• The new top income tax rate of 50% applies to those with incomes over £150,000 from 6 April 2010.
• There is a phased elimination of personal allowances reaching zero for those with incomes exceeding £112,950.
• The national insurance employee rate rises and for individuals from 6 April 2011 this will be increased to a 2% levy in place of the current 1% on salary in excess of approximately £44,000. For employers the rate of charge increases to 13.8%.
• The effective marginal rate where UK national insurance, as well as income tax is due will rise in the next year or so from 41% to 52%.
The ability to shelter from the full consequences of this charge is being further diminished. The generous UK tax relief on pension contributions that has been available since April 2006 has been restricted significantly for those with incomes of at least £150,000 per annum.
Whilst these rules apply from 6 April 2011 and their exact nature is still under consultation, measures were introduced alongside this to discourage increasing contributions beyond regular patterns in place at the last Budget day (22 April 2009). Under the interim or “anti-forestalling” provisions, individuals with at least this level of income who have notbeen contributing to their pensions at least quarterly will only receive full tax relief on the first £20,000 – £30,000 of their contributions. Relief on contributions in excess of this will effectively be limited to 20%, even after the introduction of the 50% rate.
The Pre-Budget Report followed up in December 2009 to bring about further changes that bring taxpayers within these special anti-forestalling rules where income exceeds £130,000. This lower income limit applies for contributions made after 9 December 2009. These measures (and for the banking sector the payroll tax) have had a significant impact on the thinking of individuals, businesses and advisors looking again at what can be done to mitigate this higher tax charge.
It has definitely led to an increase in the popularity of deferral mechanisms such as Employee Benefit Trusts (EBTs) and Employer Funded Retirement Benefit Plans (EFRBs) which are the most common alternatives to traditional pension arrangements. Contributions into such plans allow the charge to income tax and NIC on, for example bonus income, to be pushed back to a future point in time when the tax rates may have returned to a lower level or, for internationally mobile employees, when they are resident in another country and can rely on a favourable double taxation agreement. It should still be kept in mind however, that the IHT position of both arrangements is currently unclear especially when established by owner managed businesses.
Amongst other possible solutions that may be considered is the advancement of employment income or partnership profit shares pre-5 April 2010. This can have its own legal challenges to overcome, such as in what circumstances could the monies be returnable to the employer, before such a plan can be put in place. It is also likely that HMRC will be anticipating such arrangements and be planning to review them thoroughly.
Those who are now or have in the past been taxable in the UK on the remittance basis have the opportunity to make remittances to the UK before 6 April to ensure that their potential needs for the next few years are satisfied. Particularly where that income has already been subject to tax in another jurisdiction, the UK savings that can be achieved through remitting amounts before 6 April can be substantial.
The issues involved however may be complex due in no small part to the introduction of the mixed fund rules with effect from 6 April 2008 which specify the order in which amounts are deemed to be remitted where they come from an account which contains more than one type of income and gains. This type of year-end planning therefore needs to be addressed as soon as possible. There is also clearly an increased need for taxpayers to ensure they are making the best of the basic rate bands available to both parties in a relationship such as giving consideration to whether accounts should now be moved into joint names.
The biggest silver lining to be found in these new rules may be for charities struggling to raise money in the current economic climate. Firstly the £30,000 remittance basis charge has been confirmed as franking tax reclaimed on charitable contributions and this may represent a great use of foreign income for such taxpayers where the charity has an offshore account to which donations can be made. Perhaps more importantly, gift aid contributions reduce an individual’s taxable income for the purposes of the pension anti-forestalling provisions outlined above.
On the capital gains tax front, the desire to pursue a capital gains tax rate of 18% in the UK clearly also becomes more powerful whilst this increased differential between income tax and capital gains tax rates lasts. For some organisations this may mean maximising share incentives where capital gains (currently at 18%) can be achieved either under approved plans, or by designing incentive restrictions with a prospectively small income tax burden at present, in favour of longer term capital gains tax on growththereafter. For foreign investors it will also be vital that their portfolio is reviewed to ensure that any fund investments held qualify for capital gains tax treatment and that any gain on disposal will not instead be treated as an “offshore income gain” which would attract tax at the individual’s top income tax rate.
Some commentators, the writer included, suspect that in order to fund the ever increasing budget deficit and to try and prevent too much income being converted into capital, the Chancellor may at the next Budget in March, decide to announce an increase in the capital gains tax rate, possibly to 25%. It may pay, if this is the case, to consider bringing forward anticipated disposals to this tax year where possible.
Finally, much has been made by opposition politicians about individuals taking the ultimate step of making plans to leave the UK altogether to avoid the full effects of these measures. As has become increasingly apparent however, especially in the light of the recent decision in favour of HMRC in the case of Robert Gaines-Cooper, even steps to become non-resident have in themselves become more difficult. HMRC appear set on the need for there to be a “clean break” in the individual’s life in the UK and this would appear to include the relocation of immediate family which is not always practical or possible.
In summary, while it may seem that there are difficult times ahead in terms of the tax burden on individuals, there are still a number of opportunities to be considered and actively explored which should help to at least soften the blow.
Mark Walters is Managing Director of UK/US tax advisory specialists Frank Hirth and specialises in individual tax planning and compliance. In addition to being a senior tax professional, he is managing director of the London office’s tax practice and a director of Frank Hirth Plc.