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Bill Explanatory Notes Introduction FINANCE (No. 3) BILL EXPLANATORY NOTES INTRODUCTION EXPLANATORY NOTES INTRODUCTION 1. These explanatory notes relate to the Finance (No. 3) Bill as introduced into Parliament on 31 March 2011. They have been prepared jointly by the HM Revenue & Customs and HM Treasury in order to assist the reader in understanding the Bill. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes are designed to be read alongside with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So, where a section or part of a section does not seem to require any explanation or comment, none is given. FINANCE (No. 3) BILL RESOLUTION 2 CLAUSE 1 EXPLANATORY NOTE CLAUSE 1: CHARGE AND MAIN RATES FOR 2011-12 SUMMARY 1. Clause 1 imposes the income tax charge for 2011-12 and sets the basic rate of income tax at 20 per cent, the higher rate at 40 per cent and the additional rate at 50 per cent. DETAILS OF THE CLAUSE 2. Subsection (1) imposes the income tax charge for 2011-12. 3. Subsection (2)(a) sets the basic rate of income tax at 20 per cent. 4. Subsection (2)(b) sets the higher rate of income tax at 40 per cent. 5. Subsection (2)(c) sets the additional rate of income tax at 50 per cent. BACKGROUND NOTE 6. Income tax is an annual tax re-imposed by Parliament (even if the proposed rates are the same as for the previous year). The table below sets out the main rates and rate limits for 2011-12 and for reference includes the amounts for 2010-11: 2010-11 2011-12 Basic rate £0 - £37,400 at 20 per cent £0 - £35,000 at 20 per cent Higher rate £37,401 - £150,000 at 40 per £35,001 - £150,000 at 40 per cent cent Additional rate Over £150,000 at 50 per cent Over £150,000 at 50 per cent The basic rate limit of £35,000 as identified in the table above is set by clause 2 of this Bill. FINANCE (No. 3) BILL RESOLUTION 3 CLAUSE 2 EXPLANATORY NOTE CLAUSE 2: BASIC RATE LIMIT FOR 2011-12 SUMMARY 1. Clause 2 sets the amount of the basic rate limit for income tax at £35,000. DETAILS OF THE CLAUSE 2. Subsection (1) replaces the existing amount of the basic rate limit in section 10(5) of the Income Tax Act 2007 (£37,400) with £35,000 for 2011-12. 3. Subsection (2) disapplies the indexation provisions for the basic rate limit for 2011-12. BACKGROUND NOTE 4. An individual’s taxable income is charged to tax at the basic rate of tax up to the basic rate limit. 5. The basic rate limit is subject to indexation (an annual increase based upon the percentage increase to the retail prices index). Parliament can over-ride indexed amounts by a provision in the Finance Bill. 6. The table below sets out the amount of the basic rate limit for 2010-11, the indexed amount for 2011-12 and the amount specified by this clause for 2011-12: 2010-11 2011-12 indexed 2011-12 by this clause £37,400 £39,200 £35,000 7. The effect of this clause is to over-ride the indexed amount for the basic rate limit. This clause is part of a package of measures that include a further clause in this Bill and the reduction in the Upper Earnings Limit and Upper Profits Limit provided for by separate National Insurance Contributions’ Regulations. FINANCE (No. 3) BILL RESOLUTION 4 CLAUSE 3 EXPLANATORY NOTE CLAUSE 3: PERSONAL ALLOWANCE FOR 2011-12 FOR THOSE AGED UNDER 65 SUMMARY 1. Clause 3 sets the amount of the personal allowance for those aged under 65 at £7,475 for 2011-12. DETAILS OF THE CLAUSE 2. Subsection (1) replaces the existing amount of the personal allowance for those aged under 65 (£6,475) with £7,475 for 2011-12. 3. Subsection (2) disapplies the indexation provisions for this allowance for 2011-12. BACKGROUND NOTE 4. Individuals are entitled to a personal allowance for income tax. The amount depends upon the individual’s age and income. 5. Income tax personal allowances are subject to indexation (an annual increase based upon the percentage increase to the retail prices index). Parliament can over-ride indexed amounts by a provision in the Finance Bill. For 2011-12, the personal allowances for people aged 65 to 74 and aged 75 and over have been increased by indexation. 