The Budget - Issues For Individuals

Posted: 23rd March 2011

Budget Summary 2011 23 March 2011
With Chancellor George Osborne caught between a rock and a hard place as regards the yawning public sector deficit, it was perhaps inevitable that the Coalition’s belief that the best way to fix the problem is to stand firm against its doubters would underpin the measures contained in the Budget. Time will tell if the strategy is correct but, in the meantime, the Chancellor has left some tax planning opportunities open. In some cases, the door of opportunity slams shut on 5 April 2011, so if any of the below have resonance with you, get in touch fast!
In this bulletin we are concentrating on the unexpected changes and those most likely to demand action by the reader.
Before you undertake any tax planning or mitigation exercise, take professional advice.
Summary of Changes Affecting Private Individuals
Income Tax (IT)
Allowances generally will in future be uprated in line with the Consumer Prices Index.
Higher-Rate Tax
The tax-raising effectiveness of the 50 per cent band is being reviewed. If it proves to be ineffective, it will presumably be reduced in the next Budget, making 2011/12 a good year to top up pensions and the like (although see below). Business expenditure may well attract greater tax relief for expenditure allowable in 2011/12 than subsequently, giving an opportunity to plan spending to maximise tax relief.
If you have a family company with retained profits, it might be worth declaring a dividend now (and making the necessary accounting entries) and reducing dividends taken in 2011/12. This strategy will, however, alter the amount due ‘on account’ of IT for higher-rate taxpayers and will lead to HM Revenue and Customs assessing a larger ‘on account’ payment due on 31 January 2012.
Tax Relief on Pension Contributions
From 6 April 2011, pension contributions that qualify for tax relief will be reduced to an annual allowance of £50,000 instead of the previous limit of £255,000. If you have been considering a contribution to your pension policy that will exceed the limit, there is little time left – but bear in mind the difference in tax rates now and after 6 April.
Enterprise Investment Schemes and Venture Capital Trusts
Clients making investments in Enterprise Investment Schemes and Venture Capital Trusts will welcome the increase in tax relief on such investments – it rises from 20 to 30 per cent on 6 April 2011. Subject to ‘State Aid approval’, the Finance Bill 2012 will greatly increase the amount which can be invested in these schemes by individuals and make them available for investments in bigger firms.
Non-Domicile and Non-Resident Taxation
‘Non-doms’ resident in the UK will be subject to a higher annual charge, of £50,000, if they have lived in the UK for 12 years. The current £30,000 charge will be retained for non-doms who have been resident for at least seven of the past nine years and fewer than 12 years.
The ‘remittance basis’ of assessment for non-doms is being changed to exclude remittances for commercial investment in UK business.
These reforms are intended to come into effect in 2012.
In addition, the present lack of certainty in UK law as to what constitutes ‘residence’ for tax purposes is to be resolved by the introduction of a ‘statutory residence test’. This will probably be based on a ‘physical presence’ test similar to that used in most countries.
National Insurance
National Insurance Contributions and IT are to be combined. A consultation is being put in progress as to how best to achieve this. Pensioners are assured that this will not adversely affect them. The process is expected to take a number of years to complete.
Inheritance Tax (IHT)
The ‘nil rate band’ for IHT (currently £325,000) remains frozen until April 2015.
However, if you leave 10 per cent or more of your net estate (after deducting IHT exemptions, reliefs and the nil rate band) to charity, the Government intends to reduce the rate of IHT charged to 36 per cent as opposed to the standard rate of 40 per cent.
In practice, this may mean some wills have to be reworded to achieve this tax saving as well as the intended benefit for the charity.
Savings Income
One of the tax reliefs being abolished from 6 April 2011 is the relief from IT on a NS&I Ordinary Account, which currently exempts the first £70 of interest.
On the plus side, the Government is introducing, for all UK resident children under the age of 18 who do not have a Child Trust Fund account, the ability to have a Junior Individual Savings Account (‘Junior ISA’), similar to an ‘adult’ ISA. This may be an attractive savings vehicle for younger family members.
Tax Co-operation in the EU
New regulations are being introduced in January 2012, based on the EU Directive on administrative co-operation in the field of taxation, which will:
  • extend the scope of the current Directive to include all national taxes and duties, local taxes and motor taxes;
  • allow tax officials from one Member State to attend or participate in administrative enquiries in another Member State;
  • permit information exchanged to be used more widely than at present, subject to certain restrictions; and
  • permit a range of national bodies to engage in the mutual assistance process under the general oversight of a Central Liaison Office.
In simple terms, the idea is to make sure taxes owed anywhere in the EU can be pursued anywhere else in the EU.
Charities will be able to recover the ‘Gift Aid’ tax supplement without paperwork on the first £5,000 of donations received in a year. This will come as a great relief to the trustees of many small charities. However, not mentioned in Mr Osborne’s speech was the fact that the ‘SA Donate’ scheme, whereby taxpayers can donate to charity on their tax return, is being withdrawn.
The state pension age will rise to 66 in 2020. Future increases in the state pension age will be based on regular reviews of longevity – a worrying thought for the self-employed in particular. This will inevitably mean longer working lives with an increased risk of illness before retirement age. Permanent health and critical illness insurance will undoubtedly become more widely considered.
Air Passenger Tax (APT)
The proposed rise in APT is being delayed until next year and will be kept under review. However, APT is to be extended to private jets.
Tax Online to be Compulsory
Dealing with your tax affairs online will become compulsory some time between August 2012 and August 2013.
If any of the items in this bulletin apply to you, please get in touch. The end of the tax year is 5 April for individuals and 31 March for companies.
The information contained in this newsletter is intended for general guidance only. It provides useful information in a concise form and is not a substitute for obtaining professional advice.