April 23rd, 2009
The Government’s objective for Budget 2009 is to build a strong economy and a fair society, where there is opportunity and security for all. Whether that will be delivered remains to be seen. What is clear is that taxes will increase, various layers of complexity have been created around the taxation of pensions and collectives, and the increased potential for confusion in these areas only increases the necessity for clear, impartial and above all expert advice.
Abolition of higher-rate income tax relief from 2011/12 for higher earners
The Chancellor announced that from the 2011/12 tax year higher-rate tax relief will be reduced for those with income of more than £150,000, tapering as the level ofincome increases, so that thosewith incomes in excess of £180,000 per annum will only receive basic-rate tax relief. The Government realises that it will have to include anti-avoidance measures within the legislation and that establishing thevalue ofemployer contributions to defined benefit schemes will introduce complexity. They will therefore consult interested stakeholders with a view to avoid unnecessary administrative complexity in the final legislation. At this stage therefore there is very little detail on how the proposal will operate with effect from April 2011.
Interim restriction on higher-rate tax relief from 22 April 2009 for higher earners
Having announced the abolition of higher-rate tax relief for higher earnersfrom 2011, the Government wish to avoid providing a large amount of tax relief in the intervening period on contributions that would have otherwise been paid after that date. They have therefore introduced some interim measures. The measures operate by introducing a Special Annual Allowance Charge of 20%. The Special Annual Allowance Charge will apply only to those whose income exceeds £150,000 in the tax year or in any of the two previous tax years. Income for this purpose is:
- total income for the tax year before pension contributions, personal allowances or any other reliefs or deductions
- less any normal deductions for reliefs (such as trading losses), including deductions for pension contributions up to a maximum of £20,000
- less gift aid deductions
- plus any income foregone by a salary sacrifice arrangement in return for pension contributions entered into on or after 22 April 2009.
Note also that contributions paid before 23 April 2009 are excluded from the 2009/10 tax year. A person’s Special Annual Allowance is £20,000 per annum. Employers’ contributions and defined benefit scheme accrual are included in the calculation of the £20,000 limit, ie it is calculated in the same way as a Pension Input amount for Annual Allowance purposes. Subject to two exemptions, any input in excess of £20,000 will be subject to the Special Annual Allowance Charge. Generally speaking, therefore, existing tax reliefs will continue to be available to all whose input amount in a tax year is £20,000 or less. The exemptions are:
- Where regular contributions currently exceed an input amount of £20,000 per annum. No charge will occur up to that amount providing that the regular contributions continue to be paid in accordance with contractual obligations in force before 22 April 2009. Note that contributions paid less frequently than quarterly do not count as regular contributions.
- Where the member retires on grounds of ill heath or dies before the end of the tax year.
Other pension changes Provision is being made to allow Treasury Orders enabling Pension Tax Charges, eg increasing the Lifetime Allowance charge to take account of the higher rates of personal taxation proposed in the Budget. No indication has been given of how much the charges will be increased by, or whether in fact they will be increased. Benefits payable under the Financial Assistance Scheme will be subject to the same tax treatment as benefits under a Registered Pension Scheme. Although not mentioned in the Budget, as mentioned in the Pre-Budget Statement the Annual Allowance and Lifetime Allowance will be frozen at the 2010/11 levels of £255,000 and £1.8m until 2015/16.
Various changes have been announced to income tax and can be summarised as follows. From the tax year 2010/2011:
- An additional rate of income tax of 50% will be introduced for taxable income above £150,000, so from 2010/2011 there will be three main rates of income tax: 20%, 40% and 50%.
- The basic personal allowance will be reduced to zero on a tapered basis for those individuals with ‘adjusted net incomes’ above £100,000. The reduction will be at a rate of £1 for every £2 above the income limit, similar to the way age-related personal allowances are reduced. ‘Adjusted net income’ is the total of an individual’s income, less certain deductions. The main deductions are: payments made gross for pension schemes, grossed up Gift Aid contributions and grossed-up pension contributions which have received tax relief at source.
- An additional rate of income tax for dividends will be introduced at 42.5%, applicable where dividends are otherwise taxable at the new 50% rate. From 2010/2011, therefore, there will be three rates of tax on dividends: 10%, 32.5% and 42.5%.
- The trust rate will increase to 50% and the dividend trust rate will increase to 42.5%. The previously announced plan to introduce, from tax year 2011/12, a 45% rate and withdrawal of personal allowances in two stages (at £100,000 and £140,000), has been superseded by these changes and will now not take place.
These changes will increase the number of marginal tax rates applicable to income, and therefore increase complexity, highlighting the pressing need for advice.
