Private clients
We feared the worst for individual taxpayers, before the Budget. In the end, though, the tax changes will have no greater impact than those already announced by the previous government. We still have the 50% tax rate for those earning more than £150,000, personal allowances will still be reduced for those earning more than £100,000, with it gone completely for those earning more than £113,000, and while capital gains tax did increase, it is not as bad as it might have been.
We expected a significant rise in capital gains tax, with alignment to 40% or 50% income tax. In the end a 28% rate for higher rate taxpayers seems to balance the need to close the gap between income tax rates and capital gains tax rates while avoiding the taxation of inflation and a complex system to deal with this. Entrepreneurs relief, which allows business owners to realise the gains from the sale of their trade to be taxed at just 10%, was not only preserved but extended. This will allow up to £5 million of gains to realised by a qualifying individual, during their lifetime, at the reduced rate of capital gains tax – a welcome preservation of this valuable relief. Unfortunately, the relief still does not allow passive investors in trading businesses this reduced rate of tax, as taper relief did, which would have assisted businesses in their funding from sources other than banks. Changes to capital gains tax take effect from midnight on 22 June.
A further welcome change which is likely is to tax relief on pension contributions. The very complicated system which is due to take effect from April 2011 would have introduced a tax charge to claw back the higher rate relief for those earning more than £150,000. The proposed new system appears to allow full tax relief but on a reduced amount – somewhere between £30,000 and £45,000. A consultation process will begin with changes taking effect from April 2011, but it should be more simplified than what we are currently expecting. This should also continue to encourage pension saving, albeit at a lower level.
Overall, the pain is not as bad as it could have been in the current economic climate.
In detail
Pension tax relief consultation
Revisions to the income tax relief for pension contributions is to be subject to consultation, however, the Chancellor indicated that he is considering a simpler system based on an annual maximum tax deductible pension contribution of between £30,000 and £45,000.
Personal allowances increase by £1,000
The personal allowance for people aged under 65 will increase by £1,000 on 6 April 2011. However, the benefit of the increase will be restricted to basic rate taxpayers and it is not yet clear whether age-related allowances will be increased by as much.
Tax credits and child benefit
The tax credit system has long been regarded as overly complicated. Pointing to the 150,000+ families with household incomes of over £50,000 whom are eligible for the relief, the Chancellor today said that system was also unaffordable and overdue for re-targeting at those most in need.
Capital gains tax changes
With effect from midnight on Budget day, two main rates of CGT come into force; the existing rate of 18% applies to basic rate taxpayers while higher rate taxpayers will pay 28%. Entrepreneurs’ relief, charging tax at a reduced rate of 10%, will be available for the first £5 million of lifetime gains, (previously £2 million).
VAT to increase to 20%
As we predicted, VAT will rise by 2.5% to 20% next year. Although 2.5% is a relatively large increase it will still mean that the UK’s VAT rate is below the average for the European Community.
Taxation of furnished holiday lets
Qualifying furnished holiday lettings can be treated as a trade for tax purposes in order to obtain beneficial tax treatment. The previous Government announced that these beneficial rules would be withdrawn from April 2010, but the new Chancellor has decided that these will remain until April 2011 when new rules will be introduced.