June 2010 Budget

The June 2010 Budget Report from Principle First

Here are the principal budget changes in the June 2010 budget. These refer to changes to take effect in the budgets in June 2010 and 2011.

If you require advice about any aspect of the 2010 budget changes, please do not hesitate to contact us on 0800 678 5929 or make a financial advice enquiry

Income Tax Budget Changes

The personal allowance (income tax allowance) for workers under 65 will now increase by £1,000 from £6,475 to £7,475. This will take 880,000 people out of tax altogether. This is part of a longer term plan to increase the personal allowance to £10,000. However, there is also a plan to reduce the basic rate limit so that higher taxpayers will not benefit from this increase in personal allowance.

VAT June Budget Changes

Value Added Tax / VAT is to rise from 17.5% to 20% on 4 January 2011. Food and children’s clothing, also books and newspapers will continue to be VAT-exempt. Domestic fuel and power will continue with their lower VAT rate of 5%.

Saving Budget Changes

As promised, the annual limits for savings in Individual Savings Accounts (ISAs) will be linked to increases in the Retail Price Index from 2011. The ISAs allowance is currently £10,200. Increases will be rounded to £120 and will not be reduced if the RPI were to fall.

Pensions Tax Relief Budget Changes

The June 2010 budget proposes a rethink on previously proposals affecting tax relief for high earners. From April 2011 there may now be some revision of the maximum allowable annual pensions contributions for high earners. This is likely to be limited to between £30,000 to £45,000, drastically reduced the amount of tax relief available. This replaces the previous proposals to gradually taper tax relief for those earning over £130,000.

Capital Gains Tax Budget Changes

Remains at 18% for basic rate taxpayers, rises to 28% for higher earners.
The Taxation of Chargeable Gains Act 1992 taxes net gains with Capital Gains Tax at 18%. This rate of CGT will remain for individuals earning up to £44,875 per year (comprising £34,700 of taxable income plus the personal income tax allowance of £7,475) who pay income tax at the basic rate of 20%. For those earning more, the Finance Bill 2010 provides that Capital Gains Tax will now rise to 28% on any gains realised after 23 June 2010.

However, it currently appears that those in the lower (20%) tax bracket, whose gain from sale of assets takes their total income for the year up into the higher tax bracket, may be taxed at the higher 28% of CGT on at least part of their gain.

The Capital Gains Tax tax-free allowance of £10,100 will remain unchanged by the budget changes.

The most common assets subject to Capital Gains Tax are stocks and shares, and second homes or buy-to-let properties.

Capital Gains Tax applies, not to the full value of an asset, but to the gain or profit made from that asset – in other words, to the increase in its value from buy to sell. For instance, a house bought for £150,000, which you sell today for £250,000 would be taxed on your gain, or profit, of £100,000. Under your CGT allowance the first £10,100 of that £100,000 would be tax-free, so that you would pay Capital Gains Tax on £89,900.

Today’s budget changes raising Capital Gains Tax to 28% will also hit the profits or gains made by those selling shares in the company where they work. This would affect the many thousands of UK workers who are given company shares as part of their salary and benefits package.

While primary residences and family homes are exempt from CGT, it does apply to second homes, either holiday homes, or homes bought by landlords or pension savers on a buy-t0-let basis, as part of their pensions and retirement strategy.

Under today’s budget changes with regard to Capital Gains Tax, elderly homeowners who move into care homes could face capital gains tax when later selling their home.

Although the government said that the elderly and those approaching retirement should not be targeted by CGT increases, there would at present seem to be no apparent exemption for the special group of those resident in care homes. There are currently 380,000 care home residents in the UK, of which an estimated 1 in 4, or 155,000, are home owners, according to nursing home research group Lang and Buisson. Many elderly people delay selling their family home for several years when they move into care, hoping they may become well enough to move back. As a result, a significant number have been in the care home for 3 years, before they decide to sell their family home, often in order to pay the continuing cost of care. However, after 3 years their home is deemed by HMRC to no longer to be their primary residence, falling into the same category as a second home. Capital gains tax on second property would apply in this case to homes that increase in value by more than £10,000 during the 3 years the owner is in care.

Entrepreneur’s CGT relief

The amount of an individual’s gains that can qualify for entrepreneurs’ relief is subject to a lifetime limit of £2 million. The Finance Bill 2010 will include provision to increase that limit to £5 million from 23 June 2010.

June Budget Incentives for New Business

Any new business set up outside London / South of England will receive reductions in National Insurance for their first 10 employees.

State Pension Age Budget Changes

The minimum age for taking state pensions will increase from 65 to 66. The time schedule is not clear, pending an interim report in September 2010.

Basic State Pension June Budget Changes

The link to earnings will be restored, helping ensure that the Basic State Pension will increase ahead of inflation, and in line with the national average wage. The state pension is guaranteed to increase in 2011 with a ‘triple lock guarantee’ – in line with prices, earnings or 2.5%, whichever is the higher.

Public Sector Budget Changes

Higher earning public sector workers will have wages frozen for 2 years. Exempt from this are those 1.7m workers earning less than £21,000, who will have a pay increase of £250 per year. Top earners in the public sector may not earn more than 20 times the salary of the lowest earners.

Budget Changes for Public Sector Pensions

The June 2010 budget has launched a review of public sector pensions. The government’s liability from public sector pensions is projected to double from £4bn in 2010 to £9bn by 2015. Ex-Labour cabinet minister John Hutton will lead a public sector pensions review commission which will recommend changes to be implemented in the June 2011 budget.

Pensions Annuities Budget Changes

The requirement to buy an annuity has been deferrred from age 75 to age 77 with effect from 2011/12. Legislation will be introduced in the Finance Bill 2010 to increase to 77 the age by which members of registered pension schemes have to buy an annuity or otherwise secure a pension income. For members of pension schemes who die at or after age 75 without an annuity, and their pension fund is not used to pay pensions to dependants or for payments to charity, their pension savings may be subject to tax at up to 70%.

June 2010 Budget introduces a Bank Levy

An annual levy will be made on all banks and building societies in the UK, domestic and foreign, which will net the government £2bn a year from 2011.

June 2010 Budget introduces Green Bank

The government has pledged to set up a bank based on ethical and environmentally friendly values.

Family tax credits Budget 2010 Changes

These were available to families earning up to £83,000, including 150,000 families earning over £50,000. From next year there will be a tapering reduction in tax credits to all families earning over £40,000. Child benefit will be frozen for the next 3 years.

Budget 2010 Changes to Consumer Products

No increases on alcohol, tobacco or fuel; review of taxing ‘binge drinking’ alcohol products in September; reversal of plan to raise tax on cider by 10%.

Other Budget 2010 Announcements

Planned tax relief for video games sector has been cancelled. Planned tax on telephone landlines has been cancelled.