Budget 2012 – Personal Tax

Tax rates

There were no changes to rates of income tax announced in the Budget for 2012-13.

The Chancellor did, however, announce a reduction in the additional rate of tax (that payable on income over £150,000) from 50% to 45% with effect from 6 April 2013.

Allowances and tax bands

Already announced previously were the tax and NI bands for 2012/13.

The 2012/13 personal allowance will be £8,105, with the upper limit of the basic rate tax band (ie the level of income at which people start to pay tax at 40%) is reduced to £34,370 so that 40% tax payers only benefit by the same amount as 20% tax payers.

Comment: This means that most people with straight forward tax affairs and no benefits in kind (for example, cars or health insurance) should have a tax code of 810L taking effect in April 2012.

Other allowance levels can be found on the HMRC web site at http://www.hmrc.gov.uk/rates/it.htm

The Chancellor announced in the budget that the personal allowance for 2013/14 will increase to £9,205.  This continues the plan to increase the threshold to £10,000, as set out in the Lib Dem manifesto.

The the upper limit of the basic rate band will reduce to £32,245 for 2013/14, meaning that higher rate tax payers will only receive a quarter of the benefit received by a basic rate tax payer.

Tax Credits

There are two types of Tax Credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more child.

There were no changes to tax credits announced in the Budget 2012.   Changes to the rates of payments were announced previously and can be found at http://www.hmrc.gov.uk/rates/taxcredits.htm

A number of changes announced back as far as 2010 take effect from 6 April 2012:

  • The removal of the one-off payment to new workers over 50;
  • The introduction of an income disregard for income falls;
  • The withdrawal of the second income threshold for child tax credits;
  • A reduction in the period for back-dating from three months to one month from April 2012.

Comment: The withdrawal of the second income threshold means that many of the households receiving just the basic family element of the child tax credit of £545 per annum will no longer receive any tax credits.

Child Benefit

It was announced in June 2010 that Child Benefit levels would be frozen for the next three years, so it remains at the same level as last year for 2012/13.

In October 2010, it was also announced that Child Benefit will be withdrawn from 2013 for families where at least one of the parents pays tax at 40%.  This announcement was, however, modified in Budget 2012 due to uproar over the fact that a very small increase in salary tipping a tax payer into the 40% band would have resulted in the loss of the whole of their child benefit.

New rules were announced in the Budget so that no Child Benefit is lost until the income of one of the parents reaches £50,000.  At that point, 1% of the Child Benefit award will effectively be lost for every £100 of that parent’s income between £50,000 and £60,000 and at £60,000 of income, any remaining benefit will be withdrawn.

The actual mechanics of the scheme is that Child Benefit will continue to be paid and an additional tax charge will be levied on the parent earning over £50,000.  Alternatively, the tax payer can elect not to receive Child Benefit.

These changes will come in from 7 January 2013.

Comment: This all seems rather complicated to me and it will be interesting to see how it actually works!

Individual Savings Accounts (ISAs)

The ISA threshold for 2012/13 will be £11,280, of which £5,640 may be in cash.

As of Budget day 2012, you still have a couple of weeks to use your 2011/12 allowance of £10,680 (of which £5,340 may be in cash) – the deadline is 5 April 2012.

Junior ISAs  were introduced last Autumn with an investment limit of £3,600 per annum. No changes have been announced to this limit.

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