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George Osborne opened his very own Pandora's Box today. We
now have a clearer idea of his public expenditure cuts and tax
changes. This update provides an initial summary of some of
the tax changes. We will provide more detail as it becomes available.
The update is split into two parts: changes affecting personal
taxpayers and changes affecting businesses – which include
companies, partnerships and sole traders.
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PERSONAL TAX ISSUES
Personal Tax Allowance
The personal allowance for 2010-11 remains at £6,475.
In line with the Lib Dems’ manifesto promise – as
confirmed in the Coalition agreement, the basic personal allowance
will rise to £7,475 from April 2011 with a commitment
to further increases towards the promised £10,000 target
by the end of the present parliament.
Tax bands
The income figure above which higher rate tax becomes payable
will be reduced from April 2011 so that higher rate taxpayers
will not benefit from the increase in personal allowances.
National Insurance Contributions (NICs)
Employees' NICs will increase by 1% from April 2011. The threshold
before NICs become payable is to be increased (by an unspecified
amount) so that lower paid workers will be better off.
Because the upper limit is being reduced to allow 40% income
tax to be paid sooner (see above) and the upper earnings limit
for NI purposes is linked to this, the upper earnings limit
will be reduced. Whether this means that higher paid employees
will pay less NI remains to be seen but any benefit is likely
to be wiped out by extra income tax at 40%.
State Pension
From April 2011 State Pension benefits will be increased each
year by at least 2.5%. Under a ‘triple lock’ pensions
will rise by a minimum of 2.5pc or in line with earnings or
prices, whichever is the greater.
Pension contributions
The annual allowance (the maximum allowable contributions in
any year), currently £255,000, is to be reduced from April
2011 as part of a simplification of the previous proposals intended
to limit higher rate tax relief for contributions. The Government
will discuss the changes with interested parties but anticipates
that a reformed annual allowance may be in the region of £30,000
to £45,000.
Child Benefits
Are to be frozen for three years.
Child and Working Tax Credits
The Child Tax Credit will increase by £150 above the
Consumer Price Index in April 2011.
The baby element of the Child Tax Credit will be removed from
April 2011.
The following changes will also apply from April 2011:
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Reduced eligibility for families with household income
above £40,000.
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Both withdrawal rates to increase to 41%.
-
Reduction in the income disregard from £25,000 to
£10,000.
And from April 2012, the facility to register and claim tax
credits from an earlier date is to be reduced from the present
93 days (3 months) to just one month.
Alcohol duties
Previous increases in the duty on cider products have been
reversed. All other duties are unchanged.
Landline Duty
Due to be effective from 1 October 2010 this duty will no longer
be implemented.
Capital Gains Tax
All of the changes noted below apply to chargeable gains made
on or after 23 June 2010.
In a widely expected change to the present flat rate of 18%,
a new 28% rate is to be introduced. This will be applied to
individuals whose total gains and income are more than the upper
limit of the basic rate band of income tax.
The 28% rate will apply to taxable gains, or any part of those
gains, that are above that limit. Gains under the limit will
still be taxed at 18%.
The rate for trustees and personal representatives of deceased
persons is increased to 28%.
Good news for business owners contemplating a sale of their
business. The rate of CGT for gains qualifying for entrepreneurs’
relief remains at an effective rate of 10% and the lifetime
limit on gains qualifying for entrepreneurs’ relief is
increased from £2 million to £5 million. The current
system of a 4/9th’s reduction in the gain which is then
taxed at 18% is abolished in favour of an actual 10% rate so
that the annual exemption will now save tax at 10% rather than
at 18% as previously.
Finally the annual exempt amount for 2010-11 is unchanged at
£10,100.
Individual Savings Accounts (ISAs)
From 6 April 2011 ISA limits will in future be increased in
line with the Retail Price Index (RPI).
Deferring pension annuity decision
The obligation to buy an annuity using your pension fund by
the time you reach the age of 75 is changing. As from June 23rd
2010 anyone who has yet to reach age 75 will be able to defer
a decision to purchase an annuity until age 77.
This is a stop gap measure as the intention is to abolish the
requirement to purchase an annuity as from April 2011.
Furnished Holiday Lettings (FHL)
The withdrawal of the furnished holiday letting rules on 6
April 2010 has been cancelled! For the tax year 2010-11 the
legislation continues as before with all its tax advantages
intact.
However, the Government is to publish a consultation document
over the summer about plans to change the tax treatment of furnished
holiday let property from April 2011. The consultation will
look at issues that:
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ensure the FHL rules apply equally to properties wherever
they are in the EEA;
-
increase the number of days that qualifying properties
have to be available for, and actually let as, commercial
holiday letting; and
-
change the way in which FHL loss relief is given.
