Income Tax and Personal Savings

Income tax rates

  2011/12 2010/11
Basic rate band – income up to £35,000 £37,400
Starting rate for savings *10% *10%
Basic rate 20% 20%
Dividend ordinary rate 10% 10%
Higher rate - income over £35,000 £37,400
Higher rate 40% 40%
Dividend upper rate 32.5% 32.5%
Additional rate – income over £150,000 £150,000
Additional rate 50% 50%
Dividend additional rate 42.5% 42.5%
*Starting rate is for savings income up to the starting rate limit of £2,560 (£2,440) within the basic rate band. The rate applies to any balance of the limit remaining after allocating taxable non-savings income.

 

Personal allowances (ages are as at the end of the tax year)

Personal allowances 2011/12 2010/11
Personal allowances (PA) under 65 £7,475 £6,475
  65 to 74 £9,940 £9,490
  75 and over £10,090 £9,640


The personal allowance for those aged under 65 increases from 6 April 2011 to £7,475 and from 6 April 2012 to £8,105. The advantage to higher rate payers is countered by a lowering of the higher rate threshold, to £35,000 from 6 April 2011 and to £34,370 from 6 April 2012.

Married couple's allowance (MCA)
Either partner born before 6 April 1935 (relief restricted to 10%)
£7,295 £6,965

 

Age-related allowances are reduced by £1 for every £2 that adjusted net income exceeds £24,000 (£22,900), to a minimum PA of £7,475 (£6,475).The MCA is reduced by £1 for every £2 by which the income of the spouse or civil partner with the most income exceeds £24,000 (£22,900), subject to a minimum of £2,800 (£2,670).

Where income exceeds £100,000, the PA, including the minimum age-related allowances, is reduced to nil by £1 for every £2 that net adjusted income exceeds £100,000.

Qualifying time deposits

Interest paid on sums held in qualifying time deposit (QTD) accounts is subject to tax, but is currently paid gross to account holders. From 6 April 2012, tax will be deducted at source from taxable interest paid on new QTDs.

Pension savings

The annual allowance for tax-privileged pension saving is being cut from 6 April 2011, from £255,000 to £50,000. Where premiums paid in the pension input periods ending in the preceding three years are less than £50,000, unused relief may be carried forward. Where pension savings exceed the limit, a tax charge will arise – if the charge exceeds £2,000 the individual will be able to elect to have it met from the pension benefit, with the scheme paying the tax when the charge arises.

Meanwhile, the lifetime allowance on money that can be accrued in a pension fund and still receive tax relief, is set to fall from £1.8 million to £1.5 million from April 2012.

Pensions: requirement to buy an annuity

The pensions tax rules that make it obligatory for members of registered pension schemes to secure an income, usually by buying an annuity, by age 75 are to be removed. This will involve, amongst other things, changes to the rules applying to income drawdown arrangements.

With effect on or after 6 April 2011:

  • individuals with defined contribution pension savings from which they have not yet taken a pension will be able to defer a decision to take benefits from their scheme indefinitely
  • individuals with a lifetime pension income of at least £20,000 a year will be able to gain access to their drawdown pension funds without any cap on the withdrawals they may make
  • the age 75 ceiling will be removed from most lump sums to which entitlement arises and the tax rate on lump sum death benefits will be 55%.

Pensions taxation

Legislation will be introduced in the Finance Bill 2011 to remove the tax charge on borrowing linked to the cost of setting up, managing or administering the National Employment Savings Trust (NEST), subject to conditions. It will also remove the tax liability on any interest payments on late pension contributions made by an employer to qualifying pension scheme. In addition it will provide a regulation-making power to deal with any unintended tax consequences that may emerge as a result of the implementation of NEST and the employer duty provisions as set out in the Pensions Act 2008.

This measure will have effect on or after 6 April 2011 apart from the removal of the tax liability on any interest payments, which will have effect on or after Royal Assent.

Domicile and residence

It is proposed that from April 2012 the existing £30,000 annual Remittance Basis Charge (RBC) will be increased to £50,000 for resident, non-domiciled individuals (non-doms) who have been UK resident for 12 or more years. The current £30,000 RBC will continue to apply for those who have been resident for at least 7 out of the last 9 years, and fewer than 12 years. However, the remittance basis tax charge will not apply where non-doms remit foreign income or gains to the UK for the purpose of commercial investment in UK businesses.

Some aspects of the current tax rules for non-doms will be simplified. A proposed statutory residence test is expected to bring clarity.

Individual Savings Accounts (ISAs)

The Chancellor has confirmed that the annual ISA subscription limit for 2011/12 will rise from £10,200 to £10,680, up to £5,340 of which can be invested in a cash-only ISA.

Following the closure of the Child Trust Fund to new entrants earlier this year, the Government has announced that tax-free Junior ISAs will be launched from Autumn 2011. They will be available to UK resident children under the age of 18 who do not have a Child Trust Fund account, as a cash or stocks and shares product.

Furnished Holiday Lettings (FHL)

Following a consultation on the tax rules for FHL, the law will be changed by the Finance Bill 2011 so that:

  • FHL in both the UK and European Economic Area (EEA) will be eligible as qualifying FHL within the (revised) special tax rules. This is the current situation but is not within the legislation
  • the minimum period over which a qualifying property must be available for letting to the public in the relevant period is increased from 140 days to 210 days in a year with effect from April 2012
  • the minimum period over which a qualifying property is actually let to the public in the relevant period is increased from 70 days to 105 days in a year with effect from April 2012
  • losses made in a qualifying UK or EEA FHL business may only be set against income from the same UK or EEA FHL business (existing rules allow set off against general income)
  • a ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period.

Reduced childcare relief for higher earners

Those joining employer-supported childcare schemes providing childcare vouchers or directly-contracted childcare on or after 6 April 2011 will, if they are higher rate or additional rate taxpayers, have the value of their tax relief restricted to match the value to basic rate taxpayers’. This will be achieved by introducing new income tax exempt limits of £28 per week for higher rate payers and £22 per week for additional rate payers.

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