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The Chancellor of the Exchequer, George Osborne, presented his emergency Budget to Parliament on 22 June 2010.  The Budget follows the General Election and the formation of the Coalition Government which is committed to tackling the fiscal deficit by reducing public expenditure and increasing the tax take.

SUMMARY OF THE MAIN CHANGES

The rates of income tax, limits, thresholds and allowances remain unchanged for 2010/2011.

The rates and limits of national insurance contributions remain unchanged for 2010/2011.

Increases in the income tax personal allowance and rates of national insurance contributions will be introduced from   2011/2012.

An increase in the rate of capital gains tax was announced and took effect from 23 June 2010.

No changes to the inheritance regime were announced.

Reductions to the rates of corporation tax will be introduced from 2011/2012.

PERSONAL INCOME TAX

Personal Allowances and Thresholds – 2011/2012

The Chancellor announced that, for 2011/2012, the income tax personal allowance for those aged under 65 will be increased by £1,000 taking it from £6,475 in 2010/2011 to £7,475 in 2011/2012.

The basic rate limit (£37,400 for 2010/2011) will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance.  The exact figures for the basic rate limit and the higher rate threshold will be confirmed when September’s Retail Prices Index is known.

Comment

The significant rise in the personal allowance from 2011/2012 is designed to lift many people on low incomes out of the income tax “net” and ease the burden on basic rate taxpayers.  The focus remains on increasing the tax take from individuals with higher incomes in 2011/2012.

NATIONAL INSURANCE CONTRIBUTIONS (NICs)

The Chancellor confirmed the following measures for 2011/2012:

The main rate of Class 1 employee NIC’s will be increased by 1% to 12%.  The additional rate of Class 1 employee NICs will also be increased by 1% to 2%.

The rate for employers will rise from 12.8% to 13.8%, although the level at which employers start to pay NICs is to be increased by an extra £21 per week above indexation.

The rate of Class 4 NICs between the lower profits limit and the upper profits limit will be increased by 1% to 9%, and above the upper profits limit will be increased by 1% to 2%.

The alignment of the upper earnings limit / upper profits limit (UEL/UPL) with the total of the personal allowance for those aged under 65 and the basic rate limit will be maintained by reducing the UEL/UPL.

Comment

The increase in the employer NIC rate to 13.8% should continue to encourage employees to forego salary for commensurate employer pension contributions.  Where an employer is prepared to fee their NIC savings into the payment, the contribution in respect of a basic rate taxpayer can effectively be enhanced by almost 31% for 2010/2011 as compared to the employee paying the contribution directly.  Exchanges within the higher rate band can enhance contributions by nearly 15%.

However, care is needed regarding the anti-forestalling measure and their impact on salary sacrifice arrangements.

CAPITAL GAINS TAX (CGT)

As expected, the taxation of non-business capital gains featured heavily in the Budget with announcements concerning the increase in the tax rate.

The rate of CGT for disposals made before 23 June 2010 will remain at 18%.

For disposals on or after 23 June 2010, the rate of CGT will remain at 18% for individuals whose total income and capital gains fall within the basic rate limit.

A rate of 28% will apply to gains (or part gains thereof) for individuals above the basic rate limit.

For trustees and personal representatives the rate is increased to 28% from 23 June 2010.

The annual exemption for 2010/2011 will remain at £10,100 (individuals) and £5,050 (most trusts).

The effective rate of CGT for gains qualifying for entrepreneurs’ relief will remain at 10%.  However, the lifetime limit on gains which qualify for entrepreneurs’ relief will increase from £2 million to £5 million for disposals on or after 23 June 2010.

Comment

This change will re-invigorate the single premium bond versus collective investments debate and may lead to an increase in the attractiveness of the bond (either UK based or offshore).  The surprise retention of the annual exemption for gains at £10,100 and the lowering of the basic rate income tax limit from 2011/2012 will lead to many opportunities to add value through advice on income and gains strategies to mitigate tax burdens.

INHERITANCE TAX (IHT)

Nil Rate Band

As enacted in the 2010 Finance Act, the nil rate band will be frozen at £325,000 from 6 April 2010.  The nil rate band will remain at that level for the tax years 2011/2012 to 2014/2015.  The mooted increase to £1million is unlikely to occur during the lifetime of this Parliament.

