The personal allowance for 2012/13
For those aged under 65 the personal allowance will be increased by £630 to £8,105. This increase is greater than the minimum required and is part of the plan of the Coalition Government to ultimately raise the allowance to £10,000.
The personal allowance is reduced by £1 for every £2 of adjusted net income over £100,000. So for 2012/13, the allowance ceases at adjusted net income in excess of £116,210.
Planning should be considered where adjusted net income is expected to exceed £100,000. This figure is calculated after giving a deduction against income for pension contributions and Gift Aid payments. Consider whether these could be made to protect some or all of the personal allowance.
Tax bands and rates for 2012/13
The basic rate of tax is currently 20%. The band of income taxable at this rate is being reduced to £34,370 so that the threshold at which the 40% higher rate of tax applies will remain at £42,475.
The 50% additional rate of tax currently applies where taxable income exceeds £150,000.
If dividend income is part of total income this is taxed at 10% where it falls within the basic rate band, 32.5% where liable at the higher rate of tax and 42.5% where liable to the additional rate of tax.
Changes for 2013/14
The personal allowance is to increase to £9,205. The band of income taxable at this rate is being reduced to £32,245 so that the threshold at which the 40% band applies will reduce to £41,450.
For 2013/14 the 20% basic rate and 40% higher tax rates remain unchanged. However the 50% additional rate tax will be reduced to 45%. A rate of 37.5% will be payable on dividends liable to the additional rate of tax.
Similar changes will be made to the rates which apply to trusts.
There had been widespread speculation that the 50% top rate of tax would be abolished.
From 2013/14 the higher age related personal allowances will not be increased and their availability will be restricted to people born on or before:
- 5 April 1948 for the £10,500 allowance
- 5 April 1938 for the £10,660 allowance.
Legislation will be introduced to impose a new charge on a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000 the charge will apply to the partner with the higher income.
The income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.
Child Benefit claimants will be able to decide not to receive Child Benefit if they or their partner do not wish to pay the new charge.
This charge will have effect from 7 January 2013 and for 2012/13 will apply to the Child Benefit paid from that date to the end of the tax year. The income taken into account will be the full income for 2012/13.
The removal of Child Benefit from households containing a higher rate taxpayer had been announced previously. However the detail of the way in which the restriction would apply had been subject to speculation. The following example shows how the charge will be calculated.
The Child Benefit for two children amounts to £1,752.
The taxpayer’s adjusted net income is £54,000.
The income tax charge will be £700.80.
This is calculated as £17.52 for every £100 above £50,000.
For a taxpayer with adjusted net income of £60,000 or above the income tax charge will equal the Child Benefit.
Cap on unlimited tax reliefs
Legislation will be introduced to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will only apply to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25% of income (or £50,000 if greater).
Statutory Residence Test
The Government is proposing to introduce a Statutory Residence Test (SRT) which will come into effect in April 2013. Detailed proposals have already been the subject of consultation and further consultation will take place before the rules are finalised. It is likely that a series of tests will be introduced which will enable an individual to arrive at a definitive answer to the question ‘Am I resident in the UK?’.
There is currently no definition of ‘residence’ in UK tax law and yet the liability to income tax and capital gains tax (CGT) rests on knowing an individual’s UK residence status for a tax year. Currently the determination of residence is based on old case law and, as a recent Supreme Court decision has shown, it can lead to significant uncertainty and large tax liabilities.
The Government is also proposing to remove the concept of ‘ordinary residence’ for tax purposes from 6 April 2013. Certain employees who work abroad may be treated as not ordinarily resident. As such they are liable to UK tax only on employment income derived from time in the UK. Someone with duties which are carried out both inside and outside the UK is entitled to deduct a proportion of their earnings which relate to time spent outside the UK. This is referred to as ‘overseas workday relief’ but currently has no statutory basis. This relief will be brought into legislation.
The new SRT will make the concept of ordinary residence effectively redundant. The main tax areas likely to be affected by the change will be CGT and the remittance basis.
Changes for non-domiciled individuals
Individuals who are not domiciled in the UK or who are not ordinarily resident may be able to benefit from the remittance basis of taxation in respect of overseas income and gains. Two significant changes are made to these rules from 6 April 2012:
- the remittance basis charge (currently £30,000 for those resident for seven out of the nine preceding years) will be increased to £50,000 where an individual has been resident in the UK for 12 out of the preceding 14 tax years
- if an individual remits funds to invest directly or indirectly in a UK trading company then that remittance will be tax free if the remittance basis is claimed (although the remittance basis charge will still be payable). The investment must be in a company but can be in the form of shares or loans. Certain activities will not constitute trading, for example, letting residential property. When the investment is realised, it will be necessary for the individual to either reinvest the funds in another qualifying venture or remove the funds from the UK. The reinvestment or removal of the funds needs to be within 45 days of the date on which funds are received.
Some administrative changes in the remittance basis rules will also be introduced.