The last point in particular may merit attention as current
legislation allows all furnished holiday lets losses to be set
off against other income of the same year. We will advise as
and when more information is released after the summer consultation.
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BUSINESS TAX ISSUES
Corporation Tax
The present 28% corporation tax rate for larger companies is
to be reduced by 1% per annum from 1 April 2011 as follows:
1 April 2011 - 27%
1 April 2012 - 26%
1 April 2013 - 25%
1 April 2014 - 24%
For smaller companies, those with taxable profits below £300,000,
the small companies rate of corporation tax will reduce from
the present 21% to 20% on 1 April 2011.
National Insurance Contributions
The 1% increase in employers’ contributions will go ahead
from April 2011. However, the threshold before contributions
become payable will increase by £21 pw more than indexation.
This means that contributions for lower paid workers will be
lower overall.
The Government also promised a three-year scheme to exempt
new businesses in targeted regions from up to £5,000 of
class 1 employer NIC payments, for each of their first 10 employees
hired in their first year of business. Subject to meeting the
necessary legal requirements, the Government aims to have the
scheme up and running by September, but any qualifying new business
set up from 22 June 2010 will also benefit.
Capital Allowances
As you are probably aware, depreciation charged in your accounts
is not an allowable deduction for tax purposes. Instead HMRC
allow you to claim capital allowances at fixed rates that vary
dependent on the nature of the assets.
Partly to offset the reductions in corporation tax rates most
rates of capital allowances are to be reduced - from 1 April
2012 (for limited companies) and from 6 April 2012 (for unincorporated
businesses).
The proposed reductions are:
-
Writing down allowances will be reduced from 20% to 18%
on the cost of qualifying plant and machinery. This will
also affect any unrelieved expenditure in the main rate
pool;
-
Writing down allowances on long life assets, integral features
and specified cars will be reduced from 10% to 8%. This
will also affect any unrelieved expenditure in the special
rate pool;
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The annual 100% investment allowance available for qualifying
capital expenditure upto £100,000 will be reduced
to £25,000.
A new 100% first year allowance is to be introduced giving
full relief for expenditure incurred on new zero-emission goods
vehicles. The relief is back dated to April 2010 as it was originally
announced by the previous Government.
Enterprise Management Incentives (EMIs)
From the date the June Budget receives Royal Assent the following
change to the present EMI rules will be made:
The requirement that a company granting qualifying EMI options
to its employees must operate “wholly or mainly”
in the UK is to be replaced by a requirement that it be required
to have a “permanent establishment” in the UK.
VAT - Increase in standard rate
From 4 January 2011 the standard rate of VAT will increase
from 17.5% to 20%. The reduced rate of VAT stays at 5%.
If you want to find the amount of standard rate VAT in a VAT
inclusive price from 4 January 2011, simply divide the total
cost including VAT by 6.
VAT - Users of Flat Rate Scheme
Due to the increase in the standard rate to 20% from 4 January
2011 the Flat Rate Scheme rates will change from the same date.
If you currently use this scheme or have previously considered
the decision to be marginal, you will want to reconsider its
attractiveness by reference to the new rates.
Insurance Premium Tax (IPT)
From 4 January 2011 the standard rate of IPT will increase
from 5% to 6%. The higher rate will also increase from 17.5%
to 20%.
Research and development (R&D) tax relief
The Government are introducing a relieving measure that was
originally announced in the last Pre-Budget Report. Qualifying
expenditure incurred by SMEs on or after 9 December 2009 will
now qualify for the relief even if the intellectual property
derived from the R&D is not owned by the company making
the claim.
Tax Avoidance
The coalition government seems as committed as their predecessors
to further reducing the attractions of overt tax avoidance schemes.
Schemes using trusts to reward employees and to assist in the
avoidance, deferral or reduction in income tax or NIC including
avoiding the new pensions tax relief restrictions, will be legislated
against with effect from April 2011. The Chancellor has confirmed
that Employer Funded Retirement Benefit Schemes (EFRBS) are
within these measures. The government is also consulting
on the introduction of a General Anti-Avoidance Rule. Other
specific anti-avoidance measures have also been introduced to
counter specific schemes.
Other Business Tax Measures
Various other specific business tax announcements were made
including clarifications on the treatment of UK companies receiving
capital distributions, changes to the “worldwide debt
cap” rules for large groups of companies, amendments to
the rules for companies claiming consortium relief and harmonising
of the interest rules for late payments and repayments of corporation
tax.
DISCLAIMER - PLEASE NOTE: The
ideas shared with you in this email are intended to inform rather
than advise. Taxpayers circumstances do vary and if you feel
that tax strategies we have outlined may be beneficial it is
important that you contact us before implementation. If you
do or do not take action as a result of reading this newsletter,
before receiving our written endorsement, we will accept no
responsibility for any financial loss incurred. |
