UK: Emergency Budget 2010 – personal tax highlights

"We are all in this together"

Flanked by Nick Clegg and Danny Alexander, George Osborne took to the Dispatch Box today to deliver the Coalition's 'austerity budget'. Heralding a new era of responsibility, freedom and fairness, the Chancellor delivered on his promise to focus on spending cuts rather than tax increases, with the only significant tax raising measures being the widely anticipated increases in capital gains tax and VAT and the introduction of a new levy on banks.

Tax increases aside, one of the most significant announcements today was a consultation on future tax policy changes, seeking to make them more considered and transparent. The impact of this in creating an environment of stability and certainty may be the most significant legacy of this Budget.

Capital gains tax

A new top rate of 28%

That oft repeated quote that 'I pay less tax than my cleaner' came back to haunt entrepreneurs and investors today, with the widely anticipated increases in capital gains tax being announced. From midnight tonight, the capital gains tax rate for taxpayers whose income and gains exceed £43,875 (the higher rate threshold) will increase to 28%. While still a substantial increase, this is considerably lower than the 40% or 50% rates that had been mooted before the Budget.

Trustees and personal representatives will be subject to the top rate of 28% irrespective of the level of their income or gains.

Immediate application

The greater shock was perhaps that the increase will take effect for disposals made on or after 23 June 2010. An increase in direct tax rates in the middle of a tax year is unprecedented, but perhaps emphasises the 'emergency' nature of the Budget.

However, the nature of a mid tax year change in rates will present a considerable challenge to the draftsmen. There will need to be transitional rules for the apportionment of losses, the annual exempt amount and deferral reliefs (for instance where investments are made in EIS or VCTs) where a taxpayer has pre and post 23 June 2010 gains. They will also need to deal with the myriad tax rules that simply refer to gains being deemed to accrue 'in a tax year' rather than on a particular date (such as remittances made by non-doms and charges to beneficiaries on the distribution of gains from offshore trusts).

Extension of Entrepreneurs' Relief

At the same time the Chancellor extended the availability of entrepreneurs' relief to the first £5 million of gains. He rejected all proposals for taper or indexation reliefs (which characterised capital gains tax before 2008), as the 'complexity and administration involved would have been self-defeating'.
While many investors will breathe a sigh of relief that the increase in rates was not as dramatic as had been feared, the lack of any incentive (such as a taper or indexation relief) for long-term investment may be something that the Government will want to revisit in time.

Annual exempt amount

There had also been speculation that pressure from the Lib-Dems would lead to a cut in the annual exempt amount of £10,100, but this did not transpire.

Value added tax (VAT)

As has been widely anticipated, the rate of VAT is to rise from 17.5% to 20% on 4 January 2011 (the first business day of 2011), allowing for consumers to benefit from the January sales before the austerity starts to bite. The scope of VAT will not be extended, so items such as food and children's clothing remain exempt and the 5% reduced rate that applies to domestic fuel is unaltered.

Tax policy review

A potentially far reaching set of proposals were published today, in a discussion document entitled 'Tax policy making: a new approach.
Taking the importance of fostering an environment conducive to business, economic recovery and stability as its cornerstone, this document sets out a potentially radical change in the way in which tax laws may be drafted and tax policy formulated.

The key precept on which the new approach will be based is restoring predictability, stability and simplicity to the UK tax system. This is to be achieved by measures including consulting a wide range of interested parties including business, advisers and professional bodies, and when there is to be no consultation on a proposed change, providing an explanation of why that decision has been made.

Other measures proposed include publishing the Finance Bill or draft legislation three months before it comes into effect so that interested parties have an opportunity for comment.

Strategic policy

Hand in hand with reforming tax policy formulation goes 'a strategic approach to tax avoidance'.

This may include the introduction of a general anti-avoidance rule ('GAAR'), which would mark a huge shift in the tax planning landscape. One would expect a GAAR to be principle rather than rule based, and this is to be welcomed to the extent that it avoids the need for regular technical changes, and would also assist in bringing further stability to the UK tax system. Of course, the success of any GAAR will depend on its being sufficiently widely drafted so as not to be easily abused, but not so widely drafted that it prohibits standard tax planning.

A good thing?

