Jones Sheridan Budget Update

June 28th, 2010 Posted in Uncategorized

Further to this weeks budget you will probably be aware of the headline catchers such as the rise in VAT to 20% from 4 January 2011, the freeze on public sector pay or the reduction in child tax credits for those earning over £40,000. What you may not be aware of is some of the more specific changes that will affect pensions and investments and I have therefore taken the opportunity to provide our summary of these measures for you.

The Personal Allowance and National Insurance

These changes will come into force on and after 6 April 2011. Some of the figures will depend on September’s RPI and therefore could change.

• The personal allowance for those under age 65 will increase by £1,000 to £7,475
• The basic rate limit will reduce so that higher rate taxpayers cannot benefit from the increased personal allowance.
• The Upper Earnings/Profits Limit will be reduced.
• The threshold at which employers play Class 1 NICs will be increased by £21 per week above normal indexation.

There is no change here for higher rate taxpayers, however lower and basic rate payers will be marginally better off as a result of these changes.

ISA Subscriptions

As previously announced from 2011/12 ISA allowance will be linked to RPI and rounded to £120 per year. If RPI is negative the ISA limit will not change.
Our view – Remember if you do not use your full allowance in any tax year it cannot be carried over, you will lose it for ever. Please speak to your advisor to ensure that you are making the most of your tax free savings limits.

Capital Gains Tax (CGT)

The basic rate of 18% will remain unchanged for those with total gains and income less than the basic rate income tax band (currently £37,400). A new rate of 28% applies to any gains (or parts of gains) above that limit and came into effect on 23rd June. Losses and allowable deductions such as the income tax personal allowance can still be offset against gains.The trustee rate also increased to 28% however entrepreneurs relief has remained at 10%.Example: Mr Client earns £27,400 after deductions and the personal allowance in 2010/11. He then sells an asset in May 2010 realising a gain of £17,000 and then sells another asset in November 2010 realising a further £25,100. There are no allowable losses and the annual exempt amount is £10,100.Mr Client’s income is £10,000 less than the upper earnings limit (£37,400-£27,400). The first gain of £17,000 occurred before 23 June and therefore is taxable at the old 18% rate. Mr Client therefore sets his annual exempt amount against the second gain of £25,100 as part of this is chargeable at 28%. This leaves £15,000 taxable with the first £10,000 taxed at 18% and the balance of £5,000 at 28%. This gives a total tax bill of £6,260 for the £42,100 gain. Under the old regime the tax would have been £5,760. This is a £500 increase in tax.Entrepreneurs relief has had the limit increased to £5 million from the current £2 million limit. Gains above the old limit made before 23 June will not benefit from the new £5 million limit but further qualifying gains made after 23 June will apply up to a further £3 million.
Our view – It has never been more important to ensure that your money is managed in a tax efficient manner. Your advisor will be able to explain in detail the options available to make the most from your investments.

Annuity Changes

The government has announced its intention to end the requirement to purchase an annuity at age 75 from 2011/12. An interim measure increasing the age to 77 will be introduced in the Finance Bill 2010.It is expected that those who do not buy an annuity at the new age of 77 will still be subject to strict minimum and maximum income limits, it is also expected that if a pension on death after 77 is not used to provide a dependents pension or charitable donation a tax charge of up to 70% will apply. There is also the potential for IHT charges in this instance.In the interim period before these changes come into force, there will be tax charges of 35% on lump sum death benefits for those still in drawdown, however the specific IHT charges will not apply. Previously there could have been tax charges up to 82% of the value of the drawdown fund.

Pension Tax Relief

The government is looking to change the current restrictions on tax relief for those with incomes of between £150-180,000. This is expected to be simplified by reducing the pension annual allowance from the current level of £255,000 down to £30-45,000 which would have the same effect without the unnecessary complexity.
Our view – Pensions legislation is a constantly changing area and regular reviews of your retirement planning are essential. For some high earners there may be opportunities to reduce the impact of increased income tax by making pension contributions.

Taxation of Settlors and Trustees

Currently Settlors can receive tax refunds on trust income if their personal tax rate is lower than that of the trustees. The measure announced will require settlors to pay any tax refunds back to the trustees. These payments will be disregarded for IHT purposes.
Our view – If you think you may be affected by these changes please contact your advisor who will be happy to help.

Corporation Tax

Corporation tax rates are due to be reduced from the current rates of 28% and 21% as follows:For companies with earnings above the upper limit (£1.5 million) corporation tax from 1 April 2011 will be 27%.The small profits rate of corporation tax with profits under the lower limit (£300,000) will be 20% again from 1 April 2011.