UK Budget 2012 – Income tax overview

On 21 March 2012 the UK Chancellor of the Exchequer announced a raft of measures affecting income taxation in a fiscally neutral budget.

The announcements include changes to tax rates and allowances and reliefs, the treatment of non-domiciled individuals, confirmation of a statutory residence test, EMI option limits and confirmation of a number of consultations on future tax plans.

Tax rates and Allowances

• The dividend additional rate will be set at 37.5% from April 2013, reduced from the current rate of 42.5% to coincide with the reduction of the additional rate to 45%.
• The main rate of corporation tax is reduced from 26% to 24% in April 2012. A further reduction will be made to 23% in April 2013 and then to 22% in April 2014.

Other announcements

• Confirmation of the introduction of a statutory residence test from 6 April 2013.
• Reforms to ordinary residence to be deferred until April 2013 with ordinary residence being abolished for tax purposes. However overseas workday relief will be retained and placed on a statutory footing.
• An increase to the remittance basis charge to £50,000 from 6 April 2012 for non-domiciled individuals electing for the remittance basis of taxation who have been resident in the UK for 12 or more of the previous 14 years.
• Introduction of a limit on uncapped income tax reliefs with a cap being set at 25% of income, for any individuals seeking more than £50,000 tax relief. However, this will not be extended to reliefs which are already capped (e.g. pensions).
• The individual limit on qualifying Enterprise Management Incentives (EMI) options is increased from £120,000 to £250,000. Legislation will be introduced in the Finance Act 2012 but is subject to State aid approval. It is also the Government’s aim that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for capital gains tax entrepreneurs’ relief.
• An increase in the tax charge for certain company cars and an increase in the car fuel tax charge.

Further consultations

The Government has announced further consultations will take place in the areas as set out below:

• • General Anti-Avoidance Rule (GAAR)

The Government will consult on the introduction of a General Anti-Avoidance Rule based on the recommendations of the Aaronson Report.

• • Disclosure of tax avoidance schemes (DOTAS)

In 2011, HMRC consulted informally about extending the DOTAS “hallmarks” (the descriptions of schemes required to be disclosed for income tax, capital gains tax or corporation tax). The Government will be formally consulting over the summer on extending the hallmarks so as to capture avoidance schemes that do not currently have to be notified, with a view to publishing draft regulations later in the year.

• • Inheritance tax: spouses and civil partners domiciled outside the UK

The Government will consult on legislation to increase the IHT-exempt amount that a UK domiciled individual can transfer to their non UK domiciled spouse or civil partner. The Government similarly proposes to allow individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of IHT. Legislation will be in Finance Bill 2013.

• • Income tax and NICs reform

The Government announced in Budget 2011 that it would consult on the options, stages and timing of reforms to integrate the operation of income tax and NICs. Since then, the Government has issued a call for evidence, published a response and set out an indicative timetable for reform in integrating the operation of income tax and NICs. Following detailed work with interested parties over recent months, the Government will consult shortly after Budget 2012 on a broad range of options for employee, employer and self employed NICs.

Resources

A UK General Anti-Avoidance Rule moves a step closer

HMRC – Rates and allowances

For further information or to discuss the issues raised, please get in touch.