By JOHN WESTWOOD [email protected]
John Westwood is the Managing Director of Blacktower Financial Management Group.
The Chancellor announced major changes to tax relief on pension contributions and increases in income tax that will have an impact on higher earners and their advisers. And remember that he previously announced increases to National Insurance in his pre-Budget report, which will have an impact on all UK residents.
Probably the biggest news story to come out of the Budget is the removal of higher rate tax relief for higher earners for pension contributions made on or after April 6, 2011.
The good news is that Alistair Darling has not scrapped higher rate tax relief for all, as was widely rumoured in the run up to the Budget. He has however announced two changes in a bid to limit tax relief for high earners.
New rules will apply immediately for those whose income now, or in the previous two tax years, was more than 150,000 pounds sterling and who make any change from today to their normal pattern of contributions or the normal way benefits are accrued and the benefit accrued exceeds 20,000 pounds a year. These new rules are intended to remove any advantage from increasing pension contributions before April 6, 2011.
From April 6, 2011 it is intended to restrict tax relief for those earning over 150,000 pounds. Tax relief will be gradually tapered so that anyone earning over 180,000 pounds will only receive basic rate tax relief.
Alistair Darling’s comment was “It is difficult to justify that a quarter of all the money the country spends on tax relief on pensions goes as now to the top 1.5 per cent of earners. I believe it is fair that those who have gained the most should contribute more.”
It is estimated that the cut in tax relief for the 225,000 people affected by this change will earn the Treasury approximately 4.75bn pounds Sterling.
This follows on from announcements in the pre-Budget report intended to curb tax relief on pensions by freezing the lifetime allowance and the annual allowance for the five years following April 5, 2011, for example up to and including the tax year 2015/2016.
Individual Savings Accounts (ISAs)
The increase to ISA contribution limits from 7,200 pounds to 10,200 pounds is good news, but appears to have been over complicated by restricting the increase for the current tax year to investors aged over 50.
Income Tax and National Insurance
UK tax payers have already benefitted from increases in personal allowances and the basic rate tax band for the current tax year. Although, to temper this, higher rate taxpayers will notice an increase in their National Insurance as the upper earnings limits rose significantly on April 6.
All taxpayers will be affected by a ½ per cent National Insurance increase which the Chancellor proposed would apply from April 2011 in his November pre-Budget report.
In a move to bring forward tax increases for higher earners, individuals earning above 150,000 pounds will have to face the prospect of 10 per cent tax increase from April 6, 2010 instead of five per cent increases. This tax increase will also apply to trustees.
On top of this, personal allowances will be restricted for individuals earning over 100,000 pounds.
No change in the basic rate of income tax of 20 per cent for 2009/2010
Increase in higher rate tax to 42½ per cent for dividend income and to 50 per cent for other income from 2010/2011 for individuals earning over 150,000 pounds and for trustees (without an income threshold)
Personal income tax allowance and basic rate limit already raised for 2009/2010.
Individuals earning over 100,000 pounds will lose part or all of their personal allowances in 2010/2011; based on a reduction of one pound for every two pounds of income in excess of 100,000 pounds.
National Insurance rates have remained unchanged for 2009/2010. The upper limit was increased from 40,040 pounds Sterling to 43,875 pounds for 2009/2010; the lower limit was increased in line with inflation.
National Insurance rates to increase by ½ per cent from 2011/2012.
However, it´s not all gloom and doom.
It appears that it will be possible to deduct pension contributions to reduce income below the 100,000 pounds income limit to preserve the personal allowance
Employees can reduce the impact of increased National Insurance charges by using salary sacrifice.
Trustees may not be affected by the proposed income tax increases where, as in many cases, tax will fall to be charged on a lower taxpaying settler or beneficiary.
Additionally, investment bonds can be very convenient for individual and trustee investments, as income tax can be deferred, perhaps until a lower tax rate applies on encashment in retirement. In addition to this, bonds can be given away without triggering a tax charge, which can be particularly useful for making gifts into trust and for appointing benefits out of trust to beneficiaries, who may pay a lower rate of tax on encashment.
The additional loss relief available to companies (and unincorporated business entities) has been extended to November 23, 2010 (April 5, 2010 for unincorporated business entities). This will help some businesses to get back a tax refund earlier than usual, helping with their cash flow. Many companies will benefit from corporation tax rates remaining unchanged for the current financial year (April 1, 2009 to March 31, 2010). However, if the smaller companies’ rate of corporation tax increases by one per cent from April 1, 2010, this will leave many smaller companies with less money for planning and investment:
The smaller companies’ rate of tax remained at 21 per cent from April 1, 2009. A one per cent increase to 22 per cent was previously deferred to April 1, 2010, but was not mentioned today by the Chancellor.
The full rate of corporation tax remained at 28 per cent from April 1, 2009, and is proposed to remain at this level through to March 31, 2011.
Child Tax Credit
Increases to the child tax credit had already been brought forward to April 2009.
Investment bonds and pensions contributions can be useful in preserving this income. Investment bonds allow up to a five per cent a year to be withdrawn without triggering a tax charge. This allowance is cumulative so if no withdrawals are made in year one, 10 per cent can be withdrawn in year two.
The allowance continues until all of the original investment has been withdrawn. Withdrawals within the five per cent allowance are not counted as income which means that they will not erode or eliminate tax credits; and the impact of chargeable event gains on tax credits can largely be controlled by careful timing of encashments. Pension contributions can reduce the income counted for tax credits, which means they can help to preserve child tax credit.
Review of Offshore Financial Centres
Last year the Chancellor promised that initial recommendations of a review of the UK’s crown dependencies and overseas territories would be available this spring.
A progress report has been issued which confirms that recommendations will not be made on specific tax regimes and rates as these are a matter for the Governments concerned. It also indicates a willingness to clarify the importance of existing tax regimes as a factor in attracting and retaining financial services business and in supporting the current economic models of the financial centres. The consultation period ends on June 5.
The impact of the review remains to be seen, however you should carefully monitor its progress to measure any impact it may have on individual financial planning arrangements.
Please contact John Westwood for further information. Call 289 355 685 or email [email protected]