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The Budget 2011 Introduction »
Personal tax
The personal allowance for 2011/12
For those aged under 65 the personal allowance will be increased by £1,000, from £6,475 to £7,475 for 2011/12.
However a new concept of withdrawing the personal allowance for those with adjusted net income over £100,000 was introduced in 2010/11 and will continue for 2011/12. The reduction in the allowance is by £1 for every £2 of adjusted net income above the income limit. Adjusted net income for this purpose is broadly all income after adjustment for pension payments, charitable giving and relief for losses.
Comment
If adjusted net income is £112,950 or above in 2010/11 or £114,950 or above in 2011/12, there will be no personal allowance. If adjusted net income can be reduced to below these figures, some personal allowance will be given, so the tax saving is rather more than the 40% higher rate of tax.
Consider:
- whether you can defer income to 2011/12 (for example if you are a director/shareholder of a company)
- paying pension contributions
- making Gift Aid donations.
Tax bands and rates for 2011/12
The basic rate limit will be reduced from the current £37,400 to £35,000. Therefore an individual will pay 40% tax rather than the basic rate of 20% when their total income exceeds £42,475.
The 50% rate of income tax (the ‘additional rate’) will continue for 2011/12. This applies to taxable income above £150,000.
Comment
In his speech the Chancellor stated that the 50% additional rate of tax should be regarded as being ‘temporary’ and would be subject to review.
Dividend income as part of total income is taxed at 10% where it falls within the basic rate band, 32.5% where liable at the higher rate of tax and 42.5% where liable to the additional rate of tax.
Comment
As the basic rate limit has been reduced for 2011/12 more individuals will pay tax at the higher rate increasing their overall liability.
The personal allowance and basic rate band limit for 2012/13
For those aged under 65 the personal allowance will be increased from £7,475 to £8,105 for 2012/13.
The basic rate limit will be reduced from £35,000 to £34,370 for 2012/13.
National Insurance Contributions (NICs)
Changes to the rates of NICs had been announced by the previous government and the current government confirmed that the rate changes would be made. From 6 April 2011 a further 1% will apply to the rates applicable to employers, employees and the self-employed.
Changes to the thresholds at which NICs are payable will increase significantly from 6 April 2011. The level at which employees start to pay contributions will increase to £139 per week (the primary threshold) and for employers the weekly limit will be £136 (secondary threshold). The primary and secondary thresholds were aligned at £110 for 2010/11.
The upper earnings limit and the upper profits limit will continue to be aligned with the income tax higher rate threshold of £42,475.
Comment
The increase in the threshold at which employers and employees will start to make contributions will offer some protection for those at the lower end of the earnings scale from the increased contribution percentages.
Income tax and NICs reform
The government has announced it will consult on the options, stages and timing of reforms to integrate the operation of income tax and NICs.
Comment
The government will issue a consultation document later this year setting out the differences in the current income tax and NIC system. They have confirmed that NICs will not be extended to individuals above the State Pension age or to other forms of income such as pensions, savings and dividends.
Furnished Holiday Lettings (FHL)
The tax treatment of 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.
Currently the FHL treatment potentially applies to properties in the EEA but certain conditions need to be satisfied including that the property must be:
- available for letting for at least 140 days a year and
- actually let for at least 70 days.
From April 2011 there will be two types of FHL business; a UK FHL business consisting of properties in the UK and an EEA FHL business consisting of properties in one or more EEA states. FHL losses will only be able to be set against income from the same FHL business.
From April 2012 the property must be available for letting for at least 210 days a year (generally the tax year) and actually let for at least 105 days.
A ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period.
Comment
If the new conditions are met it is only the loss relief provisions which are being restricted. The other potential tax advantages, in particular the property being regarded as a trading asset for capital gains tax, remain.
Junior Individual Savings Account (Junior ISA)
The government will introduce a new Junior ISA product which will be available for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs will be tax advantaged and will have many features in common with existing ISAs. They will be available as cash or stocks and share based products.
The government expects that Junior ISAs will be available from autumn 2011.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)
EIS and VCTs are designed to encourage private individuals to invest in smaller high-risk unquoted trading companies. While the EIS requires an investment to be made directly into the shares of the company, VCTs operate by indirect investment through a mediated fund.
Currently EIS investors may be given income tax relief at 20% on their investments of up to £500,000 a year. Legislation will be introduced to increase the rate of tax relief to 30% for shares issued on or after 6 April 2011, subject to State aid approval.
Future changes
Subject to State aid approval, legislation will be introduced to make the following changes to the EIS and for shares issued on or after 6 April 2012.
- The thresholds for the size of the company which may benefit from both types of investment will be increased to fewer than 250 employees and £15 million gross assets before the investment.
- The annual amount which can be invested in an individual company is to rise to £10 million.
- The annual amount that an individual can invest through EIS is to increase to £1 million.
Tainted donations to charity
New rules will replace the existing substantial donor rules for donations made on or after 1 April 2011.
The rules will deny tax relief on the donation where one of the main purposes of the donation is to receive an advantage for the donor or connected person directly or indirectly from the charity. There is no monetary limit on the amount of the donation which may be caught by these rules. These donations will be ‘tainted donations’.
Gift Aid donor benefit limit
Legislation will be introduced to increase from £500 to £2,500 the maximum value of the benefits that donors may receive as a result of making a donation to charity of more than £10,000 under Gift Aid. The new limit will be subject to the existing rule that the benefit must not exceed 5% of the gift. The new rules will apply for benefits received as a consequence of donations made on or after 6 April 2011 by individual donors (similar changes will be made to the corporate Gift Aid rules).
Comment
The measure will enable charities who wish to do so to thank their larger donors in a more generous way. HMRC have also announced that they will publish revised guidance to clarify a number of issues and misunderstandings on Gift Aid benefits.
Gift Aid smaller donations
From April 2013 charities that receive small donations of up to £10 will be able to apply for a Gift Aid style repayment without the need to obtain Gift Aid declarations for those donations. The amount of donations on which the new repayment can be claimed will be capped at £5,000 per year, per charity.
Gifts of art
The government will consult on introducing a tax reduction for taxpayers who give a work of art or historical object of national importance to the State.
Non-domiciled taxation review
The government will consult on measures to introduce the following reforms from April 2012. The measures will:
- remove the tax charge when non-domiciles remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses
- increase the existing £30,000 annual charge to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to retain access to the remittance basis of tax
- simplify some aspects of the current rules to remove undue administrative burdens.
The Budget 2011 Introduction »
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