Category Archives: Tax

The Budget 2011 Corporate and Business Tax

Corporation tax rates

The main rate of corporation tax which applies to companies with profits of more than £1.5 million was due to fall by 1% to 27% from 1 April 2011. The Chancellor announced that this will now decrease by 2% to 26%.

The further annual decreases of 1% previously announced with eventually bring the rate to 23% (rather than 24%) by 1 April 2014.

The small companies’ corporation tax rate which applies to companies with up to £300,000 will fall to 20% from 1 April 2011, as previously announced.

Companies with profits between £300,000 and £1.5 million pay tax at a marginal rate to bring their overall rate to the main rate by the time they have profits of £1.5 million.

Comment: It’s worth noting that the thresholds of £300,000 and £1.5 million have been in place since 1994 – may be its time the Chancellor reviewed these too!

Business Payment Support

The budget documentation confirmed that the Business Payment support scheme would continue.

Comment: The Business Payment Support Service allows businesses and individuals having difficulty in paying their taxes to agree a payment schedule with HM Revenue and Customs without incurring any penalties for late payment. The contact number is 0845 302 1435.

Although the scheme is ongoing, users have reported that it is getting harder to agree a payment plan and businesses going back for a second time are being given a particularly hard time, and are often being refused.

Capital allowances

In 2010, the Chancellor announced a decrease in the rate of Annual Investment Allowance (AIA – the value of fixed asset additions for which a 100% relief can be claimed in the year of purchase) from £100,000 to £25,000 with effect from April 2012.

The annual writing down allowances will also be reduced, from 20% to 18% for the main rate pool and from 10% to 8% for the special rate pool.

It has also possible to elect to treat assets as short life assets if they were expected to last less than four years. This time period has been increased to eight years, but will have little impact for most small businesses since the majority of their expenditure is covered by the AIA.

 

 

The Budget 2011 Personal Tax

Tax rates

There were no changes to rates of income tax announced in the Budget.

The Chancellor did say that the 50% rate was intended to be temporary, however, he did not give any time scales for its removal.

Allowances and tax bands

The 2011/12 personal allowance will be £7,475, increasing to £8,105 for 2012/13. This continues the plan to increase the threshold to £10,000, as set out in the Lib Dem manifesto.

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 £35,000 for 2011/12, and will further reduce to £34,370 for 2012/13.

Other allowance levels for 2011/12 were announced in December 2010 (set with reference to the September RPI) and are be found on the HMRC web site at http://www.hmrc.gov.uk/rates/it.htm.

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 2011.

In the 2010 Emergency Budget in June 2010, a number of changes to tax credits, to take effect from April 2011 and beyond, were announced as follows:

  • A reduction in payments to families earning over £40,000 (from £50,000) from April 2011 and the alignment the thresholds for the child and family element;
  • An Increase in the taper rate at which awards are reduced;
  • The removal of the baby element for new children from April 2011;
  • The removal of the one-off payment to new workers over 50 from April 2012;
  • A reduction in the income disregard from £25,000 to £10,000, and then £5,000;
  • The introduction of an income disregard for income falls;
  • A reduction in the period for back-dating from three months to one month from April 2012.

Comment: In these times of economic uncertainties, it may be advisable to make a protective claim for tax credits so that if your income drops unexpectedly, tax credits will be paid for the whole tax year, rather than being restricted by the date of the claim.

Child Benefit

It was announced in June 2010 that Child Benefit levels will be frozen for the next three years.

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%.

Individual Savings Accounts (ISAs)

The ISA threshold for 2011/12 will be £10,680 (of which £5,340 may be in cash).

In Budget 2011, it was announced that future increases would be in line with CPI (rounded to £120 to allow regular monthly payments to be made).

Junior ISAs

In October, the Government announced that it would introduce a new tax-advantaged account for saving for children not entitled to a Child Trust Fund, to be known as a Junior ISA.

It is anticipated that these will become available in autumn 2011.

The Budget 2011 Employment Issues

National Insurance Contributions (NI)

As previously announced, NI contributions will increase by 1% for both employees and employers from 6 April 2011.

In order to compensate employers and employees, the primary and secondary thresholds (that at which employees and employers, respectively, start to pay NI) have been increased by more than inflation, to £139 and £136 per week respectively

The upper earnings (or profits for the self employed) limit has been reduced to £42,475 to align it with the higher rate tax threshold (ie the total of the personal allowance for those under 65 and the basic rate tax limit).

NI thresholds and the fixed class 2 NI rate will in future increase in line with CPI rather than RPI.

Comment: For those of you paying yourselves the National Insurance limit, this means that you should increase your pay to £7,072 per annum (£589.33 per month).

The actual NI thresholds can be confusing, so I thought it might be useful to take a moment to explain them.

For the employed: Firstly, there is the ‘Lower Earnings Limit’ (£102 per week for 2011/12) – this is the threshold for entitlement to certain benefits and for NI credits. Next, there are the ‘Primary’ and ‘Secondary’ thresholds – these are the thresholds above which the employee and employer respectively start to pay NI. Then there is the ‘Upper Earnings Limit’, above which the employee’s (but not the employer’s) national insurance rate decreases to 2%. To further complicate things, there is another threshold called the ‘Upper accruals point’ – this is all to do with state second pension.

For the self employed, there are upper and lower limits on Class 4 (income related) NI which broadly correspond to the Secondary Threshold and Upper Earnings Limit respectively. There is also a small earnings exception of £5,315 per annum, below which you can choose not to pay Class 2 NI (the fixed weekly amount).

