The March Budget introduced a number of measures intended to continue the policy of stimulating the economy by keeping public spending substantially above public revenue.  The new Government [...]]]> The year 2010 is more than usually complicated from the tax point of view because of the change of Government and the introduction of an Emergency Budget.

The March Budget introduced a number of measures intended to continue the policy of stimulating the economy by keeping public spending substantially above public revenue.  The new Government takes the view that this policy is unsustainable and that the tax burden must rise in addition to expenditure being cut.  The June Emergency Budget addresses the taxation side of this equation, although the Tax Credit proposals can be seen as part of the plans to reduce expenditure.

As widely anticipated, the standard rate of VAT is set to rise from 17.5% to 20%, but not until 4 January 2011.  There will be corresponding changes to the Flat Rate Scheme percentages, and legislation is proposed to prevent larger businesses charging the existing rate by invoicing early.  The 5% reduced rate remains unchanged, and there are no alterations to the definitions of exempt and zero-rated supplies.

The basic personal allowance for Income Tax will rise to £7,475 for the year, or £143.75 a week, from next April.  This is a rise of £1,000 over the figure for the current year.  It has been publicised as an increase for the under-65s.  The position for the over 65s is unclear, as the enhanced income-related allowances available to them have not yet been announced, but it is likely that they will benefit from the increase if their income stops them from qualifying for the enhanced allowances.

There will at the same time be a reduction in the threshold for 40% tax, which will result in those on incomes above about £45,000 will not benefit from the allowance increase.  The precise threshold figure will be announced later.  The upper earnings limit for National Insurance will also be reduced, to avoid a situation where part of a taxpayer’s earnings is taxed at 40% plus standard National Insurance.

The special treatment of furnished holiday lettings is to continue for the time being, but there is to be consultation on future changes.  There is also to be a review of the treatment of ‘non-doms,’ who seem at present to receive more favourable treatment in the UK than in most other countries.

The rates of Class 1 National Insurance for employees and employers and Class 4 National Insurance for the self-employed will, as proposed in the March Budget, increase next April by 1% (from 11%, 12.8% and 8% to 12%, 13.8% and 9% respectively).  The threshold for employer’s contributions will, however, rise from the current level of £110 per week to £131 per week, subject to a further increase for inflation.

It was generally expected that there would be an increase in the rate of Capital Gains Tax.  The change that has been brought in is not as bad as many commentators foretold, but it does apply to all gains arising after 22 June 2010.  Capital Gains attract an ‘annual exemption’ of, currently, £10,100.  The rates charged on gains in excess of this will be depend on income.  If the taxable income is below the 40% threshold, gains up to the unused basic rate band will be taxed at 18%.  Any remaining gains, and all taxable gains if the income reaches the 40% threshold, will be taxed at 28%.  The exception will be gains on business assets, which will be taxed at 10%, subject to a lifetime ceiling of £5 million of gains.

Because the Capital Gains Tax changes are being introduced part way through the tax year, there are complications for people who realised taxable gains between 6 April and 22 June this year and realise further taxable gains during the rest of the tax year.  This newsletter cannot detail these complexities.

The main rate of Corporation Tax was to be 28% from 1 April 2011, but will now be 27%.  The small profits rate, chargeable on the vast majority of companies, will also reduce from 21% to 20%.  These changes do not affect the current tax year.

There is to be a National Insurance ‘holiday’ for new businesses setting up in regions outside London, the South East and Eastern England.  This will only apply to business start-ups after 22 June 2010 and will be a maximum of £5,000 for each of the first 10 employees.  The target commencement date is 6 September with a duration of three years, but the necessary arrangements have yet to be made and the start may be delayed.

There are a number of proposals for tax credits, which are aimed at reducing the cost and focussing the benefit on the more needy.  The ‘baby element’ is to be abolished from 6 April 2011, and the ‘over-50 element’ from 6 April 2012, whilst the proposed addition for children aged 1 and 2 will not now be paid.  Annual uprating will be by reference to the Consumer Price Index rather than the Retail Price Index in future.  The child element will be increased by £150 a year over the rate of inflation from 6 April 2011 and by £60 a year over the rate of inflation from 6 April 2012.  On the other hand, the universal Child Benefit will be frozen at its present level until April 2014.

For households with incomes over £40,000, the rate of withdrawal of tax credits will rise from 39% to 41% from 6 April 2011.  This means that for every £1 of income above that point the household will lose 41p in tax credits, rather than the present 39p.  The lower 6.67% rate of withdrawal for the family element of tax credits and the threshold of £50,000 for that withdrawal will disappear, and the 41% rate will apply to that element as well.

From 6 April 2012 the backdating period for tax credit claims will reduce from three months to one month.  The income increase ‘disregard’ will fall from its present level of £25,000 to £10,000 in April 2011 and £5,000 in April 2013.  In April 2012 an income reduction ‘disregard’ will be introduced.  These changes will make it more likely that claimants will be faced with overpayments after the end of the tax year.

Finally, it is confirmed that the over 60s will qualify for Working Tax Credit from April 2011 if they work more than 16 hours per week.