Introduction

Following on from our budget update we have looked closer at the various aspects of the budget which affect our clients.  The earlier update referred to key elements of the budget speech where Charles Osborne was quick to stress that the UK deficit should be closed using a mix of reduced public spending and adjustments in taxation.  This update drills down into the details of each tax proposal and outlines the thresholds and rates applicable.

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 (RPI) 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.

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.  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.  These changes will come in with immediate affect.

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 company’s 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

There is still to be reform of higher rate tax relief on pensions. However, the complex high 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.

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 immediately, but it appears that individuals will still have to take a pension commencement lump sum before reaching age 75.

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.