The 2010 Emergency Budget
George Osborne delivered his first Budget on 22 June 2010.
This followed some 3 months after the last budget delivered by Alastair Darling. Many of the proposals included in the earlier Budget were retained, but there are also some radical proposals. We highlight below the tax changes that we consider are of most relevance to our clients.
Value Added Tax (VAT)
Perhaps the most radical proposal in the Budget is the planned increase in the standard rate of VAT from 17½% to 20% from 4 January 2011. This measure is expected to raise an additional £13.5 billion a year by 2014/15 and so it will affect everyone.
For small businesses there will be corresponding increases in the Flat Rate. A full list of revised flat rates which apply from 4 January 2011 is available on the HMRC website. Small businesses who gain by using the Flat Rate Scheme are likely to see that the amount they benefit by increases.
Personal allowances
There is no increase in the personal allowance for 2010/11, but there is a planned £1,000 increase to take effect from 6 April 2011. At the same time, it is proposed that the level at which higher rate tax applies will be reduced provisionally by £2,500 to ensure that the personal allowance increase is only of benefit to basic rate taxpayers. Tapering away of personal allowances will remain which has the effect of extending the notional 60% tax band. Effective rates are expected to be as follows:
Taxable Income |
2010/2011 |
2011/2012 |
up to £6,475 |
0% |
0% |
£6,475 - £7,475 |
20% |
0% |
£7,475 - £41,375 |
20% |
20% |
£41,375 - £43,875 |
20% |
40% |
£43,875 - £100,000 |
40% |
40% |
£100,000 - £112,950 |
60% |
60% |
£112,950 - £114,950 |
40% |
60% |
£114,950 - £150,000 |
40% |
40% |
£150,000 + |
50% |
50% |
National Insurance (NIC)
The planned increases to National Insurance rates from 6 April 2011 are to go ahead, but the level of at which employers’ NI becomes due will increase provisionally by £1,092 per annum. At the same time the upper earnings limit will reduce provisionally by £1,650. National Insurance rates are expected to be as follows:
Class 1
2010/2011 |
2011/2012 |
|||
Annual Income |
Employees NIC |
Employers NIC |
Employees NIC |
Employers NIC |
up to £5,715 |
Nil |
Nil |
Nil |
Nil |
£5,715 - £6,807 |
11% |
12.8% |
12% |
Nil |
£6,807 - £42,225 |
11% |
12.8% |
12%
|
13.8% |
£42,225 - £43,875 |
11% |
12.8% |
2% |
13.8% |
£43,875 + |
1% |
12.8% |
2% |
13.8% |
Class 2
The rate for 2010/11 is £2.40 per week, but the rate for 2011/12 is not yet known.
Class 3
The rate for 2010/11 is £12.05 per week, but the rate for 2011/12 is not yet known.
Class 4
The rates of Class 4 NIC are expected to be as follows:
Annual Income |
2010/2011 |
2011/2012 |
up to £5,715 |
Nil |
NIl |
£5,715 - £42,225 |
8% |
9% |
£42,225 - £43,875 |
8% |
2% |
£43,875 + |
1% |
2% |
In a further National Insurance move a 3 year scheme has been announced under which genuinely new businesses which are established outside London, the South Coast and East will be exempted from employers’ NIC on the first 10 employees they take on up to £5,000 in value over the first year of each employees’ employment. Full details have yet to be released, but the scheme will be available for businesses starting on or after 22nd June 2010. Certain trading activities will be excluded.
Capital Gains Tax (CGT)
Until 2008 there was a complex system in place distinguishing business assets and non business assets and tapering gains according to how long an asset has been held. Alastair Darling simplified this by introducing a flat 18% rate with tapering of 4/9ths for certain business assets up to a limit of £1million subsequently increased to £2 million and resulting in an effective 10% rate.
From 22 June 2010 this tax has been increased and further simplified. The standard rate for all assets will be 18% to this extent that an individual is a basic rate taxpayer and 28% to the extent that they are higher rate taxpayers. A 10% rate will apply to certain businesses assets subject to a lifetime limit of £5 million.
Corporation Tax
The main rate of corporation tax which is currently 28% will reduce to 27% from 1 April 2011. There will be further 1% reduction in each of the subsequent 3 years so that by 1 April 2014 the rate will be down to 24%.
The small companies rate, presently 21% had been set to increase to 22% on 1 April 2011. Instead it will be reduced to 20%.
Capital Allowances
The annual initial allowance which at present allows a business to claim a 100% deduction of plant purchased each year will be reduced from the present level of £100,000 to £25,000 from 1 April 2012 (6 April 2012 for sole traders and partnerships). At the same time the writing down allowance will be reduced from 20% to 18% (10% to 8% for long life assets).
Pensions
The present complex anti-forestalling legislation will remain in place until 5 April 2011. However, it is expected that plans to deny higher rate tax relief to certain individuals from 6 April 2011 will be scrapped and replaced by an annual limit on pension input likely to be between £30,000 and £45,000.
The requirement to purchase an annuity by the age of 75 is to be the subject of consultation and with effect from 22 June 2010 as an interim measure, no one under 77 will be required to purchase an annuity.
Tax Efficient Savings
The present Individual Savings Account (ISA) limit is £10,200, of which up to £5,100 can be held as cash. From 6 April 2011 the limit will be indexed with the increase rounded to the nearest £120.
Other Measures of Note
Plans to repeal the favourable treatment of furnished holiday lets from 6 April 2011 have been dropped although following consultation some changes are likely.
The standard rate of Insurance Premium tax will increase from 5% to 6% at the same time as the VAT rate increases.
Plans for a 50p per month landline tax have been dropped.
And finally, George Osbourne has reversed Alistair Darling’s hike in duty on cider!
Comment
This was a bold and radical Budget which primarily sought to address the Nation’s huge deficit that has built up over recent years. There were no winners, but by making a 2.5% VAT increase the cornerstone of the Budget, George Osborne has attempted to spread the burden as thinly as possible over the whole population.
Disclaimer
This document has been produced for general guidance only and does not constitute tax advice. Whilst every care has been taken in its preparation, Warr & Co will not accept liability for any loss incurred as a result of any use made from this document or its contents. We will be happy to offer specific advice to clients when requested. Should you have any queries or wish to discuss any of the points raised, please contact Suresh Dhokia or Peter Edwards on 0161 477 6789.
Date of Article: 22nd June 2010