National Insurance holiday for new businesses

As announced in June 2010, anyone who sets up a new business outside London, the South East and the Eastern region within the next three years will be exempt from up to £5,000 of employer national insurance payments for each of their first 10 employees hired.

The scheme is still not legally enacted, but presuming the legislation is passed, any qualifying new business set up from 22 June 2010 will receive the help.

 

 

The Budget 2011 Motoring costs

Fuel prices

The Chancellor made a surprise announcement that fuel duty would be cut by 1p with effect from 6pm on Budget day.

In addition, the increase of 3.06p per litre due to take place in April will be delayed until 1 January 2012 and the 2012/13 increase will happen on 1 August 2012.

He also announced a fair fuel stabiliser to amend the tax paid by UK Continental Shelf oil companies according to the barrel price of oil.

Business mileage payments

HMRC sets an approved mileage allowance payment (AMAP) rate. This is the rate at which employers may reimburse business mileage tax free.

Businesses with a turnover of less than the VAT registration threshold (£73,000 from April 2011) can also choose to claim a tax deduction for their vehicle costs at the AMAP rate, rather than recording all vehicle expenditure and claiming the actual costs.

The AMAP rate will increase from 40p to 45p for the first 10,000 miles per annum from 6 April 2011. The rate for mileage over 10,000 will remain at 25p.

Comment: The AMAP (Approved Mileage Allowance Payment) rate was set at 40p and 25p in 2002, when fuel prices in the spring (according to the AA) were 76p per litre. It is therefore disappointing to see an increase of only 5p per mile in the higher rate, and no increase at all in the lower rate.

Company Cars

The base figure for calculating the benefit where private fuel is provided alongside a company car will increase to £18,800 (from £18,000) with effect from 6 April 2011.

The percentages for calculating company car benefits will increase by 1% from April 2013 for all vehicles with carbon emissions between 95g and 220g.

 

 

The Budget 2011 Pensions and retirement

The Government announced on 14 October 2010 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.

Legislation will also be introduced in Finance Bill 2011 to remove the effective requirement to buy an annuity with your pension fund by age 75 from April 2011.

In the Budget, the Chancellor announced plans to make the state pension system more simple is proposing a flat rate state pension worth around £140 per week for all contributors.

 

 

The Budget 2011 Other Matters

IR35

The Government had pledged a review of IR35,

To quote the Treasury Budget document: “The Government has decided to retain IR35 as abolition would put substantial revenue at risk.”

Furnished Holiday Lettings

The rules for furnished holiday lettings (FHL) will be revised, as previously announced.

From April 2011 loss relief may only be offset against income from the same FHL business. UK losses can relieve UK FHL income only and similarly with the EEA losses. From April 2012 to qualify in a year, a property must be available to let for at least 210 days and actually let for 105 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.

Bank Levy

In June 2010, the Chancellor announced that there would be a bank levy introduced from 1 January 2011.

The Chancellor announced an increase in this levy to offset the additional 1% reduction in corporation tax rates so that the banks do not benefit from the reduced tax rate.

Research and development (R&D) tax credits

SMEs are able to claim an additional tax deduction for Corporation Tax purposes for qualifying R&D expenditure.

The Chancellor announced an increase in the additional deduction for qualifying R&D expenditure from 1 April 2011 from 75 per cent to 100 per cent of the qualifying expenditure, giving a total deduction of 200 per cent.

From 1 April 2012, the additional deduction will increase by a further 25 per cent giving a total deduction of 225 per cent, and, subject to consultation, the rules of R&D tax relief for SMEs will be simplified.

Inheritance tax

The June 2010 budget confirmed that the inheritance tax nil rate band will remain frozen at £325,000 until 2014/5.

Budget 2011 announced that from April 2012, a reduced rate of IHT of 36% will be introduced where 10 per cent of more of the net estate is left to charity.

Enterprise Zones

The Government announced the creation of 21 new Enterprise Zones in the Budget. These will offer 100% business rate discounts for 5 years, as well as enhanced capital allowances and superfast broadband.

The first ten of these zones will be in the areas of highest need, including one in the Nottinghamshire and Derbyshire area. The actual locations will be announced later.

Gift Aid

From April 2013 charities (and community amateur sports clubs) that receive small donations of £10 or less will be able to apply for a gift aid style repayment without the need to obtain gift aid declarations for those donations. The amount of small donations on which the new repayment can be claimed will be capped at £5,000 per year, per charity.

Also, for donations to charities to be eligible for Gift Aid tax relief, there are limits on the value of benefits that individuals and companies may receive as a result of making those donations. The Chancellor announced an increase in the benefit limit for donations of more than £10,000. The existing rule that the benefit must not exceed 5 per cent of the gift will remain the same, but the overriding annual limit to the value of benefits a donor may receive will be increased from £500 to £2,500.

Tax simplification

The Budget abolished 43 tax reliefs in response to the work of the Office for Tax Simplification (OTS).

In addition, the Chancellor announced a consultation on options for integrating the operation of income tax and national insurance contributions. He did clarify that he did not intend this to extend National Insurance to pensions or other income.

Comment: Some of the 43 reliefs were obsolete in any case!

The confirmation that there is no intention to extend National Insurance to other income is good news for those paying themselves mainly in dividends from their limited companies.

 

This summary is published for the information of clients. It provides only an overview of the main proposals announced by the Chancellor of the Exchequer in his Budget Statement, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.