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Budget 2009 - Impact for High Net Worth Individuals

April 30th 2009

The budget has introduced a number of changes for pensions and we have summarised these for you for information at this stage. The main issues are as follows:
 

  • From 6th April 2010, an additional rate of income tax of 50 per cent will apply to income over £150,000, and the income tax personal allowance will be restricted for those with income over £100,000.
  • In addition, the basic personal allowance (for income tax purposes) for individuals with adjusted net incomes (i.e. taking account of existing income related reductions to the personal allowance, e.g. age related allowance) above £100,000 will be gradually reduced to nil.
  • From 6th April 2011, tax relief on pension contributions will be restricted for those with incomes of £150,000 and over, and tapered down until it is 20 per cent. In anticipation of this change, legislation will be introduced, effective from budget day, to prevent individuals taking advantage of the pensions tax relief while it is still available to them at a higher rate, by making substantial additional pension contributions prior to the restriction taking effect. 

I have outlined the changes below in more detail. 

  • The tax-free allowance limit on ISAs will rise from £7,200 to £10,200, taking effect for those aged 50 and over from October this year and extending to everyone in April 2010. Cash limits within the overall allowance will rise from £3,600 to £5,100.
  • From 6 April 2010 the furnished holiday letting (FHL) rules will be repealed.  These measures currently treat landlords as trading for certain tax purposes provided that they satisfy certain conditions. Until the FHL rules are repealed, HMRC will extend these rules to furnished holiday accommodation elsewhere in the EEA, but not outside it.
  • Once repealed, the consequences will be that all losses can only be carried forward against future profits of property letting; no sideways relief against other income will be available. The 10% wear and tear allowance will replace the claim for capital allowances. Profits will not be pensionable and capital gains tax reliefs such as rollover relief, holdover relief and entrepreneurs’ relief will no longer be available.

Our understanding of the proposals is that they will only affect individuals where their relevant income is £150k or more in the tax year or in either of the previous two tax years. Relevant income is broadly defined as an individuals total income, less any normal deductions for reliefs (such as trading losses, and including deductions for pension contributions up to a maximum of £20,000), less any gift aid deductions.

However, you should also note the following concerning individual’s making existing regular pension contributions. Any regular payments (which have to have been at least quarterly in 2008/09) are protected pension inputs and effectively will still receive the higher rate relief so long as they are not increased from Budget Day.

  • One off/Increase to Regular Pension Contributions 
  • There is a special annual allowance of £20k.
  • Contributions may be made up to £20k and still receive higher rate tax relief, however the special annual allowance will be reduced by the amount of regular pension contributions.
  • Any contributions in excess of £20k will not receive the higher rate tax relief.

 

Pension contributions can still be made up to the 2009/10 annual allowance (£245k or earnings if lower) but higher rate tax relief will be restricted.

Examples:

  • has no regular pension contributions and makes a one off pension contribution on 23 April 2009 of £100k. Higher rate tax relief will only be available on £20k and although the additional £80k can be paid into the pension (subject to sufficient earnings), only basic rate tax relief will be obtained.
  • has regular pension contributions of £1k per month in 2008/09 and continues to make these in 2009/10. In addition, on 23 April 2009 she pays £58k into a personal pension as a one-off. Total pension contributions in 2009/10 are therefore £12k + £58k = £70k. Since this exceeds the special annual allowance, no higher rate tax relief will be available on £50k.
  • has regular pension contributions of £2k per month in 2008/09 and continues to make these in 2009/10. In addition, on 23 April 2009 she pays £58k into a personal pension as a one-off. Total pension contributions in 2009/10 are therefore £24k + £58k = £80k. £24k are protected pension inputs benefiting from higher rate tax relief but fully utilise the special annual allowance therefore no higher rate tax relief will be available on £58k.

This is our initial understanding of the interim measures.  Following the changes effective from 6 April 2011, it would appear that instead of a £20k special annual allowance, there will be a tapering of higher rate relief on those earning between £150k and £180k although we have not yet seen detailed proposals for how this is intended to operate.

If you want to discuss this further please call 0113 287 8200 or e-mail advice@prosperis.co.uk.