2011 Budget News and Analysis
These allowances represent the amount of an individual’s income in the tax year that is not subject to income tax. Some people are eligible for several allowances such as the personal allowance, and married couples allowance. The married couples allowance is available to married persons and civil partners, but only where at least one person of the couple was born before 6 April 1935.
The personal allowance for 2011/12 will increase by £1,000 to £7,475, but the 40% tax threshold will reduce to £35,000 (see below). This ensures that higher and additional rate taxpayers do not benefit from the increased personal allowance in this year. From 6 April 2012 the personal allowance will be increased again by £630 to £8,105, and in that year the 40% threshold will be reduced further to £34,370.
Personal allowances are withdrawn at certain income thresholds, indicated below, and cannot be claimed by non-domiciled individuals who elect to have their foreign income and gains taxed on the remittance basis for the tax year.
The 2011/12 personal allowances are…
Under 65 – £7,475
65-74 – £9,940
75 and over – £10,090
Minimum married couples allowance* – £2,800
Maximum married couples allowance* – £7,295
Blind person’s allowance – £1,980
Income limit for allowances for those aged 65 or more – £24,000
Income limit for allowances for those aged under 65 – £100,000
* given where one partner was born before 6/4/1935, and only as 10% reduction in tax.
Income Tax Rates
The tax rates for 2011/12 have been frozen at the 2010/11 levels but the threshold at which the 40% tax rate is applied is reduced to £35,000. This introduces a subtle tax increase as it pulls more taxpayers into the 40% tax bracket, and increases the amount of income subject to tax at 40%.
The 2011/12 rates and bands are…
Savings rate* (10%) – 0 to £2,560
Basic rate (20%) – 0 to £35,000
Higher rate (40%) – £35,001 to £150,000
Additional rate (50%) – over £150,000
* Only applies if non savings income is below this amount
There is currently no clear measure by which an individual can determine whether they are treated as resident for tax purposes in the UK. The Government intends to introduce a legal test of residence with effect from April 2012.
The main changes to Tax Credits as it applies to the self-employed, is the change in the income disregard from £25,000 in 2010/11 to £10,000 in 2011/12.
The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. The reduction in this threshold is likely to adversely affect families with fluctuating incomes, such as the self-employed. In the future, in order to avoid a claw-back of tax credits, the claimant will need to finalise their self-employed profit figures as close to the tax year end as possible.
The level of contributions that can be made with full tax relief to a registered pension scheme is to be reduced from £255,000 to £50,000 per pension input period (PIP) falling in the tax year. However, this cap can be expanded by bringing forward unused relief from the previous three tax years, up to a maximum of £50,000 from each year. If the annual allowance is exceeded the taxpayer must pay an annual allowance charge on the excess at their marginal rate of income tax.
The Lifetime Allowance will reduce from £1,800,000 in 2011/12 to £1,500,000 in 2012/13.
Individual Savings Accounts (ISAs)
The ISA savings limits applicable in 2011/12 for those over 18 are:
Overall limit – £10,680
Cash up to – £5,340
Balance in stocks and shares up to – £10,680
The rules that govern what type of expenditure qualifies for this relief will also be revised with effect from 2012 to make it easier for small companies to claim this relief.
When business owners and accountants are asked what single action could simplify the tax system, most suggest merging income tax and NI. This message has finally been heard by the Government, who will start consulting on how the operation of NI and income tax could be combined.
This does not mean these two taxes will be merged. The Government has stated that NI will not be applied to savings, dividends or pensions. The likely changes will involve aligning the rules and mechanics of collecting the two taxes. However, don’t expect big changes any time soon!
From 6 April 2011 the rates and thresholds for the main NI contributions were already known with most increasing by 1%. The main figures for 2011/12 are:
Lower Earnings Limit (LEL) for Class 1 NICs – £102/week
Employer’s class 1 above £136/week not contracted out – 13.8%
Employee’s class 1 not contracted out from £139 to £817/week – 12%
Employee’s additional class 1 above £817/week – 2%
Self-employed class 4 from £7,225 to £42,475 per annum – 9%
Self-employed class 4 additional rate above £42,475 per annum – 2%
Self-employed class 2 – £2.50 per week
Voluntary contributions class 3 – £12.60 per week
Approved Mileage Rates
Where an employee uses his or her own car for business journeys their employer can pay them an approved mileage allowance payment (AMAP), free of tax and NIC.
This AMAP rate has been stuck at 40p per mile since about 2002, and at current petrol prices many employees who need to use their car for business cannot afford to do so. The AMAP will increase to 45p per mile from 6 April 2011 for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile. If the employer does not pay the full AMAP rate the employee can claim the additional amount in tax relief from HMRC.
The tax free AMAP can also be paid by charities to volunteers. The self-employed, who have turnover below the VAT registration threshold (£73,000 from 1 April 2011), may also use the AMAP rate as a substitute for motor expenses claimed in their accounts.
Where an employee carries a fellow employee as a passenger on a business journey, an additional 5p per mile tax free can be paid. The rate will also now apply to volunteer drivers who take other volunteers on business/ charity related journeys.
The tax charge for personal use of a company car is based on a percentage of the list price of that car when new.
From 6 April 2011 the percentages are all increased by 1% for those in the 15% to 35% range but with 35% kept as the maximum. The taxable benefit of using a car with CO2 emissions of 121-129g/km is 15% of the list price. This percentage increases by 1% for each additional 5g/km of CO2 emissions to a maximum of 35% for cars with CO2 emissions of 225g/km or more.
Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to a set value, currently £18,000. This value will increase to £18,800 from 6 April 2011. The maximum taxable benefit of receiving fuel for personal use will increase from £6,300 (for 2010/11) to £6,580 (for 2011/12).
VAT Rates and Thresholds
There were few changes announced for VAT. The rates and thresholds are as follows from 1 April 2011:
Lower rate – 0%
Reduced rate – 5%
Standard rate – 20%
Registration turnover – £73,000 (up from £70,000)
Deregistration turnover – £71,000 (up from £68,000)
It will be compulsory for all VAT registered businesses to file their VAT returns online from 1 April 2012. At present only businesses who became VAT registered from April 2010 or those with turnover of £100,000 or more must file VAT returns online. Also from 1 August 2012 all requests to register or deregister for VAT will have to be made online.
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