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The Budget 2010 Introduction »
Personal Tax
Tax rates
As previously announced the government proposes significant changes to the system of personal allowances and tax rates for 2010/11. These mainly affect those with higher levels of income. The changes are set out below.
Allowances and rates
The 2010/11 personal allowance will remain at the current level of £6,475. The basic rate limit will also be maintained at £37,400. Therefore an individual will start to be taxed at higher rates when their total income exceeds £43,875.
Changes for 2010/11
The government had previously announced that the personal allowance would be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of adjusted net income above this limit.
The personal allowance will therefore be reduced to nil when adjusted net income exceeds £112,950.
Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.
A new rate of income tax of 50% will be introduced from 6 April 2010. This will apply to taxable income above £150,000.
Dividend income is currently taxed at 10% where it falls within the basic rate band and at 32.5% where liable at the higher rate of tax. A new rate of 42.5% will be introduced for dividends which fall above the £150,000 threshold.
Example |
| The effect of the changes can be illustrated as follows: |
| |
2009/10 |
2010/11 |
| |
|
tax |
|
tax |
| |
£ |
£ |
£ |
£ |
| Non dividend income |
200,000 |
|
200,000 |
|
| Personal allowance |
(6,475) |
|
Nil |
|
| Taxable income |
193,525 |
|
200,000 |
|
| Taxable at 20% |
37,400 |
7,480 |
37,400 |
7,480 |
| Taxable at 40% |
156,125 |
62,450 |
112,600 |
45,040 |
| Taxable at 50% |
|
|
50,000 |
25,000 |
| Total tax liability |
|
£69,930 |
|
£77,520 |
Trust rate
The trust rate, which mainly applies to discretionary trusts, will be increased from 40% to 50%. The trust dividend rate will be increased from 32.5% to 42.5%. These changes will take effect from 2010/11.
Comment
Discretionary trusts that invest for capital growth will have a significant advantage because capital gains are taxable at 18%. Life interest trusts continue to be taxed on their income at 10% on dividends and 20% on other income.
National Insurance Contributions (NICs)
The NIC rates and limits are broadly frozen for 2010/11 at the 2009/10 figures. There are two exceptions to this in that the lower earnings limit will increase from £95 to £97 per week and there will be an increase in the NIC rate which applies to Volunteer Development Workers. All other rates will be held at the 2009/10 levels.
An increase in the rates of NIC is proposed from April 2011. A further 1% will apply to the rates applicable to employers, employees and the self-employed. The main rate of Class 1 (employee) NIC will be 12% and the Class 4 rate will be 9%. The employer rate will increase to 13.8%. The additional rate of Class 1 and Class 4 contributions payable will be increased from the current 1% to 2%.
In order to protect those at the lower end of the earnings scale the government has announced that the primary threshold and lower profits annual limits will be increased by £570. Those paying the standard employee rate and earning below £20,000 will pay less NIC overall as a result of the change.
Pension contributions and the Special Annual Allowance (SAA) charge
The Special Annual Allowance (SAA) charge was introduced by some very complex rules in 2009. The aim of the charge is to discourage individuals who have relevant income above £130,000 from making significantly higher pension contributions in anticipation of the removal of higher rate tax relief which will occur in 2011.
The current rate of the SAA charge is 20% on the excess contributions. For 2010/11 the rate will be that necessary to reduce the tax relief on the excess to the basic rate. Bearing in mind that the top rate of tax will be 50%, some of the charge could be at 30% and some at 20% depending on the effective rates at which pension contributions are being relieved.
Removal of higher rate tax relief for pension contributions from 6 April 2011
Further detail has been provided on the plan to remove higher rate tax relief on the pension contributions of those with high income.
The rules will apply to those whose gross income exceeds £150,000 and (broadly) in calculating the gross income account will be taken of:
- taxable income before deduction of an individual’s pension contributions and charitable donations and
- employer pension contributions.
There will be an income ‘floor’ of £130,000 which excludes employer pension contributions. Any individual with income below this limit will not be affected at all by the rules. If the income exceeds £130,000 then the amount of any employer contribution must be added to establish if the £150,000 limit is exceeded.
The amount by which higher rate tax relief is restricted depends upon the amount of gross income:
- if gross income is above £180,000 a charge will be made on the individual to reduce the effective tax relief on pension contributions to 20%
- if gross income is above £150,000 a taper will apply gradually reducing tax relief on pension contributions until it is restricted to the basic rate. This restriction will apply to the individual’s contributions and to any pension benefits funded by their employer. The rate of tax relief will be determined by where an individual’s income lies on the taper.
Comment
Note that an individual with gross income of up to £150,000 will continue to receive 40% tax relief on pension contributions. Reducing tax relief to 20% as soon as an individual’s gross income exceeds £150,000 would create a cliff edge effect, so a sliding scale of relief is proposed for those with income in the £150,000 to £180,000 range.
Extension to UK charity tax relief
Legislation will be introduced in the Finance Bill to extend UK charitable tax reliefs to certain organisations which are the equivalent of UK charities and Community Amateur Sports Clubs (CASCs) in the EU, Norway and Iceland.
UK donors will be able to receive the same tax reliefs in respect of donations and legacies that they currently enjoy for donations to UK charities.
The qualifying overseas charities will enjoy the same UK tax exemptions and reliefs as UK charities.
Financial Services Compensation Scheme interventions
The Financial Services Compensation Scheme (FSCS) may intervene in certain circumstances by providing financial assistance to an insurer, transferring policy holders’ rights to another insurer, or paying compensation to the policy holder. This intervention may occur in respect of a wide range of taxable and tax advantaged insurance and annuity products.
Legislation will be introduced in the Finance Bill to ensure that if the FSCS takes action to protect policy holders, there will be broadly the same tax treatment as if the FSCS had not intervened.
UK Real Investment Trusts stock dividends
Legislation will be introduced in the Finance Bill to allow Real Estate Investment Trusts (REIT) to issue stock dividends in lieu of cash dividends. One of the REIT requirements is that 90% of the profits from the property rental business must be distributed and these stock dividends will qualify towards this requirement.
Individual Savings Accounts (ISAs)
As previously announced the 2010/11 ISA limits will be £10,200 of which £5,100 can be held in cash. From April 2011 and over the course of the next Parliament the ISA limits will be increased in line with the Retail Prices Index (RPI) measure of inflation on an annual basis. In the event that the RPI is negative the ISA limits will remain unchanged.
Venture Capital Trusts and Enterprise Investment Schemes
The government intends to legislate in the Finance Bill to introduce four changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes as agreed with the European Commission as a condition for their approval as State aids. The measures include:
- Shares making up VCTs can be listed on any EU regulated market instead of the current UK listing.
- VCTs currently have to satisfy a test that throughout their accounting period 30% of their holdings is in eligible shares. This investment limit for eligible shares will be increased to 70% but the types of qualifying shares will be relaxed to include shares which may carry certain preferential rights to dividends.
- Companies will be excluded from qualifying for the purpose of the VCT or EIS legislation where it would be reasonable to assume that they would be regarded as an ‘enterprise in difficulty’ under the European Commission’s Rescue and Restructuring Guidelines.
- The current rules which require that a company’s trade be carried on wholly or mainly in the UK will be relaxed. The requirement will be that the company has a permanent establishment in the UK.
Child Tax Credit
From April 2012 the government will introduce additional support in the child element of the Child Tax Credit for each child aged 1 and 2 by £4 per week.
Guardians and carers
From 6 April 2010 certain payments to special guardians and carers looking after children under a special guardianship or residence order will be exempt from tax. The new exemption will be similar to the current tax exemption for payments to adopters.
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