Overall, the measures proposed today are to be welcomed, but as ever the devil lies in the detail. For a true reform of tax policy making to work, the Government will need to have a very clear tax strategy, and it is hoped that just such a coherent strategy will emerge. A good way to demonstrate commitment to reform would be to give clear guidelines about the scope of the review of the taxation of non-doms which was announced a few weeks ago, and about which very little further detail has since emerged.

On balance though the best test of whether the new approach succeeds may well be if the size of the books of tax statutes reduces in the years to come!

Taxation of the banking industry

A new bank levy

Banks are to make 'a more appropriate contribution' to tax revenues. A non-deductible bank levy of 0.07% will be introduced with effect from 1 January 2011 (with a reduced rate of 0.04% applying in 2011) and is expected to raise more than £2bn per annum. The levy will apply to institutions with aggregate liabilities of more than £20bn, so only the larger banks will be affected. While this levy is independent of any EU or G20 initiative, a joint statement with Germany and France issued today indicated that they will introduce a similar levy in due course.

Bonuses and remuneration

A consultation on a remuneration disclosure scheme for banks has been announced and the Government will explore the costs and benefits of a Financial Activities Tax on profits and remuneration. The FSA (as part of its review of its Remuneration Code) will also consider imposing more stringent requirements on the deferral and award of variable pay, examine ways to strengthen performance and remuneration to ensure that incentives are aligned with long-term performance and consider how to vary capital requirements to offset risk in remuneration practices.

Pensions

Annuities

The Coalition's Programme for Government announced the intention to remove the requirement for pensioners to buy annuities at 75 and today's Budget introduced the first step towards this by increasing the age to 77. These are only interim changes and there will be further consultation on this issue.

Limit on contributions

Following his theme of simplifying the tax system, the Chancellor announced that the Government will seek to avoid the complexity of the 'high income excess relief charge' which is due to take effect from 6 April 2011, which will limit the availability of tax relief on pension contributions for the highest earners. Instead the Government has suggested that this might be replaced by a cap on the maximum level of pension contributions that qualify for tax relief (the 'annual allowance') at '£30-45,000', down from the current limit of £255,000.

Other points to note

Corporation tax

From 1 April 2011 the full rate of corporation tax rate will be reduced over the subsequent years by 1% each year until it reaches 24%. The small companies' rate of 21% will also be cut to 20% from 1 April 2011. Other measures to encourage investment will also be introduced. Also announced was a five year plan to review the corporation tax system to reduce the administrative burden on business.

Cigarettes and alcohol

Taxpayers keen to drown their sorrows will be pleased to note that (with the exception of 'long' cigarettes ) rates of duty on cigarettes and alcohol have not been increased and the 10p increase in duty on cider announced in the March Budget has been dropped.

Income tax

The personal allowance for those aged under 65 will be increased to £7,475 in 2011/12, up from £6,475 this year. Those aged over 65 already have an annual exemption of £9,490 and those over 75 £9,640. This will be matched by a reduction in the basic rate threshold (currently £37,400) to ensure that higher rate taxpayers do not benefit from the increase. Those earning over £100,000 already have their personal allowance progressively reduced by £1 for every extra £2 earned and those earning above £112,950 (or £114,950 in 2011/12) lose it entirely.

National insurance thresholds and exemptions

Modest changes were announced to the secondary threshold for employers NICs, which is increased by an extra £21 above inflation.

Office for Budget Responsibility

As previously announced, the Office for Budget Responsibility will be formally constituted by primary legislation and its functions enshrined in law.

Furnished holiday lettings

The previously announced decision to abolish the tax reliefs for furnished holiday lettings is to be reversed.

Inheritance tax

The Conservatives proposal to increase the nil rate band to £1 million did not make the Budget. The only mention of inheritance tax in was in the context of a proposal to extend the Disclosure of Tax Avoidance Scheme rules to inheritance tax planning using trusts. No further details have been announced.

The Civil List

Mirroring the treatment of public servants, the amount of the Civil List has been frozen at the existing level of £7.9m. This freezing of the Civil List gives further credence to the Government's desire for all sections of society to share the burden of spending cuts!

MPs' expenses

And finally, perhaps the only exceptions to the austerity regime are MPs, for whom new rules will be introduced to ensure that expenses paid under the new scheme will continue to be specifically excluded from taxation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Christopher Groves
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions