Personal and trust taxation

Income tax rates and personal allowances

The proposed changes to income tax announced in the 2008 Pre-Budget Report have been revised.
From 6 April 2010:

• There will be an additional higher rate of 50% for taxable income above £150,000.
• The corresponding rate of tax on dividends will be 42.5%.
• The trust rate and dividend trust rate will rise to match these new higher tax rates.
• The basic personal allowance for income tax will be gradually reduced to nil for individuals with ‘adjusted net incomes’ (broadly gross income less certain deductions) over £100,000. The allowance will be reduced by £1 for each £2 of income over £100,000.

Pensions: limiting tax relief for high income individuals
From 6 April 2011, tax relief on pension contributions will be restricted for people with taxable income of £150,000 or more. Above that level of income, the value of pension tax relief will be tapered down until it is 20% for those with incomes over £180,000.

There will be ‘anti-forestalling’ provisions in the interim which apply to individuals with incomes of £150,000 or more who, on or after 22 April 2009, change: their normal pattern of regular pension contributions; or the normal way in which their pension benefits are accrued; and whose total pension contributions or value of additional benefits accrued (‘pension savings’) exceed £20,000 a year (the special annual allowance).

The provisions will apply a special annual allowance charge (SAAC) to the excess contribution, which is defined as:

• The excess over regular pension savings, where those savings exceed £20,000; and
• Any excess over £20,000 where regular pension savings are below £20,000.

The SAAC will have the effect of restricting tax relief on the excess pension savings to basic rate and will be collected through the self assessment tax return.

Saver Maximise your age allowance. Once you are 65 or older you may qualify for an extra tax allowance, but it is reduced for every pound your income is over £22,900 in 2009/10. If you are under 75 you could make a pension contribution to bring your income down to £22,900 and benefit from the full allowance.

Pension lifetime allowance and annual allowance
The lifetime allowance will be maintained at the 2010/11 level of £1.8 million for a further five years, up to and including 2015/16, as announced in the 2008 Pre-Budget Report. The annual allowance will also be held at £255,000 over the same period.

Company car taxation
From 6 April 2011, the £80,000 price cap used to determine the cash equivalent of the car benefit charge will be abolished. The discounts given to cars using various alternative fuels will be abolished from the same date, other than for electric-only vehicles, where the ‘appropriate percentage’ will be fixed at 9%. The lower threshold for CO₂ emissions (135 g/km for 2009/10 and 130 g/km for 2010/11) will be cut to 125g/km for 2011/12.

Taxation of personal dividends
From 22 April 2009, individuals with shareholdings of 10% or more who receive dividends from non-UK resident companies will become entitled to a non-payable 10% tax credit, subject to certain anti-avoidance provisions, treating them the same as investors with less than 10%.

From the same date, individual investors who receive distributions from offshore funds will also be entitled to a non-payable tax credit where the fund does not hold more than 60% of its assets in interest bearing (or economically similar) form. Income from funds breaching the 60% threshold will be taxed as interest, and will not carry a tax credit.

The remittance basis
Several ‘minor‘ changes will be made to the remittance rules, mostly with effect from 6 April 2008. These include the removal of the obligation to file a return where an individual has overseas employment income of less than £10,000 and overseas bank interest of less than £100 in any tax year, if all of it is subject to a foreign tax.

UK personal allowances and reliefs for non-resident individuals
From 6 April 2010, non-resident individuals who currently qualify for UK personal allowances and reliefs from income tax solely by virtue of being a Commonwealth citizen will have their entitlement to these allowances and reliefs withdrawn. The vast majority of individuals affected will still benefit through other means, for example double taxation treaties.

Saver Check you are not paying too much NIC. If you have more than one job, or you are employed and self-employed at the same time, you may well overpay your NICs. You can avoid this by applying to defer payment on one of your incomes.

Individual savings account (ISA) limits
The ISA contribution limit will be raised to £10,200, up to £5,100 of which can be saved in cash. The new limits will apply with effect from 6 October 2009 to people aged 50 and over in 2009/10, and for all ISA investors from 2010/11 onwards.

Investment trusts investing in interest bearing securities
A new elective tax framework is to be introduced that will allow investment trust companies (ITCs) to invest in interest bearing assets in a tax efficient way. An ITC that invests in interest bearing assets and makes the appropriate election will receive a tax deduction for any interest distributions it makes, effectively removing any corporation tax liability that would otherwise arise. The new rules will have effect for any interest distributions made on or after 1 September 2009.

Tax elected funds
From 1 September 2009, UK authorised investment funds that meet certain conditions can opt to be treated as a tax elected fund (TEF). TEFs will have to make two types of distribution of the income they receive – a dividend distribution and a non-dividend (interest) distribution. UK dividend income will not be taxable in the fund and will be distributed as a dividend. All other income distributed will be classed as a non-dividend distribution, with the fund receiving a corresponding tax deduction. UK investors will be treated as receiving UK dividend income (including the non-payable dividend tax credit) and a payment of yearly interest. This will mainly benefit non-taxpaying investors.

Don’t forget Use as many tax reliefs and tax-free benefits as you can. Some, such as the personal allowance and age allowances, are given automatically, but others need to be claimed, such as child tax credits and child benefit.

Improvements to venture capital schemes
There are a number of minor changes to the rules for the enterprise investment scheme (EIS), corporate venturing scheme (CVS) and the venture capital trust (VCT) scheme. These include the extension of the period for EIS carry back of relief to cover investments throughout the tax year and from 22 April 2009, the full amount subscribed can be carried back (subject to the overriding limit of £500,000).

Furnished holiday lettings
The furnished holiday lettings rules will be repealed from 2010/11. Until then, the rules will be extended to apply to qualifying holiday lets in other EEA countries. 

Income shifting
The Government will not legislate on income shifting in the 2009 Finance Bill, but will keep it under review.