financial advice on emergency budget
The Chancellor introduced the Budget as an emergency Budget intended to deal with the national deficit, seen by the Coalition Government as an unavoidable legacy of the previous government. Although the deficit will be reduced primarily through a reduction in public spending, the increase to the main rate of capital gains tax (CGT) for higher rate income tax payers could have implications for the financial services industry especially when considering the most suitable tax wrapper for their clients.
This article sets out the main changes to tax rates for individuals and trustees. I will be covering pensions and CGT in more details over the next few days.
Hang on to your hats folks because it’s going to be a rough ride!
Income Tax
Few changes were announced to the income tax regime, with the previously announced changes (the 50% income tax rate and the withdrawal of the personal allowance for high earners) remaining untouched.
- The main personal allowance will remain at £6,475 for 2010/11. However, from 6 April 2011, the personal allowance will increase to £7,475. Over the longer term, the intention is to gradually increase the personal allowance to £10,000.
- The basic rate limit (currently £37,400) will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance. The exact figure will be confirmed when September’s Retail Prices Index is known.
Capital Gains Tax
The most widely anticipated change was an increase to the rate of CGT, which could have resulted in a maximum CGT rate of 40% or possibly 50%. To the relief of many, this change did not materialise, the Chancellor instead opting for a 10% increase in the rate of CGT for higher rate income taxpayers.
From 23 June 2010:
- the main rate of CGT for those who pay income tax at the basic rate or below will remain at 18%. For those individuals whose income and gains exceed the higher rate tax threshold, the main rate of CGT will be increased to 28%; and
- the lifetime limit on gains that qualify for entrepreneurs’ relief will be increased by £3 million to £5 million.
In addition:
- the annual CGT exemption for individuals will remain at £10,100; and neither indexation allowance nor taper relief will be available to reduce chargeable gains.
Corporation Tax
In an emergency Budget we would expect to see spending cuts and tax increases. Contrary to this expectation and the repeated warnings issued by the Government and the press, companies seem to have come out of this Budget relatively unscathed, perhaps even better off.
- The main rate of corporation tax will be reduced by 1% to 27% from 6 April 2011. It will then be gradually reduced to 24% by 1 April 2014.
- The small companies rate will also be reduced by 1% to 20% from 6 April 2011.
- However, companies didn’t have it all their own way, due to the announcement that the amount of capital allowances that they are able to claim each year will be reduced:
- The annual investment allowance will be reduced to £25,000.
- Writing down allowances will be reduced from 20% to 18% (the main pool) and 10% to 8% (the special rate pool).
Inheritance Tax
- No changes to inheritance tax were announced in the Budget speech.
VAT
- The main rate of VAT will increase to 20% from 4 January 2011.
- Items such as basic foodstuffs and children’s clothing (which are zero-rated) are not affected by this change.
Pensions
Restrictions on pensions tax relief:
- There is still to be reform of higher rate tax relief on pensions. However, the complexhigh income excess relief charge scheduled for 6 April 2011 may be replaced by a significantly reduced annual allowance. It is currently set at £255,000 in tax year 2010/11. The Government will discuss the changes with interested parties but provisional analysis has suggested that the level of a reduced annual allowance may be in the region of £30,000 to £45,000.
- The pensions anti-forestalling provisions currently in place which affect high income individuals (broadly those with relevant income of £130,000 or more) remain the same for the current tax year.
Changes to pension requirements affecting those reaching age 75 on or after 22 June 2010:
- The Government intends to end the effective requirement for pension scheme members to purchase an annuity by age 75.
- The intention is to introduce this change in tax year 2011/12 and a consultation on this will be published shortly.
- In the meantime the requirement to buy an annuity will be put back to age 77, but it appears that individuals will still have to take a pension commencement lump sum before reaching age 75.
Basic State Pension:
- From 6 April 2011 the basic state pension will be increased by the higher of prices, inflation and 2.5%.
ISAs
- From 6 April 2011, the annual ISA subscription limits will be increased in line with RPI
Like I said earlier I will be adding more meat to the bone over the coming days once all the boffins have scrawled through every minute detail and offered their considered opinions.
