Budget June 2010 commentaries - Personal tax & Trusts

"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Initial thoughts from Richard Mannion, Head of National Tax

“An increase of £1,000 in the basic personal allowance from 6/4/2011 will be good news for millions but will do nothing for those with higher incomes who have already lost their personal allowances. The freezing of the higher rate threshold will drag more people into the higher rate net (the action of 'fiscal drag').”

Personal Allowance, Basic Rate Limit and NIC Thresholds for 2011/12

From 6 April 2011 the personal allowance for those aged below 65 will be increased by £1,000 to £7,475.  So that higher rate taxpayers do not benefit from the increase in personal allowance, the band of income chargeable to tax at the basic rate of tax (20%) will be reduced.  The indication is that this reduction will be £2,500, based on current RPI forecasts, and the higher rate threshold by £1,650.  The exact figures to be confirmed when September’s RPI is known.

Comment

The headline change is the significant increase in personal allowances which will be worth up to £200 to individuals who would not be liable to pay higher rate tax. 

That advantage will be removed, however, for those who are not basic rate taxpayers by a reduction to the basic rate limit and adjustment to the higher rate threshold for those paying tax at 50%.  The reduction to the basic rate band, so as not to advantage higher rate payers, will hit those with incomes between £100,000 and £150,000.  Taxpayers within this band appear to still lose entitlement to personal allowances but would still suffer the effect of the reduced basic rate band.  We wait to see if and how this issue is resolved.