum will make it more difficult to structure ‘limited life’ VCTs. In the Budget the Chancellor announced that the rate of relief for EIS would increase to 30% from 2011/12, bringing it into line with VCTs. The EIS investment limit for individuals will double to £1m from 2012/13. From April 2012 companies will be eligible for VCT/EIS investment if they: Have less than 250 employees (current limit less than 50); Have gross assets of up to £15m (current limit £7m); and The total investment under all schemes is £10m. All the EIS/VCT Budget changes are subject to EU State aid approval.
• #9 Car benefit The main threshold for calculating scale benefits on cars falls by 5g/km to 125g/km for 2011/12. Any car with emissions of 225g/km or over (210g/km for diesel) will suffer the maximum 35% charge. The 10% scale charge will continue to apply for cars with emissions of 120g/km or less. The list price ceiling of £80,000 for calculating benefits is abolished, which is bad news for Rolls Royce drivers. Also facing a bigger tax bill are drivers of alternatively fuelled cars, eg LPG or hybrids, as the discounts for these are scrapped. In 2012/13 the scale charges will rise by 1% for cars with emissions between 95g/km and 220 g/km. Fuel benefit The flat figure used for calculating fuel benefit rises by £800 to £18,800 for 2011/12. For vans there are no changes. For those without a company car, the approved mileage payment will rise to 45p a mile for the first 10,000 miles from April 2011. Above 10,000, the 25p figure is unchanged.
• #10 Limits The lower earnings limit – a key threshold for DWP benefits – rises to £102 a week for 2011/12, in line with the increase in the basic state pension. The point at which employees start paying NICS rises from £110 a week to £139. The corresponding threshold for employers increases to £136 a week. The upper earnings limit falls from £844 a week to £817 a week, in line with the reduction in the higher rate threshold. The winners are low earners, the losers are high earners, especially those who see their additional rate double on a large slice of income. Rates The reason for the increased starting points is partly to compensate for a 1% increase in all the main NIC rates. The main employer rate is13.8% and the employee rate will be 12% to the upper earnings limit and 2% above. Thus the highest earners face losing 52p in the pound at the margin. Contracting Out A number of changes to state pensions come into effect last April. Contracting out by personal pensions and money purchase occupational schemes will end from April 2012, at which point the rebates for contracted out defined benefit schemes will be cut from the current 5.3% to 4.8%.
• #11 2011/12 marks the start of a number of pension reforms: The annual allowance is falling from £255,000 to just £50,000. The Treasury consultation paper on pensions tax relief indicated that any increase would not be before 2016. A contributions falling foul of the new limit will be subject to a tax charge on the excess which removes all tax relief. This looks likely to cause potential problems for high earners in final salary schemes and anyone receiving a significant pension boost on early retirement/redundancy. The impact of the lowered annual allowance is to some extent countered by new provisions to carry forward unused annual allowance for up to three tax years. This will notionally be backdated to 2008/09, so in 2011/12 you might be able to contribute £200,000 to a pension – three years’ carry forward of £50,000 a year plus the current year’s £50,000 – without falling foul of the annual allowance charge. The carry forward provisions could be particularly useful for anyone whose pension contributions have been constrained by the special annual allowance, which will reach the end of its short life on 5 April 2011. Few will mourn its passing. In April 2012,the next stage of the government’s attack on pension tax relief will come through, with a reduction in the lifetime allowance from £1.8 to £1.5m – the level at which it started in April 2006. Future increases were virtually ruled out by the Treasury, which did not even indicate a post-2016 possibility. There will be a new option of ‘fixed protection’ , which can be chosen from an as yet unspecified date until 5 April 2012 . If you elect for this your lifetime allowance will remain at £1.8m, but only if you make no further contributions and accrue no more benefits after 5 April 2012.
• #12 At the retirement end of pension provision, there are also major changes which begin on 6 April 2011: There are revised rules about income drawdown, ie drawing an income from you own pension (typically a Self invested personal pension -SIPP). In most instances the maximum amount that can be withdrawn is being reduced. For example, at current interest rates for a man or woman aged 60 the maximum will fall by about 18%. However, there will be a new option of ‘flexible drawdown’ – effectively drawdown without limits. This can be claimed if you have at least £20,000 a year of ‘secured income’ – basically occupational scheme pension, pension annuity and state pension income. The review period will also change from five years to three, up until the age of 75. Thereafter reviews are annual. Unfortunately there has been an increase in the flat tax charge for drawdown funds left as a lump sum at death. The charge from April is 55% rather than 35%, although the good news is that the net payment will nearly always be IHT-free. It will be possible to continue income drawdown throughout life – there will be no age 75 or 77 limit when you have to stop. Alternatively secured pensions – the constrained age-75/77+ version of income drawdown will disappear after 5 April and with it the potential 82% tax charge on death. Even fewer will mourn its passing. From 6 April here will be no requirement to draw an income from your pension at any time – you could hold your pension plan untouched (uncrystallised in HMRC’s jargon) until you die at age 90. Your beneficiaries will then receive 45% of your fund, with the rest passing to the Treasury.
