Compensation & Benefits: UK income tax and social security - the new realities
We look at the new tax rates in force from April 2010 as well as the new rules on tax relief for pension contributions.
Changes to the UK tax system taking effect from 6 April 2010 significantly increase the tax burden on those earning over £100,000, with some paying income tax at a 60% rate. Quite apart from the well off, from 2011 all employees and employers will be paying an extra 0.5% in national insurance contributions on an uncapped basis.
Taking effect from 6 April 2010
Personal allowances restricted for those earning more than £100,000 - a 60% tax rate for some
The benefit of the personal allowance (tax free earnings limit) to taxpayers with income of more than £100,000 will be progressively restricted. £1 of the allowance will be lost for every £2 of income over £100,000. For those earning between £100,000 and £112,950 this, together with the prevailing higher rate of income tax at 40%, gives an effective tax rate of 60% (not taking account of employee’s national insurance contributions).
A new 50% income tax rate for those earning over £150,000
For the 2010/11 tax year there will be three rates of income tax rather than the current two (basic and higher rates).
|Tax year (from 6 April)||2009/10||2010/11|
|Basic rate (income up to, currently, £37,400*)||20%||20%|
|Higher rate (from, currently, £37,400*)||40%||40%|
|Additional rate (income over £150,000)||N/A||50%|
*The threshold between lower and higher rates is adjusted annually
Taking effect from 6 April 2011
A 0.5 % rise in all social security costs for all employees and employers
A rise of 0.5% in all employees and employer’s national insurance contributions was announced in the pre-budget review of November 2008 to take effect from 6 April 2011. The increase for both employees and employers will be on uncapped earnings in addition to the rates prevailing at that time.
Current rates for the 2009/10 tax year are as follows:
|0- £110 per week|
|£110 - £844||11%||12.8%|
The table above assumes the employee is not contracted out of the State Second Pension Scheme
Restriction of higher rate relief on pension contributions for those earning more than £150,000
Under existing law higher rate tax payers can receive tax relief for contributions made to pension schemes which are “registered pension schemes”. Tax relief is given at their highest marginal rate of income tax (currently 40%). However, from 6 April 2011 such tax relief will be tapered down for those earning more than £150,000 so that those with an income of more than £180,000 will receive basic rate (currently 20%) income tax relief for pension contributions rather than the current 40%.
Anti-avoidance: basic rate tax relief only on any increase to “normal” pension contributions over £20,000 from 22 April 2009.
Anticipating that there would be a flood of higher rate taxpayers making larger than normal contributions to their registered pensions schemes in order to benefit from the current higher rate tax relief before it is abolished, an anti-avoidance regime was introduced from 22 April 2009 (the day the changes were announced to the UK parliament).
The anti avoidance measures are therefore designed to catch anyone with income of £150,000 or more in one or more of the tax years 2009/2010, 2008/2009 or 2007/2008 who increases their contributions to a registered pension scheme (including any employers contributions) above their “normal” regular pensions savings pattern and who has total pension savings in 2009/2010 of more than £20,000 (before or after any increase).
The measures will impose a special tax charge to restrict income tax relief to 20% on any additional pension contributions above the previously “normal” pattern, or on contributions in excess of £20,000 (if the regular savings were less than £20,000 in the tax year).
Anti-avoidance for those who try to reduce their incomes
Those who use salary sacrifice arrangements or rely on any scheme with a main purpose of reducing their incomes below £150,000 in the 2009/2010 tax year so that they can avoid the immediate charges for contributions over their normal rate will be deemed to earn £150,000 under the anti-avoidance provisions.
To catch any clever schemes thought up by tax advisers the existing tax disclosure requirements have been widened under existing legislation so that HM Revenue & Customs may receive early warning of new avoidance schemes targeting the new charges. The disclosure rules oblige disclosure of tax avoidance schemes to HM Revenue & Customs in certain situations.
The new pension charges will be imposed through the self-assessment tax regime.
A radical change in UK political thinking
Together with the 2008 changes to the taxation of foreign domiciled employees in the UK (see Resources below), the new realities of the income tax system represent a radical change from the commitment to restrict taxation on higher earners shared for many years by both Labour and Conservative parties.
Not changing any time soon
Perhaps one of the most surprising things is that the latest tax changes have faced no serious political opposition from the UK’s traditional party of low taxation, the Conservatives, who now seem most likely to form the next government. This follows the changes to the taxation of non-domiciled individuals being widely seen as having been lifted by the Labour Government straight out of the Conservative party’s declared policy agenda. For those hoping for a change in policy there seems to be little cause for optimism on the horizon.
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue, please seek specific advice relevant to your particular circumstances.