Tax Rates and Thresholds

Income tax

 Personal allowance: the personal allowance will be increased by £1,000 to £7,475 from 6April 2011. The basic rate limit, or threshold at which higher rate tax is payable, will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance. The reduction in personal allowance for those with income over £100,000, which came into effect from 6 April 2010, will continue.

 National Insurance (NIC) 

The secondary threshold, at which employers start to pay Class 1 NIC, will be increased by£21 above indexation, from April 2011. This is to partially offset (for employers) the previously announced 1% increase in NIC from April 2011 which also applies to employees.

Corporation Tax 

The main rate of Corporation Tax, for companies with profits over £1.5m, will be reduced to 27% from 1 April 2011, and by 1% per year for the following 3 years, to 24% in 2014. Small Companies’ Rate, for companies with profits below £300,000 will be reduced to 20%from 1 April 2011.

Capital Gains Tax 

The 18% rate is to continue for basic rate taxpayers but a rate of 28% will apply to higher rate taxpayers, from midnight on Budget day (22 June 2010) (see detailed analysis below).

VAT

 The standard rate of VAT is to increase to 20% from 4 January 2011 (see further detail below).

Insurance Premium Tax (IPT) 

The standard rate of IPT, which applies to most general insurance (including property, motor and medical insurance); will increase from 5% to 6% from 4 January 2011 The higher rate of IPT, which applies to travel insurance and extended warranties on cars and consumer goods, will increase from 17.5% to 20%, again from 4 January 2011. The increase in the higher rate, introduced to prevent value shifting between goods and related insurance, mirrors the increase in the standard rate of VAT on the same date.

Capital Gains Tax – Rates and Entrepreneur’s Relief

There will be a new rate of Capital Gains Tax (CGT) of 28% for disposals taking effect on or after23 June 2010.This new rate will apply to such gains (or any part thereof), where total taxable gains and income are above the upper limit of the Income Tax basic rate band. The 28% rate will also apply to any gains realised by trustees and personal representatives. Where taxable gains and income when taken together are less than the upper limit of the Income Tax basic rate band, (i.e. after allowing for annual exemption and losses), the rate of CGT remains at 18% on the whole gain. Thus, it is only the excess of gains over the upper limit which will be taxed at 28%. (Pre 23 June 2010 gains will not be included in this calculation).The annual exemption for the current year will remain at £10,100.The maximum level of Entrepreneurs’ Relief will be increased from £2m to £5m for disposals arising after 23 June 2010. This will apply both to individuals and trustees that make qualifying gains. Where gains in excess of the previous limit of £2m were made before 23 June 2010, no additional relief will be allowed for the excess above this limit. However, if further gains are made after 23 June 2010, they will qualify for the additional increase of £3m.All gains arising on or before 22 June 2010 will continue to be liable to CGT at 18% but in calculating any CGT payable for the current year, individuals and trustees will be able to deduct losses and the annual exempt amount in any way which minimises the tax due for the current tax year. Where certain reliefs are claimed which allow gains on disposal of assets to be deferred by the acquisition of assets, the new rates will apply to such gains when they are ultimately realised by the disposal of these newly acquired assets.

Furnished Holiday Lettings (FHL)

At Budget 2009, the previous Government announced that the FHL rules would be withdrawn from 6 April 2010. Under these rules landlords with income from furnished holiday accommodation in the UK are treated as if they are trading for certain tax purposes, as long as they meet prescribed conditions. This means, for example, that a loss incurred on the letting of a property may be offset against other taxable income. Today’s Budget confirms that the FHL rules will not be withdrawn, but will continue to apply for properties in the UK and elsewhere in the EEA until 5 April 2011. The Government will consult over the summer as to how furnished holiday lettings will be taxed from 2011 onwards.

