The Chancellor has made no changes to rates and allowances for the current year to April 2011. The figures in the table are those confirmed by Alistair Darling in his March Budget.

The Coalition Agreement between the Conservatives and the Liberal Democrats includes a long-term objective to take many low earners out of taxation by raising the starting point for income tax to £10,000. From 6 April 2011, the personal allowance will be raised by £1,000, significantly more than the usual inflationary rise, as a first step towards this aim.

Higher rate taxpayers will not benefit from this increase: the threshold for paying higher rate tax will be reduced, after taking inflation into account, so that the overall benefit to them is the same as for a basic rate taxpayer.The extra allowance will reduce tax but the reduction in the higher rate threshold will mean that more tax is paid at 40% to compensate.

The Upper Earnings Limit, at which National Insurance Contributions fall from the full rate to 1% (2% in 2011/12), will be reduced so that the threshold for higher rate tax and lower NIC is the same. Lowering the threshold therefore increases income tax but reduces NIC.

As no other changes have been announced to personal allowances, the new rules which withdraw their benefit to those with incomes over £100,000 will take effect in 2010/11 as expected. For every £2 by which income exceeds £100,000, £1 will be deducted from personal allowances – so the basic allowance will be reduced to nil by the time income reaches £112,950. In this income band, the combined effect of the 40% tax rate and the withdrawal of allowances means that the marginal rate of income tax is 60%.

No general changes have been made to the rates of NIC for 2010/11. Two important changes were announced to take effect from 6 April 2011:

• A reduction in the upper earnings limit (UEL) to match the reduction in the threshold for 40% income tax – this means that less NIC will be charged at the full rate and more will be charged at the lower rate that applies above the UEL, so there will be a small cut in contributions.
  
  
• The secondary threshold,which is the point at which employers start to pay employer contributions,will increase by £21 above the effect of inflation.
  
  

Tax Tip When rates change, you may save money by moving income between tax years.

At present, employers and employees both start to pay NIC when pay exceeds £110 per week. The change to the threshold will mean that no employer's NIC will be payable until the employee earns the 2011/12 equivalent of £131 per week, saving approximately £140 a year for all workers and taking the lowest paid out of employer's NIC altogether. However, the use of different thresholds for employees' and employer's contributions may increase complexity for those who still calculate NIC without using a computer.

These changes are in addition to two other measures which were announced by Mr Darling and which are also set to take effect on 6 April 2011:

• A 1% increase in the rates of NIC so that employers will pay 13.8%, employees will pay 12% (2% above the UEL), and the self-employed will pay 9% (2% above the UEL).
  
  
• An increase in the primary threshold (in 2010/11: £110 per week) to compensate lower earners for the increase in rates.
  

Although the increases in employer's NIC rates were attacked during the election campaign as "Labour's tax on jobs", it appears that they will be implemented.

Class 1A NIC are charged on taxable benefits in kind, and are due from the employer on 19 July following the tax year to which they relate. As the rate will have gone up by July 2011, the Class 1A NIC for 2010/11 will be levied at 13.8%, even though they will relate to a year in which the rate was 12.8%.

Holiday for new businesses

The Budget included a preliminary announcement of a scheme to encourage new businesses outside London and what the Government calls the "Greater South East". New businesses set up from 22 June 2010 will not have to pay the first £5,000 of employer's NIC for each of the first 10 employees hired in the first year of business. That covers all the employer's NIC on a salary of about £40,000, so in effect it is a year's holiday on employer contributions for anyone earning up to that level.

Tax Tip Can you benefit from setting up business in a tax- favoured area?

The scheme is aimed at promoting more private sector employment in parts of the United Kingdom which are particularly reliant on public sector employment (and which will presumably therefore be worst affected by the public sector expenditure cutbacks). It will therefore be restricted to new businesses in Scotland, Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West. Details of the scheme will be announced shortly. It is likely that there will be a number of restrictions to make sure that only genuinely "new" businesses enjoy the relief, and that the business activity is genuinely located in the qualifying regions and countries.

Company cars and fuel (Table C)

No further changes were announced to the taxation of company cars, following the significant programme of measures included in the March Budget. Electric cars now give rise to no taxable benefit on either the car itself or the charging of the batteries. Very low emission petrol cars (up to 75g/km) will be taxed at 5% of the list price. Tax charges then increase to a maximum of 35% of the list price at ratings of 230g/km (petrol engines) or 215g/km (diesel engines). The levels at which the percentages increase will be lowered in future years. The chargeable amount on a company van remains at £3,000 (if private use is more than travel between home and work).

The taxable benefit of free fuel provided for use in a company car remains based on £18,000 for 2010/11. When multiplied by the same percentage as the list price for the car, this gives a chargeable figure of between £900 (at 5%) and £6,300 (at 35%). The chargeable figure for free fuel in a company van remains £550.

