In the 23 March 2011 Budget it was confirmed (as previously announced) that there would be a £1,000 increase to the personal allowance for 2011/2012 tax year compared to 2010/2011 tax year and it was also announced that for the following 2012/2013 tax year the personal allowance would be £8,105.
Capital gains will continue to be taxed at two levels, 18% for basic rate taxpayers and 28% for higher rate taxpayers. This has applied since 23 June 2010.
Income Tax
From 6 April 2011 the personal allowance will be £7,475 (£6,475). The allowance for age 65 - 74 £9,940 (£9,490); personal allowance age 75 and over £10,090 (£9,640); married couples' allowance for those born before 6 April 1935 £7,295 (£6,965); married couples' allowance minimum amount £2,800 (£2,670). The married couples allowance is restricted to 10%. Blind person's allowance £1,980 (£1,890). The income limit for age-related allowances increases to £24,000 (£22,900). Pensioners with income over this limit will lose some or all of the enhanced allowances depending upon how much they exceed the limit by.
The Basic Rate of Tax for 2011/2012 remains at 20% and applies up to £35,000. (£37,400) The 40% higher rate will apply up to £150,000. The new Additional Rate of Tax proposed in the earlier 24 March 2010 Budget will remain and will apply to income over £150,000 with a tax rate at 50%. The tax rate for dividend income remains the same, i.e. 10% and 32.5% for basic rate taxpayers and higher rate taxpayers respectively, but the earlier proposed Additional Rate of 42.5% will apply where income is over £150,000.
Similar to the current 2010/2011 tax year, from 6 April 2011, the personal allowance of £7,475 will continue to be gradually withdrawn for income over £100,000 at a rate of £1 of allowance lost for every £2 over £100,000. A taxpayer with an income of £114,950 or over will therefore not be entitled to any personal allowance.
There remains a 10% tax band of £2,560 (£2,440), but this, or a part thereof can only be claimed against investment income where other sources of income, e.g. earnings or pension, are less than £2,560.
Legislation will be introduced in Finance Bill 2012 to set the personal allowance for Income tax for 2012-13 for those aged under 65 at £8,105 and the basic rate limit at £34,370. All other income tax, personal allowances and imits that are subject to indexation will be increased in line with the retail prices index.
Inheritance Tax
No changes were proposed so the inheritance tax threshold remains frozen at £325,000 and also for the following four years to end on 5 April 2015. However, as introduced on 9 October 2007 an executor of a widow or widowers estate can claim a further exemption for their previously deceased spouse's estate. Therefore, when the surviving spouse or civil partner dies (on or after 9 October 2007), the unused amount, uplifted in proportion to today's tax threshold, may be added to their own nil-rate band. In its simplest form, a Widow who dies today whose husband died many years ago, leaving the whole of his estate to his wife will have a Nil Rate Band of £650,000 applying to her estate before Inheritance Tax is charged.The Government has announced that from 2015-16 the consumer prices index will be used as the default indexation assumption for any increases.
A new provision has been introduced in this Budget to lessen the 40% charge rate to 36% for tesstators who donate at least 10% of their estate to charity.The new rate will apply where death occurs on or after 6 April 2012.
Capital Gains Tax
The annual exempt amount for capital gains tax rises to £10,600 (£10,100) for 2011/2012 for individuals, trustees of settlements for the disabled and personal representatives of a deceased person's estate. For other trustees, it increases to £5,300 (£5,050). The charge rate is 18% or 28% depending upon an individual's total taxable income and gains after all allowable deductions (including losses, the income tax personal allowance and the capital gains exempt amount). If they are less than the upper limit of the basic rate income tax band (£35,000), the rate of CGT will be 18%. For gains (and any parts of gains) above that limit the charge rate will be 28%.
For trustees and personal representatives of deceased persons, the charge rate will be 28%.
National Insurance
National Insurance contributions (NIC's) will rise with effect from 6 April 2011 as initially proposed in the 24 March 2010 Budget.These Contributions are payable by men under 65 and women under 60 on earned income. 12% contributions will be imposed on income between the lower threshold of £139.01 per week (£110) and the higher threshold of £817 per week with a further 2% contribution upon income over £817 per week. Class 2 contributions for the self-employed will be at £2.50 per week. The self-employed will also pay 9% Class 4 contributions on profits and gains between the lower and upper profit limits (£7,225 to £42,475 per annum) and 2% on amounts above the upper threshold.
Employers will pay in 2011/2012 National Insurance Contributions at 13.8% on their employees' earnings above a threshold which will be increased to £136 (£110) per week without an upper limit. This is payable by employers even if the employee is 65 or over although the employee would not be liable to pay the individual contribution.
