As part of the government’s aim to raise the personal income tax allowance to £10,000 over the next five years, the personal allowance is to be increased by £1,000 to £7,475 from 6th April 2011. To avoid higher rate earners benefiting from the increase in personal allowances, the higher rate tax threshold will be reduced accordingly. The higher rate threshold will then be frozen for three years.
The announcement was quite clear that the £1,000 increase was for those aged under 65 years only. The implication is that the over 65’s will get an inflationary increase in their personal allowances. However they will presumably suffer the same reduction in the higher rate threshold.
So what was widely touted by the popular press as a tax cut is not what it initially seemed, very low earners will benefit, but an estimated 700,000 people on higher levels of income will be brought into higher rate tax as a consequence of the changes.
Capital Gains Tax
In what looks like one area of compromise between the Conservatives and Liberal Democrats, the expected rise in capital gains tax on non-business assets is to be much lower than many had predicted. From 23rd June, the rate rose to 28% for higher rate taxpayers only; it remains at 18% for taxpayers who are within the basic rate band. This split rate means that greater care must be taken when planning the disposal of assets in order to minimise any tax liability. We strongly recommend that you contact us for advice before the disposal of any major capital asset.
Whilst the difference between the highest rates of income tax and capital gains tax has been reduced, it is still 22% for very high earners. The differential still offers tax planning opportunities, especially where income can be converted into capital. We will continue to advise you when we consider this to be appropriate.
For business assets, Entrepreneur’s Relief stays in place, keeping the effective rate of tax on these assets at 10% with the added bonus of a lifetime limit for Entrepreneur’s Relief increasing to £5 million.
As was widely anticipated, the standard rate of VAT is to increase by 2.5% to 20%, effective from the 4th January 2011, raising the exchequer an estimated £13 billion a year.
There will be no changes to the scope of zero/reduced rates or exemption.
Most businesses will find it impossible to absorb the VAT rise and will be left with no alternative than to pass it on to their customers. It is the reaction of their customers which is difficult to predict.
In the most obvious change in direction between the old and new governments, the Annual Investment Allowance, the amount of capital investment a business can write off against profits each year, will reduce from £100,000 to £25,000 from April 2012, after only being increased from £50,000 this March.
The reduction in Annual Investment Allowance is coupled with a 2% reduction in writing down allowances, the tax equivalent of depreciation.
The savings these changes generate will help fund a reduction in corporation tax. The small company rate will be reduced to 20% and the main rate to 27% from 1st April 2011. There will be further adjustments in the main rate reducing it to 24% by 1st April 2014. The small company rate will stay at 20%.
There will be no comparable reduction in tax on the business profits of unincorporated businesses, sole traders or partnerships, whose profits continue to be taxed at normal income tax rates.
In light of all the changes, we will look at all our business clients to assess the impact on them and assess whether incorporation would be beneficial.
To help assist businesses the threshold at which employers start to pay national insurance will rise by £21 per week above inflation from April 2011.
Additionally, a complicated relief is to be introduced to assist new businesses by exempting them from employers National Insurance on the first 10 employees they recruit. The relief will be limited to a maximum of £5,000 per employee for the first 12 months of their employment. At this time the conditions for qualifying for the relief are unclear but look to be very restrictive. This one looks more like a headline grabber than being of practical help to most.
Furnished Holiday Lets
Removal of the tax reliefs available for Furnished Holiday Lets announced in the 2009 pre- budget report has now officially been put on hold. A consultation period will now take place with changes to the taxation of Furnished Holiday Lets to be implemented in April 2011. At this moment it looks likely that some tax benefits will remain but with more stringent tests as to what constitutes a holiday let and what differentiates it from permanent letting.
Another piece of good news is that the broadening of the definition of Furnished Holiday Lets to include properties within the European Economic Area (that is, not just within the UK) is to stay.
Pension Tax Relief for High Earners
The 2010 Finance Act included legislation to restrict relief given to high income individuals to the basic rate from 5th April 2012. A period of consultation will now take place to assess whether the current legislation is appropriate. It should however be noted that the government still intends to introduce some form of reform in this area and the current anti-forestalling measures remain in place. The use of pensions to avoid tax at higher rates therefore is and will remain restricted.