Pension contributions (Table B)

No changes were announced to the rules on pension contributions. This means that the maximum amounts for the current year remain unchanged, and extra contributions over £20,000 made by people earning over £130,000 may also be subject to a clawback of relief if made before 6 April 2011.

This clawback was introduced to prevent people paying early contributions to get around the restriction of higher rate pensions tax relief for those earning over £150,000 currently planned to come into force on 6 April 2011. In spite of retaining this preliminary measure, the Government has reservations about the rule itself. Mr Osborne intends to raise the same amount of money from cuts to pension relief that Mr Darling proposed, but will discuss with interested parties whether there might be a simpler and fairer way of doing this – for example, by restricting the maximum amount that can be paid into a tax-favoured scheme to a much smaller figure (say £40,000 instead of the current £255,000). More details will be published later in the year.

In the meantime, anyone paying a large pension contribution out of earnings of over £130,000 still needs to take advice to understand the tax consequences – but the rules next year may be quite different from what we were expecting.

Pension Benefits

Up to now, anyone with a tax-favoured pension scheme has been required to buy an annuity or start an "alternatively secured pension" (ASP) no later than their 75th birthday. An annuity may cease on the death of the pensioner or may continue to be payable to a dependant for a set period. An ASP preserves the identity of the pension fund, which may be passed on to the pensioner's dependants on death, but it is currently subject to heavy tax charges if this happens. If pension benefits have not commenced by the time an individual dies, it is normally possible to leave the fund to the dependants tax-free.

The Government has announced that it will end the effective requirement to buy an annuity with effect from 2011/12. As an interim measure, the age requirement for purchasing an annuity (or starting an ASP) will be increased to 77 for anyone who has not reached the age of 75 by 22 June 2010. The IHT charges that would previously have applied on a death will be substantially reduced.

Tax Trap Take advice before fixing your pension benefits.

Individual Savings Accounts (ISAs)

The annual limit on investment in tax-free ISAs was increased from £7,200 to £10,200 on 6 April 2010 (6 October 2009 for those aged 50 and over). This limit is to be increased annually in line with inflation in future, starting in 2011/12. The precise amount of the increase will not be known until the retail price index for September is published, as the calculation uses the annual measure of inflation to that month.

The limit will be rounded to a convenient multiple of £120 so that regular savers can fix a round monthly amount to pay into their ISA.

Furnished Holiday Letting (FHL)

The Chancellor confirmed that the favourable tax treatment of furnished holiday lettings, which was set to be abolished by the Labour government, will be retained for 2010/11. Compared with other rental income, FHL sources benefit from more generous relief for losses and can be used to pay pension premiums. The disposal of FHL properties enjoys a number of CGT advantages, including potentially qualifying for Entrepreneurs' Relief, which applies a lower rate of 10% on gains.

The Government will consult during the summer in order to consider what the FHL rules should be in 2011/12. It seems likely that the favourable treatment will be retained (and will apply to properties anywhere in the European Economic Area), but the qualifying conditions may be tightened, for instance by increasing the number of days for which properties must be available and must be let.

Rate of Tax

The Liberal Democrats had pressed for a significant increase in the rate of CGT, and some expected it to rise to the same level as the higher rates of income tax (40% or 50%). There was also speculation about the possible reintroduction of reliefs for inflation or for length of ownership (tapering). It is encouraging that Mr Osborne rejected these on grounds of complexity: the computation of CGT was significantly simplified by the abolition of taper relief in 2008, and its reintroduction would have required yet another redesign of stockbrokers' software.

Instead, the Chancellor implemented an immediate rise in the CGT rate to 28%, to apply to disposals after midnight on Budget day, but only affecting those who pay higher rate income tax. It is unprecedented to change the CGT rate during a tax year, and the details of how this works for people who have made disposals both before and after 23 June 2010 are complicated. Deductions, reliefs and the annual exemption can be allocated by the taxpayer in the most beneficial way, so that the maximum amount of gain is charged at the old 18% rate and the minimum at the new higher rate.

Basic rate taxpayers will continue to pay CGT at 18%. Where a gain is large enough to take someone over the higher rate income tax threshold, the 28% rate will apply to the excess.

The annual exemption for 2010/11 remains unchanged at £10,100, and Mr Osborne announced that it will increase in line with inflation in future years as it has done in the past. However, he has said that the rate of CGT will be reviewed in the next Budget, so there is a possibility that the rate could rise again for the next tax year.

Tax Trap Will your gains be charged at the new higher rate?

Trustees

Where assets are disposed of after 22 June 2010, trustees and personal representatives of deceased persons will pay CGT on all gains above their annual exemption at 28%.

