As previously announced the government proposes significant changes to the system of personal allowances and tax rates. These changes which were announced last year mainly impact on those with higher levels of income. Significant changes have now been made to the original proposals.
Allowances and Rates 2010/11
The 2010/11 personal allowance will stay the same at £6,475. The basic rate limit will also stay the same at £37,400. Therefore an individual will pay 40% tax rather than the basic rate of 20% when their total income exceeds £43,875.
The 10% starting rate for savings income band (£2,440) is only available where an individual’s non savings income (broadly earnings, pensions, trading profits and property income) does not exceed the starting rate limit.
Changes for 2010/11
The Chancellor has not only brought forward proposals which were to take place in 2011, he has also made changes to his original announcements.
The personal allowance will be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of adjusted net income above the income limit. The personal allowance will be reduced to nil from this income limit instead of the proposed two stage reduction announced in 2008.
Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.
Instead of introducing a 45% top rate of tax in 2011, a new rate of income tax will be introduced of 50% from 6 April 2010. This will apply to taxable income above £150,000.
Dividend income is currently taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. A new rate of 42.5% will be introduced for dividends which fall into the income band above £150,000.
The effect of the basic changes can be illustrated as follows (this assumes that the basic rate band remains unchanged):
1. Main due dates for tax payments
2. 31st January in tax year: Normally 50% of previous year’s income tax less tax deducted at source. Following 31 July less tax deducted at source
3. Following 31st January: Balance of income tax and all CGT
tax (£) tax (£)
Non dividend income 200,000 200,000
Personal allowance (6,475) Nil
Taxable income 193,525 200,000
Taxable at 20% 37,400 / 7,480 37,400 / 7,480
Taxable at 40% 156,125 / 62,450 112,600 / 45,040
Taxable at 50% 50,000 25,000
Total tax liability £69,930 £77,520
National Insurance Contributions (NICs)
The NIC thresholds have been increased but the rates of Class 1 and 4 contributions have been held at their 2008/09 levels.
An increase in the rates of national insurance is proposed from April 2011. An increase of 0.5% will apply to the rates applicable to employers’, employees’ and the self-employed.
The trust rate will be increased from 40% to 50% and the trust dividend rate from 32.5% to 42.5%. These changes will take effect from 2010/11 and will apply to all trust income.
Comment: Trusts that invest for capital growth will have a significant advantage because capital gains are taxable only at 18%.