Tax Credits
There is a parental earnings restriction proposed from 6 April 2011 to reduce the earnings limit from £50,000 to £40,000. This means that as a general rule, parents will be entitled to the basic level (family element) of "Child Tax Credits" (CTC) from 6 April 2011, if their combined incomes for 2010/2011 are less than £40,000 gross.
New claimants will though only be entitled to back dated payments one month before application rather than three months currently.
Other than that the principles remain largely as before (please see previous Budget Summary).
Child Benefit
This longstanding allowance is to be frozen at current levels for the next 3 years so the weekly rate for the first child is £20.30 and the weekly rate for subsequent children is £13.40.
Individual Savings Accounts (ISA's)
From 6 April 2011 the ISA limits will be increased in line with the Retail Prices Index. Therefore for 2011/2012 the limit for Cash ISA's is £5,340 and for Investment ISA's it is £10,680.The Budget also introduces a new tax-advantaged account for saving for children, to be known as a Junior ISA. Legislation to provide for the Junior ISA will be introduced in Finance Bill 2011. Draft secondary legislation for the establishment and operation of Junior ISAs will be published alongside Finance Bill 2011. It is expected that Junior ISAs will be available from autumn 2011 for any UK-resident child who does not currently hold a Child Trust Fund.
Value Added Tax (VAT)
VAT will had already increased from 17.5% to 20% with effect from 4 January 2011. VAT on domestic fuel remains at 5%.
Approved Mileage Allowance Rates
Where employees use their own cars for business mileage they can claim reimbursement from their employers through the approved mileage allowance payments rates (AMAPs) which is not regarded as a taxable benefit. There is currently a higher rate of 40p per mile for the first 10,000 miles of business use and 25p per mile thereafter. Where individuals are paid less than those amounts by their employer, they can claim mileage allowance relief (MAR) for the residual amount. A statutory instrument has increased the higher rate to 45p per mile with effect from 6 April 2011. The rate will also apply to MAR. Volunteer drivers may reclaim the actual cost of motoring expenses from the relevant voluntary organisation as long as they keep records to demonstrate that no taxable profit has been made, but, for administrative ease, they are allowed to use the AMAPs rates if preferred. In addition to claiming AMAPs rates, an allowance for passenger payments currently in place for employees at 5p per passenger per mile will be extended to volunteers.
Income tax and NICs reform
The Government has announced that it will consult on the options, stages and timing of reforms to integrate the operation of income tax and National Insurance contributions (NICs). The aim is to remove distortions created by the tax system, reduce burdens on business and improve fairness for individuals. However, it recognises that any change will be complex and will involve a wide range of policy and implementation issues. A consultation document will be published later this year setting out the differences in the current income tax and National Insurance systems, and options to address these. The Government will maintain the contributory principle and reflect this in any changes it brings forward. The Government says it will not extend NICs to individuals above State Pension age or to other forms of income such as pensions, savings and dividends.
Pension Annuities
Legislation will be introduced in Finance Bill 2011 to remove the effective requirement to annuitise by age 75 from April 2011. This will include changes to the annuitisation requirements, income drawdown pension arrangements and the related inheritance tax rules. Savers who have reached age 75 will also be allowed to align multiple drawdown pension funds under the same scheme so the funds can all be valued annually on the same date.
General Pension Schemes
The Government announced on 14 October2010 that the annual allowance for tax relief on pension savings for individuals will be reduced from £255,000 to £50,000 from 2011-12, and the lifetime allowance will be reduced from £1.8m to £1.5m from 2012-13. The Government also published additional draft legislation on 3 March 2011 containing provisions to enable individuals to meet high annual charges from their pension benefits. Individuals with charges above £2,000 will be able to elect for their liability to be met from their pension benefit.
Furnished Holiday Lettings
The furnished holiday letting (FHL) rules will not be withdrawn as initially proposed by the previous government. The scheme therefore continues, but for 2012/2013 the Budget has increased the number of qualifying days that the property has to be let from 70 days to 105 days and the number of available days fom 140 days to 210 days. Businesses meeting the actually let threshold in one year may elect to be treated as having met it in the two following years (period of grace), providing certain criteria are met. Minor amendments will be made to the draft legislation to ensure that the period of grace provisions apply from 2010-11 and not before. The Budget also imposes restrictions to loss relief with effect from 2011/2012. Losses may only be offset against income from the same FHL business. UK FHL losses can relieve UK FHL income only and similarly FHL losses within the EU and outside the UK can only be set against EU FHL.