Individual Savings Accounts
The ISA subscription limit will be significantly increased from the current £7,200 to £10,200 on 6 October 2009. Within this new limit, up to £5,100 can be saved in cash. However, the new limit will be implemented in two stages, and the 6 October 2009 increase will only apply to investors aged 50 and over. All other ISA investors will have their ISA limit raised to these levels from 6 April 2010 onwards.Investors aged 50 and over who have already used their £7,200 ISA allowance in the current tax year will therefore be able to top up their 2009/10 ISA by a further £3,000 after 6 October 2009.
Tax elected funds (TEFs)
A new elective regime will be introduced for UK Authorised Investment Funds (AIFs) from 1 September 2009. The key impact will be to move the point of taxation from the AIF to the investor, so that the investor is treated as if they had invested in the underlying assets directly. Currently, income distributions from AIFs are in the form of either dividends or interest. Distributions from an AIF that opts in to the TEF regime will be split into separate income streams of dividends and interest. UK investors will be taxed on a separate basis for each income stream, and will be treated as receiving UK dividend income (including the non-payable dividend tax credit) and interest, with a tax credit.
From 1 December 2009 the definition of an offshore fund for UK tax purposes will be changed from the regulatory definition of ‘collective investment scheme’ (as set out in the Financial Services and Markets Act 2000) to a characteristic-based approach. In addition, the existing powers (in Finance Act (FA) 2008) will be amended to modernise the regime. These further changes will create a new ‘reported income’ regime that will replace the current ‘distributor’ or ‘non-distributor’ basis.
Certainty on trading and investment for AIFs and equivalent offshore funds
Legislation will be introduced to give AIFs and UK-resident investors in equivalent offshore funds certainty that a defined list of transactions will not be treated as ‘trading’ for tax purposes. AIFs currently pay corporation tax on their income if any of their transactions are characterised as trading for tax purposes. The changes are particularly important for UK-resident investors in those offshore funds that are reporting funds under the 1 December 2009 legislation – see above. This means that gains from these ‘exempt’ transactions will not be included in ‘reportable income’ for the purposes of taxing UK-resident investors in offshore reporting funds. The legislation applying to AIFs will have effect from 1 September 2009, and the offshore legislation will come into force on 1 December 2009.
Taxation of personal dividend distributions from offshore funds
From 22 April 2009, UK investors who receive distributions from offshore funds with more than 40% in equities will receive a non-payable dividend tax credit. This move reinstates the tax credit for offshore funds that was removed from the Finance Bill shortly after being announced in the 2008 Budget. Basic-rate taxpayers will therefore have no further tax to pay, and higher-rate taxpayers will be liable to a further 25% income tax based on the net dividend received. Where the offshore fund is invested more than 60% in interest-bearing assets, no tax credit will be available. Instead, thedistribution will be treated as interest and taxedat20% for basic-rate taxpayers and 40% for higher-rate taxpayers.
Taxation of personal dividends
From 22 April 2009, individuals who receive dividends from non-UK resident companies (not including offshore funds) will be entitled to a non-payable tax credit, regardless of the size of their shareholding. The tax credit will only be available if the source country is a ‘qualifying territory’ with a double taxation agreement with the UK.
New offshore tax disclosure
It has been announced that UK residents have an opportunity to disclose unpaid tax connected to offshore bank accounts. This tax amnesty, which is an extension of the 2007 amnesty, will run from Autumn 2009. It is reported that HMRC is targeting trusts and partnerships, as well as individuals. HMRC has already issued a number of notices to offshore banking financial institutions. It appears that this new tax amnesty will not include tax due on offshore policies.
Minor amendments to Remittance Basis legislation
Following the introduction of the Remittance Basis rules in the Finance Act 2008 and subsequent consultation with relevant external bodies, the Finance Bill 2009 will introduce minor amendments. It appears the changes are limited to clarification of amounts which should be taken into account when applying for the low income (£2,000) exemption from reporting on an arising basis or electing to report on a remittance basis. Some of these will take effect from 22 April 2009 and the remainder from 6 April 2008.
Removal of UK personal allowances and relief for non-UK residents
Currently, non-UK residents should not be able to benefit from personal allowances or relief. However, non-UK tax residents who are Commonwealth citizens can currently meet the eligibility criteria for the personal allowances and relief. With effect from 6 April 2010, non-UK tax resident individuals will not qualify for personal allowances or relief where the sole reason is they are a Commonwealth citizen. Many of the individuals affected by this change would however still benefit from double taxation agreements.
This Budget adds further complexity to an already highly complicated tax system. The overriding message is that there is a continued and growing need for advice enabling clients to fully understand not only the changes themselves, but also the real impact of what these changes could mean. Please contact GMP Independent Financial Advisers LLP who will be happy to advise you on these matters.