As proposed in the 24 March 2010 Budget, the Government will consult over the summer of 2010 on bringing IHT on trusts within the Disclosure of Tax Avoidance Schemes.

Comment

There continues to be a need, particularly for those clients with larger estates, to consider the impact of IHT and the steps that can be taken to mitigate it.  In this regard, tried and tested lump sum IHT solutions such as discounted gift schemes and loan trusts, as well as appropriate life cover for the potential liability, will continue to offer valuation solutions.

PENSIONS

No changes were announced to the Lifetime Allowance, Annual Allowance or anti-forestalling measures already in place.

It was announced that the effective requirement to use a pension fund to buy an annuity by age 75 will end with effect from 2011/2012.  Pending implementation of the necessary changes, legislation will be introduced to increase the age by which members of registered pension schemes have to buy an annuity or otherwise secure a pension income to 77.  This change will also apply for the purposes of the inheritance tax charges that specifically apply to pension scheme members aged 75 and over.  The increase in the age by which the member must secure an income takes effect from June 2010.

CORPORATE

Corporation Tax Rates

The main rate of corporation tax will remain at 28% for 2010/2011, but will reduce to 27% for 2011/2012, and will further reduce by 1% every year to a rate of 24% for 2014/2015.

The small companies’ rate of corporation tax will remain at 21% for 2010/2011, but will reduce to 20% for 2011/2012.

Capital Allowances

The Budget announced a reduction in the maximum amount of annual investment allowance from the current limit of £100,000 to £25,000 to expenditure incurred on plant and machinery.

The rate of writing down allowances for new and unrelieved expenditure on plant and machinery will be reduced by 2%.

These reductions will take effect from April 2012 and details of transitional arrangements will be announced in due course.

Comment

The reduction in the corporation tax rates is designed to stimulate business and encourage growth in the private sector.

Corporate planning should continue to focus on avoiding the marginal rate of corporation tax (29.75% for 2010/2011), primarily through the use of salary/bonus and pension contributions.  Owner-managed companies should review their approach to remuneration to ensure maximum tax efficiency.

Employer National Insurance Contributions (NIC)

The rate of employer NICs will remain at 12.8% for 2010/2011, and will be increased by 1% to 13.8% from 2010/2011.

The level at which employers start to pay class 1 NIC’s (the secondary threshold) will increase by £21 per week above indexation from April 2011.  The secondary threshold will not be known until Retail Prices Index figures are published in September.

ANTI AVOIDANCE MEASURES

The March 2010 Budget announced action to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce liabilities of employees and directors to income tax and National Insurance Contributions or to avoid restrictions on pensions tax relief.  The Government has confirmed that Employer Financed Retirement Benefit Schemes are within the scope of this measure.  Legislation will take effect from 6 April 2011.

As part of an approach to develop sustainable responses to avoidance risk, the Government intends to examine whether the option of a General Anti-Avoidance Rule should form one element of their strategy.

VAT

The standard rate of VAT of 17.5% will increase to 20% from 4 January 2011.

No changes to the VAT registration threshold were made.  This remains at £70,000 from 1 April 2010.  The corresponding rate whereby a person may apply for deregistration will be £68,000.

SAVINGS

Individual Savings Accounts (ISA’s)

With the potential increase in the rate of CGT for disposals made on or after 23 June 2010, ISAs will become an even more important savings vehicle for individuals seeking exposure to collective investments.

The overall contribution limit from 6 April 2010, will remain at £10,200 for all individuals.

Where applicable, of the £10,200, up to £5,100 can be held in cash ISA with one provider, with any remaining allowance (i.e. up to the full £10,200) available to invest in a stocks and shares ISA with the same or another provider.

From 6 April 2011, the annual ISA contribution limits will be increase in line with the Retail Prices Index.  They will be rounded to a convenient multiple of 120 so that individuals who save monthly will be able to calculate their monthly savings more easily.

SUMMARY

This Briefing represents our current understanding of the major tax issues arising from the Budget.  Inevitably some further details will merge over the coming weeks and the impact of the changes can then be assessed.

This Briefing is provided for information purposes only and any individual wishing to take action as a result of the Budget changes should take professional advice beforehand.