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Summary of main changes to Personal Tax Rules 2010-11

In 2010–11, public finances continue to be dominated by the aftermath of the global financial crisis and recession, with a pressing need to cut government borrowing. A mixture of tax rises and spending cuts are being programmed in for future years. But no government wants to swing the axe too heavily just ahead of a General Election, and so the tax climate in 2010–11 remains relatively benign except for higher-rate taxpayers. This guide summarises tax changes up to and including the March 2010 Budget.

Income tax and allowances

Allowances and thresholds are usually uprated in line with price inflation up to the previous September. As the figure for September 2009 was negative, the allowances and thresholds for 2010–11 are unchanged from 2009–10. Therefore allowances remain at £6,475 (under-65s), £9,490 (65 to 74) and £9,640 (over-75s). The limit at which the higher age-related allowances start to be lost is £22,900. From 2010–11, personal allowance is reduced for people of all ages with income over £100,000 a year: £1 of allowance is lost for each £2 of income over the £100,000 threshold.

The threshold at which higher-rate (40 per cent) tax starts remains £37,400. This threshold is to be frozen in 2012–13 at the 2011–12 level. As previously announced, a new 50 per cent additional tax rate is introduced from 2010–11 for people with incomes of £150,000 or more.

Reliefs

From ‘later in 2010’ (date to be announced), relief for giving to charity through Gift Aid and payroll giving is extended to cover charities and community amateur sports clubs in the EU, Norway and Iceland as well as the UK. This follows an EU court ruling and back claims for tax relief on donations to charities in these countries from 27 January 2009 to 1 April 2010 will be considered on an individual basis.

As previously announced, the lifetime limit and annual allowance for pension benefits and savings are frozen at £1.8 million and £255,000 from 2010–11 to 2015–16 inclusive. This also affects the trivial commutation rate which is set at 1 per cent of the lifetime limit.

Further restrictions apply in 2010–11 to tax relief on pension contributions for people on high incomes (over £130,000 a year).  Details have also been announced of how the 2011 system for clawing back relief will work, including:

  • Clawback will apply to individuals with gross income of £150,000 or more. ‘Gross income’ means income before deducting pension or Gift Aid contributions and including the value of pension benefits from the employer (or other sources). But you will be outside the rules if your income excluding employer pension benefits is less than £130,000 (called the ‘income floor’).

  • The value of the employer benefit in a defined benefit scheme will be calculated according to government scales of age-related factors that vary with age now and normal pension age (but not sex). The factors will be reviewed every five years. Your schemes will tell you the value.

  • If you are within the clawback rules, tax relief on your contributions will be reduced by 1 per cent for every £1,000 of gross income over £150,000. This continues until relief is reduced to 20 per cent from £180,000 upwards.

  • The clawed back relief will be collected through self assessment. But, where the clawed back amount exceeds £15,000, you can elect for the pension scheme to pay, in which case your benefits from the scheme will be reduced by an appropriate amount.

Tax credits

The child element of child tax credit (CTC) has risen by £20 more than earnings indexation in 2010–11. Families with children aged 1 and 2 will receive an extra £4 a week CTC child element from April 2012.

Working tax credit (WTC) is to be available from 2010–11 to over-60s working 16 hours or more per week (previously 30 hours). From April 2011, people moving from employment and support allowance into work will automatically qualify for the disability element of working tax credit. The government will review the ‘disadvantage test’ used in the WTC rules. From 2011, the government will pilot an online renewal service for tax credits.

Inheritance tax

The nil-rate band is frozen at the 2009–10 level of £325,000 from 2010–11 to 2014–15 inclusive.

Capital gains tax

The tax-free allowance is unchanged at £10,100 for 2010–11 and the rate remains at 18 per cent. The lifetime limit for entrepreneurs’ relief is doubled to £2 million (was £1 million) from 2010–11.

Tax Evasion

From autumn 2010, increased penalties will apply to people who fail to comply with the disclosure of tax avoidance schemes rules.

From 1 April 2011, penalties for offshore tax evasion will be scaled up depending on the tax jurisdiction involved: twice the UK penalty if the jurisdiction does not share information with the UK; one-and-a-half times UK amounts if the jurisdiction will share information but not automatically; and the same as the UK amounts if the jurisdiction automatically shares information.

Homes and property

For first-time buyers only, the nil-rate threshold for stamp duty increases to £250,000 for a period of two years from 25 March 2010 to 24 March 2012 inclusive. There will be a new 5 per cent rate on residential property purchases of £1 million or more from 6 April 2011 onwards.

Schemes to help home owners have been extended. The HomeBuy Direct scheme (which helps first-time buyers) is being extended to 2010–11. Under the Support for Mortgage Interest scheme, the standard interest rate is frozen at 6.08 per cent until 31 December 2010.

HMRC is discussing with lenders a possible new income verification system where lenders could check against data held by HMRC for tax purposes.

The furnished holiday letting rules were due to end on 5 April 2010, but the proposal was withdrawn from the Finance Act at the last minute. It is not clear whether it will be reinstated.

Savings and investments

The individual savings account (ISA) limit rises to £10,200 (£5,100 for the cash ISA) from 6 April 2010. From 2011–12 and for the life of the next Parliament, the limit is due to be increased in line with price inflation, with the cash ISA limit set at half the total limit.

From 2010–11, the government will pay an extra £100 each year to the child trust funds of disabled children (or £200 if severely disabled).

The Saving Gateway, a matched funding scheme to encourage low-income households to save, goes national from July 2010. The government is exploring options for other matched schemes, for example, for basic rate taxpayers aged 18 to 30.

Life insurance deficiency relief is being amended to allow additional rate (as well as higher rate) relief for surrenders from 6 April 2010.

Trusts

For settlor-interested trusts (where the settlor is liable for tax on the trust income), from 6 April 2010, if the settlor reclaims tax on the income because his or her personal tax rate is lower than the tax deducted by the trust, the tax refunded must be paid to the trustees. This does not count as a gift for inheritance tax.

Trusts for asbestos victims set up before 24 March 2010 as part of an arrangement between a company and its creditors will be exempt from capital gains tax, income tax and inheritance tax backdated to 6 April 2006.

Other

Guardians and carers looking after children under Special Guardianship Orders and Residence Orders are to be exempt from tax on related payments from parents and local authorities from 2010–11.

From 1 April 2010, households that install a low-carbon electricity generating system, such as solar panels and small wind turbines, can claim a payment (feed-in tariff) for the electricity generated even if used by the household itself. This is on top of any resulting fall in fuel bills and reduces the pay-back period for installing such systems. Income from the feed-in tariff is tax-free provided the energy you produce is mainly for your own household use.

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