Income Tax
Rates
The income tax rates applying from 6 April 2011 are to remain unchanged from the 2010/11 financial year. The rates are:
- Starting Rate 10% (Applies to savings income only)
- Basic Rate 20%
- Higher Rate 40%
- Additional Rate 50%
- Marginal Rate 60% (due to withdrawal of the personal allowance)
- Dividend Rates 10%/32.5%/42.5%
The threshold at which the higher rate will apply has been reduced. It will apply to taxable income exceeding £35,000. The additional rate continues to apply to income over £150,000. The marginal rate affects those with incomes between £100,000 and £114,950.
For details of rates and thresholds applicable in 2011/12, please click here to see tables.
Allowances
As previously announced, the personal allowance for 2011/12 will increase by £1,000 to £7,475. The allowance for those aged over 65 will increase to £9,940 and for those over 75 the allowance will be £10,090. The maximum married couples allowance available will be £7,295.
The threshold at which the personal allowance begins to be withdrawn remains at £100,000. Age related allowances and married couples allowance begin to be withdrawn to the normal personal allowance where income exceeds £24,000.
From 6 April 2012 the personal allowance will increase to £8,015. On the same date the threshold at which higher rate tax becomes payable will reduce to £34,370.
Indexation of National Insurance
The Chancellor has announced that from April 2012 the Consumer Prices Index (CPI) will replace the Retail Prices Index (RPI) as the default indexation for all National Insurance rates, limits and thresholds. The change will apply to the following:
- Class 1 lower earnings limit and primary threshold
- Class 2 small earnings exception
- Class 4 lower profit limits
- Class 2 and 3 rates
The secondary threshold will continue to use the RPI until the 2015/16 year. The Class 1 upper earnings limit and Class 4 upper profits limit will continue to be aligned with the income tax higher rate threshold.
This apparently simple measure is forecast to generate an additional £1bn in five years’ time.
Merging tax and National Insurance
For decades the UK has operated one set of tax rules for the application of income tax – such as PAYE – and a nearly completely different set of tax rules for the application of National Insurance contributions (NICs).
In its drive for simplification and also to remove anomalies and unnecessary red tape, the Government has announced that it will consult on the integration of income tax and NIC.
It is recognised that any changes would be complex and may take a few years to fully implement. It is currently anticipated that integration may only extend to administration issues and not to practical matters such as extending NICs to pensioners or to other forms of income such as savings and dividends.
Disguised remuneration - EFRBS and EBTs
As previously announced in a written ministerial statement issued on 9 December 2010, legislation will be introduced in the Finance Bill 2011 to target “disguised remuneration”. The legislation will have effect from 6 April 2011 (subject to anti-forestalling rules set out below) and apply to employers and employees who use third party intermediary arrangements such as Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS) to reward employees whilst avoiding, reducing or deferring liability to employment taxes.
The legislation will exclude, as far as possible, commercial arrangements that are not primarily designed to avoid tax. Examples include some share incentive plans and some deferred remuneration arrangements in the financial services sector.
A new charge to income tax and national insurance on employment income will apply where;
· sums or assets are earmarked for employees by third party intermediaries such as EBTs or EFRBS, or
· sums or assets are earmarked by employers with a view to third party intermediaries providing retirement benefits, or
· loans or assets are provided to employees by third party intermediaries.
The charge will be based on the full capital sum of money paid or loaned, or on the higher of cost and market value of assets provided, and the employer will be required to account for PAYE.
Anti-forestalling rules
The new charge will apply to payments, loans and the provision of readily convertible assets to secure payment or loans where the payment, loan or asset provision takes place between 9 December 2010 and 5 April 2011 and the new charge would arise if the transaction took place after 5 April 2011.
The charge will not apply if the sums paid or loaned, or the assets provided, between 9 December 2010 and 5 April 2011 are repaid or returned prior to 6 April 2012.
Benefits - company cars
The tax that an employee pays on a company car is based on an appropriate percentage of the list price of the car which is calculated by reference to the car’s CO2 emission rate.
From 6 April 2013, the appropriate percentage will be reduced by 1% for all vehicles with carbon emissions between 95g and 220g from April 2013. For example, a company car with a CO2 emission rate of 180 gms/km has an appropriate percentage for 2012/13 of 27%. From April 2013 the appropriate percentage will be 26%.
Zero emissions cars will remain at 0% and ultra low emissions cars with emissions up to 75g will remain at 5%.
Benefits - fuel
Where an employee receives free fuel for all company car motoring, their tax charge is based on a percentage calculated by reference to the car’s CO2 emission rate multiplied by £18,000. From 6 April 2011 this figure rises by £800 to £18,800.
Benefits - mileage rate
Where an employee uses their own car for business journeys in connection with their employment, the employer can reimburse or the employee can claim tax-free mileage allowances.
The mileage allowance rate has remained unchanged since 2002 but from 6 April 2011 the tax-free mileage rates will be:
For the 1st 10,000 business miles 45p per mile (up from 40p per mile)
For every business mile thereafter 25p per mile (unchanged)
Reliefs
As recommended by the Office of Tax Simplification, a number of reliefs are to be abolished. Most are redundant but one or two perhaps less so:
Amongst the measures due to go in 2012/13 is the ability to offer staff late-night taxi journeys home without tax penalty. Land remediation relief is scheduled for withdrawal the following year.
The Government has announced consultation over each of these so those interested will have the opportunity of making representations.
Pensions
It is confirmed that the draft legislation of December 2010 relating to the National Employment Savings Trust (NEST) which is due to be introduced from 2012 will be introduced without further changes. Taken together, these should remove any unintended tax consequences on employers and employees relating to the setting up and operation of NEST.
