Personal and trust tax

Income tax bands and personal allowances

The personal allowance for those under 65 will rise by £1,000 to £7,475 for 2011/12. The basic rate limit for 2011/12 will be reduced, so that higher rate taxpayers will not benefit from the increase in the personal allowance.

National insurance rates and bands

The main national insurance contribution (NIC) rates will rise by 1% in 2011/12, as previously announced. The employer’s NIC (secondary) threshold will rise by £21 a week more than indexation to reduce the impact of this increase.

The upper earnings/profits limit (UEL/UPL) will continue to be aligned with the higher rate threshold (the total of the under-65 personal allowance plus the basic rate limit) by reducing the UEL/UPL.

Deduction of income tax at source

HM Revenue & Customs (HMRC) will be given the power to make regulations to amend when and how a taxpayer other than a company should report income tax deducted from payments of interest, patent royalties and other annual payments.

Individual savings accounts (ISAs)

For tax years starting from 6 April 2011, the annual ISA investment limits will increase each year in line with inflation as previously announced. The new limit will be based on the annual retail prices index (RPI) increase to the previous September and rounded to a multiple of £120.

Child trust fund

As announced on 24 May 2010, Government contributions to child trust funds will be reduced to a basic £50 from 1 August 2010 and then the contributions will cease completely from 1 January 2011.

Deferring the requirement to buy an annuity

The effective requirement to use registered pension scheme funds to buy an annuity at age 75 will be scrapped from 2011/12. Pending implementation of the necessary changes, from 22 June 2010 the age threshold will rise from 75 to 77. This change will also apply for the purposes of inheritance tax (IHT) charges for pension scheme members aged 75 or more.

For members of money purchase pension schemes who reach age 75 after 21 June 2010, the strict alternatively secured pension (ASP) income limits will apply from age 77. Immediately before their 75th birthday, members will become entitled to income withdrawal and a tax-free pension commencement lump sum in respect of any uncrystallised funds (ie funds that have not yet vested).

Pensions tax relief

Legislation will be introduced to repeal the Finance Act 2010 measures that introduced the high income excess relief charge, which was due to operate from 2011/12. The Government will instead use the existing allowances structure to restrict higher and additional rate relief for pension contributions. The Budget Red Book says that ‘provisional analysis suggests an annual allowance in the range of £30,000 to £45,000 would raise the necessary yield’.

Think ahead: Maximise the pension contributions on which you can get full tax relief. This year the annual allowance is £255,000. In 2011/12 it could be as little as £30,000. But watch out for the current rules that can restrict higher rate tax relief.

Pension taxation – NEST

As previously announced, legislation will enable the National Employment Savings Trust (NEST) to be registered with HMRC for tax purposes. Once registered, NEST will be treated as an occupational scheme.

Real estate investment trusts (REITs)

At present, a UK REIT must pay cash dividends (property income distributions) to meet the requirement under REIT rules to distribute 90% of profits from its property rental business. From the date of Royal Assent, a UK REIT will be able to issue stock dividends instead of making a property income distribution, as previously announced.

Venture capital schemes

As previously announced, for venture capital trusts (VCTs) there will be a change in the definition of eligible shares and the minimum holding of such shares will rise to 70% from the current 30%.

Company shares will be excluded from qualifying for VCTs and enterprise investment schemes (EISs) if the company is an ‘enterprise in difficulty’. The current rule that a company must have a qualifying trade carried on wholly or mainly in the UK will be replaced with a requirement that the company must have a permanent establishment in the UK, as previously announced.

Legislation will be in the Finance Act, but no date has yet been set for implementation. The new eligible shares rule will not affect funds raised by VCTs before the implementation date.

Income tax adjustments between settlors and trustees

From 6 April 2010, as previously announced, settlors who receive repayments of tax on trust income because their personal tax rate is lower than the trustees’ rate will be required to pass such repayments to the trustees. These payments to trustees will be disregarded for IHT purposes.

Don’t forget: The 50% income tax rate (42.5% for dividends) applies to all trusts that accumulate income. If you are a trustee, you should consider whether you could save tax by restructuring the way in which the trust’s investments are held. Remember also the maximum rate of CGT for trusts is only 28%.

Guardianship orders

From 6 April 2010, as previously announced, payments made to individuals who care for children under special guardianship orders will be free from income tax.

Tax changes to trusts compensating asbestos victims

Where a company has set up a trust before 24 March 2010 to pay compensation to asbestos victims, the trustees will be exempt from income tax, capital gains tax and inheritance tax. The trusts that will benefit are those set up as part of an arrangement made by a company with its creditors. The tax relief applies from 6 April 2006 and was previously announced.

Income tax relief for shared lives carers

Shared lives carers, including adult placement carers, staying put carers and certain kinship carers will qualify for the same income tax relief as foster carers. The new relief, to be known as qualifying care relief, will have effect from 6 April 2010 and was announced in the 2009 Pre-Budget Report.

Seafarers’ earnings deduction

The seafarers’ earnings deduction will be extended to EU and EEA seafarers from 6 April 2011, as previously announced in the 2009 Pre-Budget Report.

Enterprise management incentive (EMI)

The requirement that a company granting qualifying EMI options must operate wholly or mainly in the UK will be replaced with a condition that the company must have a permanent establishment in the UK. The change will take effect from the date of Royal Assent and has previously been announced.

Expenses paid to MPs

Legislation will grant continued exemption from income tax for personal additional accommodation expenditure (PAAE) payments as well as certain travel and other expenses paid to MPs with effect from 7 May 2010. The move stems from a change in the scheme for expense payments at the start of the new parliament.

Tax credits

From April 2011, the income threshold for the withdrawal of the family element of child tax credit (CTC) will be reduced from £50,000 to £40,000 and the withdrawal rate will be increased from 6.67% to 41%.

The baby element of CTC will be scrapped from April 2011 and the planned 2012 increase for one and two-year-olds announced in the March 2010 Budget will not be introduced.

From 2012, the 50 plus element will be removed from the working tax credit.

The withdrawal rate for the other tax credits will rise to 41% (from 39%) and the income disregard will drop from £25,000 to £10,000, both from April 2011.

Furnished holiday lettings

The plans to repeal the furnished holiday lettings provisions have been scrapped. However, the Government will undertake a consultation with a view to changing the existing tax treatment of furnished holiday lettings from April 2011. Changes expected include an increase in the number of days on which properties are either available for letting on a commercial basis or actually let. There may also be restrictions on the use of loss relief.