• #13 The pension contributions restrictions could have meant an increase in the use of employee benefit trusts (EBTs) and employer financed retirement benefit schemes (EFRBS), had the government not decided to attack these, an intention it originally announced last June. EBTs have long been a contentious point with HMRC, especially when untaxed money passing into them found their way back to employees as interest-free loans which effectively cost 2% a year in tax. EFRBS had been made more attractive by the arrival of 50% tax and increased NIC rates, both of which EFRBS contributions were able to defer or avoid. Under the new ‘disguised remuneration’ provisions, if a contribution to an EBT or EFBS looks like pay – which it generally will – then it will be taxed like pay up front. This has raised some interesting issues on bankers’ bonuses, most of which must now be deferred in some way. The new measures will take effect from 6 April 2011, but anti-forestalling measures which were revealed with the main draft legislation on 9 December 2010 took immediate effect.
• #14 Capital taxes Capital gains tax The 2011/12 capital gains tax annual exemption will rise to £10,600 and the exemption for trusts will generally continue to be £5,300.The rates remain as they were set in June - 18% for gains in the basic rate band and 28% for gains in the higher and additional rate bands. Inheritance tax The 2011/12 inheritance tax nil rate band is £325,000, the same as in 2009/10. The band is currently frozen until 2015, a measure announced by Mr Darling and carried across by Mr Osborne as part of the coalition agreement. Stamp Taxes Another Darling measure retained by Mr Osborne is the new 5% stamp duty rate for residential properties costing over £1m, which takes effect from 6 April 2011. The existing £250,000 first time buyer exemption continues for another year. One stamp duty concession will be that for buyers of a portfolio of residential properties the SDLT rate will be based on the average price, not the total cost. For example, the SDLT on a purchase of 10 £200,000 flats will be at 1%, not the 5% which would otherwise apply from April. The change will take effect from Royal Assent. Three legislative changes will be made to attack SDLT avoidance schemes.
• #15 Corporation tax rates The main rate of corporation tax will be 26% from 1 April 2011 – 1% lower than previously announced. This is the first stage in yearly declines to 23% in 2014. The small profits rate will fall to 20%, bringing it in line (once again) with basic rate tax. This change, along with the increases in NICs, is likely to encourage more incorporation and dividend payments by small businesses. For a higher rate taxpaying small company owner, £1,000 of gross profits will produce £600 in net dividends against £510 net if drawn as pay. The corporation tax thresholds remain the same as they have been since 1 April 1994. Dividend Salary Marginal gross profit 1,000 1,000 Corporation tax (200 ) N/A Dividend 800 N/A Employer’s National Insurance Contributions (NICs) £879 @ 13.8% N/A (121) Gross pay N/A 879 Director’s NICs £879 @ 2% N/A ( 17) Income tax (200 ) (352 ) Benefit to director 600 510 Assumptions: 1. Company’s marginal corporation tax rate is 20% for calendar year 2011. 2. Director’s marginal income tax rate for 2011/12 is 40% (32.5% for dividends less 10% tax credit).
• #16 Capital allowances Annual Investment Allowance (AIA) was doubled to £100,000 in the March 2010 Budget, but will fall to £25,000 from April 2012. The main rate of writing-down allowance (WDA) for plant and machinery remains at 20% and the rate for long-life assets stays at10%. Both will fall by 2% in 2012. R&D tax credits for small and medium-sized enterprises will rise to 200% in April 2011 and 225% in April 2012, subject to EU State aid approval.
• #17 Value added tax (VAT) Registration and deregistration The VAT registration turnover limit rises to £73,000 from 1 April 2011. The deregistration limit increases to £71,000. Fuel scale charges From 1 April 2011, the scale charges for taxing private motoring change where a business recovers input tax on fuel. Businesses must use the new scales from the start of their next prescribed accounting period beginning on or after 1 May 2011. Low value consignment relief Maximum value for VAT-free imports cut to £15 from November 2011. Will limit scope for Channel Island imports of DVDs, contact lenses and electrical goods. Online filing, etc All returns and payments online from 1 April 2012.
• #18 The Chancellor announced a review of non-domiciled taxation, as promised in last year’s June Budget. Measures to be introduced from 2012/13 include: An increase from £30,000 to £50,000 in the annual charge for those with 12 or more years UK residence who wish to use the remittance basis of tax. Full tax relief relief where remitted income or capital gain is used for commercial investment in a UK business. No further changes will be made for the remainder of this Parliament. There will also be a new statutory residence test from 2012/13.
• #19 The cash limit on benefits received by those making gift aid payments of over £10,000 will increase from £500 to £2,500, subject as now to a maximum of 5% of the gift. From April 2013 charities will be able to claim automatic gift aid relief for up to £5,000 of small gifts (£10 or less). HMRC will introduce online filing for charities in 2012/13 to help speed reclaims. The rate of IHT will be reduced to 36% on an estate where at least 10% of the net estate is left to charity. The system which allows tax refunds under self assessment to be gifted to charity will be scrapped for 2011/12 onwards and for tax returns up to 2010/11 where repayment is made after 5 April 2012. This is meant to help finance the cost of online filing.
• #20 The work of the Office of Tax Simplification has prompted the Chancellor into a number of changes: 7 outdated reliefs will be abolished from April 2011. These include millennium gift aid and tax exemption for National Savings Bank ordinary accounts. 14 other reliefs which some may view as not quite so outdated will disappear from April 2012, including luncheon vouchers, cycle to work days and tax reserve certificates. Another 22 reliefs will be abolished after 2012, following consultation. These include such antiquities as relief for Black Beer, angostura bitters, life assurance premium relief and harbour authorities.