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Tax Changes Ahead
Introduction »
PERSONAL TAX
The personal allowance for 2011/12
For those aged under 65 the personal allowance will be increased by £1,000, from £6,475 to £7,475 for 2011/12.
However a new concept of withdrawing the personal allowance for those with adjusted net income over £100,000 was introduced in 2010/11 and will continue for 2011/12. The reduction in the allowance is by £1 for every £2 of adjusted net income above the income limit. Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.
Comment
If income is £112,950 or above in the current tax year or £114,950 or above next tax year, there will be no personal allowance. If adjusted net income can therefore be reduced to below these figures, some personal allowance will be given, so the tax saving is rather more than the 40% higher rate of tax.
For the current tax year, consider:
- whether you can defer income to a later year (for example if you are a director/shareholder of a company)
- paying pension contributions
- making Gift Aid contributions.
Tax bands and rates for 2011/12
The basic rate limit will be reduced from the current £37,400 to £35,000. Therefore an individual will pay 40% tax rather than the basic rate of 20% when their total income exceeds £42,475.
The new rate of income tax of 50% (the ‘additional rate’) will continue for 2011/12. This applies to taxable income above £150,000.
If dividend income is part of total income this is taxed at 10% where it falls within the basic rate band, 32.5% where liable at the higher rate of tax and 42.5% where liable to the additional rate of tax.
Comment
As the basic rate limit has been reduced more individuals will pay tax at the higher rate increasing their overall liability.
Example
The effect of the changes can be illustrated as follows:
|
2010/11 |
2011/12 |
|
|
Tax |
|
Tax |
|
£ |
£ |
£ |
£ |
| Non savings income |
43,875 |
|
43,875 |
|
| Personal allowance |
(6,475) |
|
(7,475) |
|
| |
------------- |
|
------------- |
|
| Taxable income |
37,400 |
|
36,400 |
|
| |
------------- |
|
------------- |
|
| Taxable at 20% |
37,400 |
7,480 |
35,000 |
7,000 |
| Taxable at 40% |
- |
- |
1,400 |
560 |
| |
|
------------- |
|
------------- |
| Total tax liability |
|
£7,480 |
|
£7,560 |
| |
|
------------- |
|
------------- |
Trust rate
For 2010/11, the trust rate, which mainly applies to discretionary trusts, was increased from 40% to 50% and the trust dividend rate from 32.5% to 42.5% and these changes remain.
National Insurance Contributions (NICs)
Changes to the rates of NICs had been announced by the previous government and the current government confirmed that the rate changes would be made. 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) NICs 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 4 contributions payable will be increased from the current 1% to 2%.
Changes to the thresholds for next year have now been announced and the point at which NICs are payable will increase significantly from April 2011.
The level at which employees start to pay contributions will increase to £139 per week (the primary threshold) and for employers the weekly limit will be £136 (secondary threshold). The primary and secondary thresholds were aligned at £110 for 2010/11.
The upper earnings limit and the upper profits limit will continue to be aligned with the income tax higher rate threshold of £42,475.
Comment
The increase in the threshold at which employers and employees will start to make contributions will offer some protection for those at the lower end of the earnings scale from the increased contribution percentages.
New tax-free children's savings account
In October the government announced the introduction of a new tax free children's savings account following the end of Child Trust Fund (CTF) eligibility.
The government intends the new accounts to be available by autumn 2011.
The new account will have the following key features:
- all returns will be tax free
- funds placed in the account will be owned by the child and will be locked in until the child reaches adulthood
- investments will be available in cash or stocks and shares
- annual contributions will be capped
- there will be no government contributions into the account.
Comment
The new account, described as a 'Junior ISA', will offer parents a simple and tax free way to save for their child's future.
Eligibility for the new account will be backdated to ensure that no child born after the end of CTF eligibility will miss out on the chance to have one of the accounts.
In July 2010 the government reduced CTF payments at birth for children born from August 2010 to £50 (reduced from £250); or £100 (reduced from £500) if they are from a lower income family. They also stopped all government payments at age 7 from August 2010.
There will be no CTF eligibility for children born from January 2011.
Reforms to the welfare system
In October the Chancellor announced a number of reforms to the welfare system. Over the next two parliaments the current system of means-tested working-age benefits and tax credits will be replaced with the Universal Credit. A White Paper was published in November on the plans for the Universal Credit by the Department of Work and Pensions.
Universal Credit is an integrated working-age credit that will provide a basic allowance with additional elements for children, disability, housing and caring.
It aims to support people both in and out of work, replacing Working Tax Credit, Child Tax Credit, Housing Benefit, Income Support, income-based Jobseeker’s Allowance and income-related Employment and Support Allowance.
For those in employment, Universal Credit will be calculated and delivered electronically, automatically adjusting credit payments according to monthly income reported through an upgraded version of the PAYE tax system (on which HMRC have issued consultation papers). The system will thus respond more quickly to changes in earnings.
The government intends to introduce a Welfare Reform Bill in January 2011 to give effect to these changes. A phased approach to the introduction of Universal Credit will be adopted with the first individuals expected to enter the new system from 2013, followed by the gradual closure of existing benefits and Tax Credits claims.
Child Benefit
As part of the reforms to the welfare system, Child Benefit will be withdrawn from households that include a higher rate taxpayer.
The government will withdraw Child Benefit payments from all households containing at least one higher rate taxpayer by 2013. HMRC will implement this policy through the existing PAYE and self assessment structures.
Comment
The withdrawal of Child Benefit will save £2.5bn a year by 2014 from the welfare bill but there will be complications introduced for taxpayers and HMRC because of the means testing introduced by reference to taxable income.
There will be some interesting discussions taking place between husbands who are higher rate taxpayers and wives who are not (and what if they don’t have the discussion?).
Furnished Holiday Lettings (FHL)
The tax treatment of FHL has been advantageous for many years. Provided that certain conditions are met, FHL are treated as a trade. This can be preferable to the tax regime for normal let property in a number of specific areas, as the rules and reliefs for trades are often more generous.
Currently the FHL treatment potentially applies to properties in the EEA but certain conditions need to be satisfied including that the property must be:
- available for letting for at least 140 days a year and
- actually let for at least 70 days.
Draft legislation has been issued to cover changes to FHL. However in an amendment to the original proposals the new qualifying conditions will not now take effect until 2012/13 for individuals.
From April 2012:
- the property must be available for letting for at least 210 days a year (generally the tax year) and actually let for at least 105 days.
- a ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period.
From April 2011 there will be two types of FHL business; a UK FHL business consisting of properties in the UK and an EEA FHL business consisting of properties in one or more EEA states.
FHL losses will only be able to be set against income from the same FHL business.
Comment
If the new conditions are met it is only the loss relief provisions which are being restricted. The other potential tax advantages, in particular the property being regarded as a trading asset for capital gains tax, remain.
Tainted donations to charity
Draft legislation has been issued which will affect charity donations made on or after 1 April 2011. The rules will replace the existing substantial donor rules. These currently affect the tax position of the charity in respect of charitable donations where there are value extracting transactions between the charity and its largest donors (broadly £25,000 in a 12 month period or £150,000 over a period of six years).
The new rules will deny tax relief on the donation where one of the main purposes of the donation is to receive an advantage for the donor or connected person directly or indirectly from the charity. There is no monetary limit on the amount of the donation which may be caught by these rules. These donations will be ‘tainted donations’.
Introduction »
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