Requirement to buy an annuity – Transitional measure

The Government has announced that it will end the effective requirement to use a pension fund to buy an annuity by age 75 from 2011/12.In the meantime, pending implementation of the necessary changes, legislation will be introduced in Finance Bill 2010 to increase to 77 the age by which members of registered pension schemes have to buy an annuity or otherwise secure a pension income. This change will also apply for the purposes of the Inheritance Tax (IHT) charges that specifically apply to pension scheme members aged 75 and over. These interim changes enable those reaching age 75 on or after 22 June 2010 to defer their decision on what to do with their pension savings until after the new rules are finalised next year. The Government has undertaken to review the Finance Act 2010 legislation which restricts tax relief for pension contributions for higher earners.

Indexing Individual Savings Account (ISAs) limits from 2011

Indexation of the ISA limits for the tax year 2011/12 will have effect on and after 6 April 2011, and for subsequent tax years will have effect on and after 6 April of each year.

Capital Allowances

Legislation will be introduced in a future Finance Bill to make the following changes To reduce the rates of writing-down allowances (WDAs) for new and unrelieved expenditure on plant and machinery:

·         from 20% to 18% per annum for expenditure allocated to the main rate pool;

·         from 10% to 8% per annum for expenditure allocated to the special rate pool; and

·         To reduce the maximum amount of the Annual Investment Allowance from the current limit of £100,000 to a new limit of £25,000. The first and second measures will have effect for the calculation of WDAs for chargeable periods ending on or after 1 April 2012 for businesses within the charge to corporation tax (CT) and on or after 6 April 2012 for businesses within the charge to Income Tax. The third measure will have effect from April 2012. Details of the transitional arrangements will be published, along with the relevant draft legislation, before the reduction takes effect.

100% first-year allowances: Zero-emission goods vehicles

This measure will provide a 100% first-year allowance for business expenditure on new and unused (not second hand) zero-emission goods vehicles. The Government will legislate for this measure in a Finance Bill to be introduced as soon as possible after the summer recess.

Corporate Capital Distributions

This measure will clarify the Corporation Tax treatment of certain distributions received by UK companies. Distributions within the definition in Part 23 of the Corporation Tax Act (CTA) 2010 will not be prevented from falling within the distribution exemption regime for companies introduced in Finance Act 2009 by virtue only of being ‘of a capital nature’. The Government will legislate for this measure in a Finance Bill to be introduced as soon as possible after the summer recess. The legislation will have retrospective effect, but companies will be able to elect for the legislation not to apply retrospectively.

UK Real Estate Investment Trusts (REITs) and stock dividends

This measure will allow UK-REITs to issue stock dividends in lieu of cash dividends in meeting the requirement to distribute 90% of the profits from the property rental business of the REIT. The Government will legislate for this measure in a Finance Bill to be introduced as soon as possible after the summer recess. The measure will have effect for property income distributions made on or after the date that the legislation receives Royal Assent.

VAT - Change of Standard Rate - Anti-forestalling legislation

The standard rate of VAT will be increased from 17.5% to 20% with effect from 4 January 2011.The Chancellor confirmed there will be no change to food and children’s clothing, which do not attract a charge to VAT. Legislation will be introduced to counter arrangements that purport to apply the 17.5% VAT rate to goods or services to be delivered or performed on or after 4 January 2011.In certain circumstances, targeted against artificial arrangements, a supplementary charge of2.5% will be due on the supply of goods or services on which VAT of 17.5% has been declared. The supplementary charge will apply where the customer cannot recover all the VAT on the supply, and one or more of the following conditions are met:

·         The supplier and customer are connected parties;

·         The value of the supply exceeds £100,000 unless the prepayment or issuing of an advance VAT invoice is normal commercial practice;

·          The supplier or someone connected to the supplier funds a prepayment for the goods or services; or

·          An advance VAT invoice is issued where payment is not due in full within 6 months (except hire purchase invoices issued in accordance with normal commercial practice).

Similar provisions will prevent the use of the grant of standard-rated rights or similar options as an avoidance mechanism.

 The charge will not apply to rental of land or buildings or other assets if the period concerned is a year or less, and the prepayment or issuing of an advance invoice is normal commercial practice.