Budget Analysis 2011 – Personal Tax

1. Personal Tax

a. Personal Allowances and National Insurance

The previously announced rates, limits and allowances for 2011/12 remain unchanged.

It is proposed that for 2012/13, the personal allowance for those under 65 will be increased by £630 bringing it to £8,105. The basic rate limit will fall by the same amount thus ensuring that higher rate taxpayers will not fully benefit from the increase. All other rates and allowances will increase in line with indexation.

From 2012/13, the Consumer Prices Index (CPI) will replace the Retail Prices Index (RPI) as the default indexation for NIC rates, limits and thresholds. Protection will be given to employers and those on age related allowances so that increases continue in line with RPI.

It was announced that a consultation will be launched on the possible integration of income tax and NIC. A document will be published later this year.

The proposed increase in allowances for 2012/13 is another step in line with the government’s policy of restricting support to lower earners. As a result of the CPI change it is anticipated that more people will pay additional NIC.

b. Enterprise

Investment Scheme and Venture Capital Trusts

Subject to State aid approval the following changes have been proposed.

EIS income tax relief will increase from 20% to 30% for shares issued after 6 April 2011.

In addition, with effect from 6 April 2012, changes will be introduced to increase:

•the maximum size threshold of a qualifying company for both EIS and VCT from £7m to £15m before investment;

•the employee limit from 50 to 250 employees;

•the maximum annual investment in a company from £2m to £10m;

•the annual amount an individual can invest from £500,000 to £1m.

Despite the complex nature of this relief the 10% increase in income tax relief will make this more attractive. Increasing the size of companies will increase the scope of the relief whilst at the same reducing the commercial risks of the investment.

c. Non-Domiciled Individuals

Subject to consultation, the following changes will be implemented in respect of non- UK domiciled individuals from 6 April 2012:

•increase the existing £30,000 annual charge to £50,000 for those who have been UK resident for 12 years or more and wish to retain the remittance basis (the current £30,000 charge for those who have been resident for at least 7 of the past 9 years remains unchanged);

•remove the tax charge in respect of remittances of foreign income or capital gains for the purpose of investment in UK businesses;

•simplify some of the rules to remove administrative burdens.

Under these proposals, it would only be beneficial for longer term residents to claim the remittance basis where unremitted foreign income and capital gains exceeded £125,000 and £180,000 respectively assuming tax rates of 40% and 28%.

d. Statutory Residence Test

A consultation document will be released in the Summer with the intention of introducing a statutory residence test from April 2012. 

This will be welcomed by advisers and their clients seeking some certainty.  We await the details.