Entrepreneurs' Relief (ER)

ER allows an effective rate of CGT of 10%, instead of 18% or 28%, on qualifying disposals which give rise to gains up to a lifetime maximum. Mr Darling increased the limit from £1m to £2m with effect from 6 April 2010; Mr Osborne has increased it further to £5m with effect from 23 June 2010. Earlier disposals on which ER has been given will be deducted from the lifetime allowance for future sales. ER has up to now achieved an effective rate of 10% by deducting 4/9 from the chargeable gain (5/9 x 18% = 10%). As there will now be two possible rates of CGT, this would no longer work, so gains qualifying for ER will simply be charged at 10%.

Qualifying disposals include the disposal of a business or an interest in a trading business, or of shares in a trading company by someone who works for the company and owns 5% of it, or the disposal of a business asset when the business ceases.

Rates

The main rate of Corporation Tax (for companies with profits over £1.5m) has been 28% since 1 April 2008. It will be cut for the Financial Year 2011 (commencing 1 April 2011) to 27%, then to 26% for FY 2012, 25% for FY 2013 and 24% for FY 2014. Mr Osborne affirmed that this will give the UK its lowest ever company tax rate, and one of the lowest in the world.

The small profits rate (for companies with profits up to £300,000) was scheduled to rise from 21% to 22% from 1 April 2011. Instead, it will fall to 20%, where it last stood for the year to 31 March 2008.

Tax Trap A small company pays lower rates than a sole trader – should you incorporate?

Capital allowances

The rates of writing down allowances (WDA) will be reduced for chargeable periods ending on or after 1 April 2012 (companies) or 6 April 2012 (unincorporated trades). The "general pool" will be written down at 18% rather than 20%, and the "special rate pool" (typically longer-life assets and cars with carbon dioxide emissions rating above 160g/km) at 8% rather than 10%.

At the same time, the Annual Investment Allowance (AIA) – the amount of expenditure on plant and machinery that qualifies for a 100% immediate deduction – will be reduced from £100,000 to £25,000. It rose from £50,000 to £100,000 in April 2010.

There are complex rules for computing both the WDA and the AIA for chargeable periods which straddle a change in rate, and these will need to be consulted in 2012 for traders whose year ends do not match the tax year.

Tax Tip Be aware of the tax effect of plant purchases – maybe advance them.

Zero-emission goods vehicles

The last Labour Budget introduced nil taxable benefits for company cars which do not emit carbon dioxide, for five years starting in 2010/11. The new Budget brings in 100% first year allowances for the purchase of goods vehicles with zero emissions. It applies for purchases for five years from 1 April 2010 (companies) or 6 April 2010 (unincorporated). The vehicle must be new and unused, not second-hand.

Rates of Tax

To match the increase in VAT, the higher rate of IPT will rise from 17.5% to 20% on 4 January 2011. Higher rate IPT is charged on insurance contracts which are sold with VATable goods, such as extended warranties on household appliances and cars, and also on travel insurance. The new rate will apply to premiums received or policies written by the insurer from 4 January onwards.

The standard rate of IPT, which applies to general insurance products such as household and motor insurance, will go up from 5% to 6% at the same time.

Penalties for late filing and payment

The March Budget included an announcement that HMRC is working on the reform of penalties for late filing of returns and payment of tax. This is part of the ongoing rationalisation of rules which formerly applied to different taxes administered by different departments (e.g. income taxes by the Inland Revenue and VAT by Customs & Excise). Several recent Finance Acts have reformed and rationalised interest on late tax payments and penalties for late filing and payment.

The latest Budget confirms that these measures will be extended to VAT and other indirect taxes, but does not set out a detailed timetable. Although the penalties for lateness in direct taxes are generally harsher than what they are replacing, the penalties under the existing default surcharge regime for VAT will be reduced after the changes.

Tax Trap Beware: the new penalties may be expensive if you are not careful – and prompt!

Anti-avoidance

There was less detail on anti-avoidance provisions than is usual in a Budget, presumably because HMRC included most of the measures they wanted in March. However, there is a proposal to clamp down on the use of trusts and other vehicles to avoid, defer or reduce liabilities to income tax and NICs on earnings, or to seek to avoid restrictions on pensions tax relief. The Government is considering measures to close down these schemes, and intends to introduce new legislation to take effect from 6 April 2011. Those who use these planning devices have been warned.

Bank levy

After Labour's tax on bankers' bonuses in 2009/10, the new administration is introducing a levy on the balance sheets of large banks. It follows a joint policy statement issued with the French and German governments – Mr Osborne is keen to ensure that such a levy does not simply drive the banks to set up their operations in countries that do not charge similar taxes. It remains to be seen whether the levy will raise as much as he hopes.