6. The table below sets out the amount of personal allowance for individuals aged under 65 for 2010-11, the indexed amount for 2011- 12 and the amount specified by this clause for 2011-12: 2010-11 2011-12 indexed 2011-12 by this clause £6,475 £6,785 £7,475 7. The effect of this clause is to over-ride the indexed amount for the personal allowance for individuals aged under 65. FINANCE (No. 3) BILL RESOLUTION 5 CLAUSE 4 EXPLANATORY NOTE CLAUSE 4: MAIN RATE FOR FINANCIAL YEAR 2011 SUMMARY 1. Clause 4 sets the main rate of corporation tax (CT) for the financial year beginning 1 April 2011 at 26 per cent on non-ring fence profits. DETAILS OF THE CLAUSE 2. Subsections (1) and (2) amend, with effect from 1 April 2011, the main rate of CT for the financial year 2011, set by section 2(2)(a) Finance Act 2010, from 27 to 26 per cent. BACKGROUND NOTE 3. The main rate of CT is paid by companies with profits of more than £1,500,000 (the upper profits limit). 4. Where two or more companies are associated with one another, the profits limit is reduced. This is done by dividing the limit by the number of associated companies. 5. Profits from oil extraction and oil rights in the UK and the UK Continental Shelf (“ring fence profits”) will continue to be subject to a separate main rate of CT applicable to those ring fenced profits. Profits from activities which are not ring fenced will continue to be charged at the main rate of CT applicable to all other profits. FINANCE (No. 3) BILL RESOLUTION 6 CLAUSE 5 EXPLANATORY NOTE CLAUSE 5: CHARGE AND MAIN RATE FOR FINANCIAL YEAR 2012 SUMMARY 1. Clause 5 charges corporation tax (CT) for the financial year beginning 1 April 2012 and sets the main rate of corporation tax at 30 per cent on oil and gas ring fence profits and 25 per cent on non-ring fence profits. DETAILS OF THE CLAUSE 2. Subsections (1) and (2) set the charge and the main rates of CT for the financial year 2012. BACKGROUND NOTE 3. The main rate of CT is paid by companies with profits of more than £1,500,000 (the upper profits limit). 4. Where two or more companies are associated with one another, the profits limit is reduced. This is done by dividing the limit by the number of associated companies. 5. Profits from oil extraction and oil rights in the UK and the UK Continental Shelf (“ring fence profits”) will continue to be subject to a separate main rate of CT applicable to those ring fenced profits. Profits from activities which are not ring fenced will continue to be charged at the main rate of CT applicable to all other profits. FINANCE (No. 3) BILL RESOLUTION 7 CLAUSE 6 EXPLANATORY NOTE CLAUSE 6: SMALL PROFITS RATES AND FRACTIONS FOR FINANCIAL YEAR 2011 SUMMARY 1. Clause 6 sets the small profits rate of corporation tax (CT) for the financial year beginning 1 April 2011 at 20 per cent for all profits apart from “ring fence profits” of North Sea oil companies, where the rate is set at 19 per cent. Additionally, it sets the fraction used in calculating marginal relief from the main rate at 3/200 for all profits apart from “ring fence profits”, where the fraction is set at 11/400. DETAILS OF THE CLAUSE 2. Subsection (1) sets the small profits rate of CT for the financial year 2011. 3. Subsection (2) sets the marginal relief standard and ring fence fractions. BACKGROUND NOTE 4. Companies with profits up to £300,000 pay CT at the small profits rate. 5. Companies with profits between £300,000 and £1,500,000 (the lower and upper limits) benefit from marginal relief from the main rate. 6. Marginal relief has the effect of gradually increasing the rate of tax for a company as its profits move from the lower to the upper profits limit. 7. The example below illustrates the effect of marginal relief for a company with taxable non-ring fence profits of £500,000. Its tax liability is calculated as follows: £500,000 @ 26 per cent £130,000 minus 3/200 of £1,000,000* £15,000 Tax payable: £115,000 * £1,000,000 is the difference between the upper limit and the profit. FINANCE (No. 3) BILL RESOLUTION 7 CLAUSE 6 8. The example below illustrates the effect of marginal relief for a company with taxable ring fence profits of £500,000. Its tax liability is calculated as follows: £500,000 @ 30 per cent £150,000 minus 11/400 of £1,000,000* £27,500 Tax payable: £122,500 * £1,000,000 is the difference between the upper limit and the profit. 9. Where two or more companies are associated with one another, the profits limits are divided by the number of associated companies. FINANCE (No.
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