By John Woolley, Director, Technical Connection
No change was made to extend the application of the top rate of tax of 50 per cent applicable from April 6, 2010.
National Insurance contributions
A real stealth tax change here. In this years’ Budget the Government announced an increase in National Insurance contributions with effect from April 6, 2011. The increase for employees will be 0.5 per cent meaning that employees with earnings above the UEL would pay 1.5 per cent.
Employers will suffer an increase of 0.5 per cent which produces a headline rate of 13.3 per cent. It was announced in the pre-Budget report that these rates of NIC are now each scheduled to go up by 1 per cent, to 2 per cent and 13.8 per cent respectively.
For those employees who will be affected by this increased national insurance burden (and are not caught by SAAC), salary sacrifice pension arrangements remain attractive. These planning arrangements are likely to have a limited shelf life so people should make the most of them while they can. The PBR clamped down on salary sacrifice arrangements linked to the provisions of food and drink!
The Government has published the draft legislation that will deal with the restriction of higher rate tax relief on pension contributions for those with income of £150,000 or more with effect from 6 April 2011. This confirms that the definition of income will take account of all pension inputs, including the value of any pension benefit funded by, or eventually funded by an individuals employer.
As far as the dreaded anti-forestalling rules are concerned, with effect from December 9, 2009, these will apply to restrict higher rate tax relief for those with incomes of £130,000 or more (down from £150,000). Existing protected pension payments will still be eligible for relief and, subject to existing regular contributions, people will be able to contribute £20,000 (in some cases £30,000) in tax year 2009/10 and 2010/11 and continue to get full higher rate tax relief. However, the impact of the change is that more people will inevitably be affected by these provisions.
For those who are higher rate taxpayers with income below £130,000, the message is clear – maximise contributions to pension schemes whilst full higher tax rate relief is still available.
It is inevitable that those with income of more than £150,000 will look for other tax efficient investments/vehicles. In this respect the employee benefit trust is still attractive as a tax deferral vehicle. Despite rumours to the contrary, no announcement was made to curtail their benefits.
Other “tax attractive” investments include VCTs which offer 30 per cent tax relief on input with the prospect of tax free dividends. However, don’t forget that pension contributions will still give 20 per cent tax relief and there will normally be more of a risk with VCT, although if a secondary market exists, shares can be redeemed as a tax free capital receipt with no “exit charge” after five years ownership. It may also be worth considering “TCF friendly” qualifying savings plans which can deliver tax free benefits after 10 (or sometimes fewer) years.
Capital gains tax
Given the high differential that now exists between the rate of CGT and top rate of income tax, it is surprising that no announcement was made on an increase in CGT. It still therefore makes tax sense then for higher rate taxpaying investors to invest for capitalgrowth as opposed to income.
Moreover, most will be able to use their CGT annual exemption of £10,100 – and could consider transferring cash to spouses and to children – perhaps via bare trusts in the case of children – to enable them to invest and use their CGT exemption in the future. Of course, as for all planning,
the balance needs to be struck between tax effectiveness and investment portfolio appropriateness.
It was no surprise the inheritance tax nil-rate band was frozen at £325,000. Three years ago, Labour announced that this would systematically increase to £350,000 in 2010/11 but that announcement was made in an era of a booming economy and escalating house prices. Since then the
revenues from inheritance tax have plummeted and there is now less pressure to reduce this tax which is still perceived by some as a tax on the wealthy. This also ties in with Labour’s attack on the Conservative policy to increase the nil-rate band of husband and wife to £1m each which has
become something of a rope round their neck. The freezing of the nil-rate band is clearly bad news for some of the more wealthy clients but good news for advisers who can continue to recommend the full range of insurance based trust solutions in the shape of discretionary trusts, loan trusts and discounted gift trusts.
Inheritance tax anti-avoidance
Two measures were introduced to combat specific artificial IHT avoidance plans that enabled a person:
(i) to make a large transfer to a trust which constituted a PET rather than a chargeable lifetime transfer and
(ii) to exchange a valuable asset (that is, cash) for an interest in possession under a family trust which meant, because of the technicalities of the legislation, that amount was removed from the individual’s taxable estate.
Given that in the words of the Treasury, these plans are “artificial schemes designed to avoid inheritance tax charges on relevant property trusts” it is not thought that the new legislation would apply to the more popular retail insurance-based IHT packaged plans.
The Government has announced a review of the inheritance tax treatment of trusts. It is thought that this review will focus on the problems that rise out of the changes to the IHT legislation that were introduced in 2006.
The small companies corporation tax rate will remain at 21 per cent for fiscal year 2010 – it was scheduled to increase to 22 per cent. This is good news for small corporate businesses who should bear in mind that, under the current concessionary rules if they do suffer a loss in an accounting year ending before November 2010, they may be able to carry that loss back against profits for any of the three previous accounting years.