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News - 22 June 2010

EMERGENCY BUDGET 2010

The Chancellor of the Exchequer presented his Budget to Parliament on 22 June 2010.

Summaries of the main announcements are outlined below. If having read them you need further clarification on any of the issues discussed please do not hesitate to contact us.

VAT

VAT will increase from 17.5% to 20% from 4 January 2011. Needless to say the Vat Flat Rate Scheme Rates have also been amended to reflect this increase in the Vat Rate.

Zero rated supplies, such as basic foodstuffs, children’s clothing and books and Exempt supplies, such as education and health; and supplies subject to VAT at the reduced 5% rate, such as domestic fuel and power, are not affected by this change.

CAPITAL GAINS TAX

Capital gains tax will also rise for higher rate taxpayers from 18% to 28% from midnight of 22nd June 2010. In simple terms the Gain falling in the Higher Rate band will be taxed at 28% and those falling in the Basic Rate band will continue to be taxed at 18%.

The annual exemption limit will also be left at £10,100 and rise with inflation.

The 10 per cent lifetime limit for entrepreneurs’ relief rate will be extended from the first £2 million to the first £5 million of gains made over a lifetime.

The rate of CGT for trusts and personal representatives is also increased to 28%, for gains arising on or after 23 June 2010, except where Entrepreneurs’ Relief applies.

PERSONAL TAX

Personal tax limits will be increased from £6,475 now to £7,475 in April next year (making 23 million base rate taxpayers up to £175 better off) with the objective to extend it to £10,000 in the long run.

The basic rate limit will however be reduced so that higher rate and additional rate taxpayers do not benefit from the increase in the personal allowance. The exact figure will be confirmed when September's retail price index is published.

Individuals who set up trusts (settlors) currently may receive repayments of income tax on trust income if they are liable to income tax at a lower rate than the trustees. Such repayments that relate to trust income that arises on or after 6 April 2010 will need to be paid over by the settlors to the trustees.
From 6 April 2011 the ISA limits will be increased in line with the Retail Prices Index (RPI) on an annual basis. The cash ISA limit will continue to be half the value of the overall ISA limit. In the event that the RPI is negative, the ISA limit will remain unchanged.
Tax credits will take a hit. Among the changes will be a drop in the maximum income level at which households are eligible from £50,000 to £40,000 and the taper rate will be increased – so more people will get less. Also the income disregard is to be reduced from £25,000 to £10,000 together with an increase in the withdrawal rate from 39% to 41%.

The extra payments for babies under a year old will come to an end, the income disregard will be reduced, and there will be no new tax credits for infants (as planned by the Labour government).

Child benefit will be frozen for three years.

CAR BENEFITS

With effect from 6 April 2011, the list price cap of £80,000 is being withdrawn. This will substantially increase the tax charge for drivers of very expensive cars. For example for a car with a list price of £150,000 and CO2 emissions of 320g/km, the annual taxable benefit will increase from £28,000 to £52,500 (being 35% of £150,000 up from 35% on the previously capped amount of £80,000).

PRINCIPAL CHANGES FOR SMALL BUSINESSES

Main Rate of Corporation tax will gradually decline from 28% now to 24% in four years.

Corporation Tax Rates for Smaller Companies to go down from 21% to 20% from April 2011.

The enterprise finance guarantee will be extended.

The government will carry out a review of IR35 and small business tax as promised.

However there will be a reduction in capital allowances from 2012 as follows:
Capital Allowance reduced from 20% to 18%
Special Rate Allowance reduced from 10% to 8%
Annual Investment Allowance to be reduced from £100,000 to a maximum of £25,000 from 2012.

The proposal inherited from the previous Government to repeal the special tax rules for furnished holiday lettings will not be implemented.  The current rules continue to apply for the 2010-11 tax year.

NATIONAL INSURANCE

There will be an increase in the threshold for Employers' National Insurance from April 2011 by £21.00.

Start-up businesses outside London and the South East will be exempt from NI for the first 10 employees. Tax break worth up to £50,000 for 400,000 businesses, is expected to last three years and will allow businesses to avoid NI for 12 months. The government hopes to have the scheme up and running by September but businesses starting up now will also be able to benefit.

Don’t forget that as proposed by the Labour government both the Class 1 National Insurance contributions (paid by employees and employers) and the Class 4 National Insurance (paid by Self Employed individuals) are going up by 1% from April 2011.

INSURANCE PREMIUM TAX

Insurance premium tax will also rise from 17.5% to 20% at the higher rate and from 5.5% to 6% at the standard rate.

INHERITANCE TAX (IHT)

The IHT threshold is frozen at £325,000 from 2010/11 to 2014/15.

The rate of IHT remains 20% for lifetime transfers and 40% for death estates (including transfers within seven years before death brought back into the estate for the purpose of calculating the tax due at death).

PENSIONS

The earnings link with the state pension will be restored, and there will be a triple guarantee that state pensions will rise by earnings, prices or 2.5% - whatever is highest.

There will be an acceleration of the increase of the state pension age to 66 and consultation on plans to abolish compulsory retirement ages.

There will be consultation on the alternatives to the proposed reduction in tax relief for higher earners, which will be considered as long as they leave the government no worse off. They may include a reduction in the annual allowance.

BIG SPENDING CUTS FOR GOVERNMENT DEPARTMENTS

There's a promise that capital spending will not be cut – which is good news for businesses making their money from government investment.

There will also be no cuts to education and real increases for the NHS.

Everyone else will share the pain, with average department cuts of an astonishing 25% - details of which will be published in the spending review on 20 October 2010.

The cuts mean a wave of redundancies is guaranteed for public sector workers.

For those who cling on there's a two year wage freeze for anyone earning over £21,000 and a £250 a year rise for those earning less.

And celebrated economist Mr Hutton is drawing up plans for public pay to ensure the highest paid do not receive more than 20 times the lowest paid.

There will be painful changes to public sector pensions, but no announcements just yet until Mr Hutton (the previous Labour Work and Pensions Secretary) reports in September on his proposals, and makes final recommendations in time for next April's budget.

TAX RETURN FILING PENALTIES

A £100 penalty immediately after the due date for filing (whether or not the tax has been paid); the failure also starts a penalty period, which is set for a year; If there are further failures within the penalty period, then the fixed penalty escalates by £100 for each of those subsequent failures, up to a maximum of £400 per failure. The penalty period is also extended to the first anniversary of the latest failure;

OTHER ISSUES

Council tax will be frozen (as long as councils can keep their costs down).

There will be no additional duties on alcohol tobacco or fuel (and a reverse on the cider tax rise from the end of the month).

The child element of the child tax credit will rise £150 above inflation next year.

The extension of broadband won't be funded by a landline levy but through the under-spend in the digital switchover part of the TV licence – which presumably means less for the BBC.

HUGE WELFARE CUTS

A big change will be that most welfare payments will be linked to a different inflation measure (CPI rather than RPI which will rise more slowly).

Housing benefit will be dramatically reduced. Among the measurements are new limits on the maximum payout, to £400 a week for a four bedroom family home and a less generous interpretation of the minimum size of a home any family is expected to live in.

The disability living allowance will continue, but from 2013 there will be a medical assessment for all existing and new claimants, which George said will remove the requirement for excessive form-filling, but is also likely to reduce the number who are eligible.

There will also be an end to one-off payments for new workers over the age of 50.

The health in maternity grants will be abolished.

The Sure Start maternity grant will be restricted to the first child.

Lone parents will be encouraged to look for work as soon as their youngest child goes to school.

There will be no extension of the savings gateway.

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