Pension allowances
As announced in October 2010, the annual allowance for tax relief on pension savings for individuals will be reduced from £255,000 to £50,000 from 2011/12. In Budget 2011 this is called a ‘restriction’ of tax relief. For many individuals, the new rules will in fact provide scope for increased relief compared to the current rules.
Since the draft legislation was published in December 2010, one aspect has improved. Individuals with tax charges in excess of £2,000 that relate to the annual allowance will now be able to elect for their liability to be met out of their pension funds. There have been no other changes to the draft legislation, but the Budget papers include a statement that further revisions to reflect consultation feedback will appear in Finance Bill 2011.
Other than the change in the annual allowance, the principal features of the draft legislation as it currently stands are:
· A three year carry forward of unused annual allowances, including notional amounts derived from 2009/10 and 2010/11.
· An increase in the valuation factor used to calculate the value of defined benefit pension savings from a factor of 10 to a factor of 16.
· An inflationary relief from the annual charge.
· A reduction in the lifetime allowance on 6 April 2012 from £1.8m to £1.5m.
Pension contributions
Consultation will be issued in spring 2011, with the intention of introducing legislation in Finance Bill 2012, on limiting tax relief for asset-backed contributions to defined benefit pension schemes to an accurate reflection of the increase in fair value of plan assets.
Annuitisation
Legislation issued in draft in December 2010 will be introduced in Finance Bill 2011 to remove the effective requirement for individuals to take a pension in the form of an annuity by age 75 with effect from 6 April 2011. The legislation has been refined to deal with some unintended consequences that were identified during the consultation process.
EIS and VCT relief for investment
With effect from 6 April 2011, the income tax relief on an EIS investment rises to 30% (up from 20%) to match the relief available on VCT investment.
From 6 April 2012, the conditions for investment are substantially relaxed
- The maximum company size rises to less than 250 employees, up to £15m gross assets
- The maximum capital that can be raised by a company rises to £10m
- The maximum investment by any one individual rises to £1m
The Government has promised to consult on further changes to these schemes but has announced that shares issued after Budget day by companies dependent on feed-in tariffs or similar subsidies will only be eligible where commercial electricity generation commences before 6 April 2012.
Time deposits
Unlike regular bank accounts, interest earned from time deposit accounts is paid gross. The government proposes to have banks, building societies and other deposit takers deduct basic rate tax at source and pay net interest on all newly opened accounts. Consultation will begin in May 2011 but the change is expected to apply in the 2012/13 tax year.
ISA limits
In line with other changes in direct taxation, the annual ISA subscription limits will be increased in line with the Consumer Prices Index (CPI) from 6th April 2012. In the event that the CPI is negative the subscription limit will stay at the level of the preceding year.
Junior ISAs
After the abolition of Child Trust Funds the Government announced last October that it would introduce a Junior ISA to encourage families to save for the benefit of their children. Unlike Child Trust Funds, Junior ISAs will not receive any contributions from the Government. The accounts will operate in a similar way to current ISA products but will only be available to UK resident individuals under the age of 18 who do not have a Child Trust Fund. Account holders will be able to invest in cash or stocks and shares and will enjoy tax relief on the investment. The legislation to introduce these accounts will be included in the Finance Bill 2011 and it is anticipated that accounts will be available in the autumn.
Offshore funds
A consultation is continuing into the Offshore Funds (Tax) Regulations. The original consultation documents were released by HM Revenue & Customs in December 2010 and February 2011. Planned amendments include alterations to the regulations governing reporting funds and the taxation treatment of investors in funds comprised of unlisted trading companies. The current proposal is that corporate investors in fiscally transparent funds will be subject to loan relationship rules on the investments.
Transparent fund
UCITS IV is a European Union initiative to introduce tax transparent funds within the financial sector.
The UK will issue a consultation document in June 2011 to establish such funds in the UK.
Further, there will also be legislation enabling foreign UCITS funds to be treated as non-UK tax resident even if they have a UK fund manager.
Furnished Holiday Lettings
The Finance Bill 2011 will revise the tax rules for Furnished Holiday Lettings (FHL) to include qualifying properties within the European Economic Area (EEA).
From April 2011 losses from a FHL will be restricted so that they are only available to offset against the same FHL business and no longer against general income.
From April 2012, in order to qualify as a FHL, the property must be:
- Available to let for at least 210 days; and
- Actually let for 105 days.
Where a business actually achieves the new lettings targets, they may elect to be treated as meeting this criteria during each of the following two tax years. This “period of grace” will be legislated to apply for the 2010/11 tax year.
Non-domiciles
There is currently a beneficial regime in place for individuals not domiciled in the UK. However, income and gains are taxed as they are brought to the UK which acts as a disincentive to inward investment.
Accordingly, the Government intends to introduce the following reforms from April 2012:
- Remove the tax charge where income and gains are brought to the UK for the purposes of commercial investment in UK businesses.
- Simplify some of the current rules to ease the administrative burden; and
- Increase the £30,000 remittance charge to £50,000 for non-domiciles resident in the UK for 12 years or more. The £30,000 charge will remain for those resident for at least 7 of the past 9 years and fewer than 12.
A consultation document will be issued in June on the details. No other substantive changes will be made to these rules in the current Parliament.
Residence
The current rules determining tax residence for individuals are complicated and unclear. As a result the Government will be issuing a consultation document on proposals to introduce a statutory definition of residence to provide greater certainty for individuals. It is intended that the new measures take effect from April 2012.
Inheritance Tax
The nil rate band for inheritance tax is frozen at £325,000 until April 2015. From the 2015/16 tax year onwards the nil rate band is to be increased using the Consumer Prices Index (CPI).
