It has long been expected that the rate of tax relief on pension contributions would be restricted to the basic rate for higher earners. This has now been announced to come fully into effect from 6 April 2011. However, there are some interim measures that apply immediately. The key points of the new rules are set out below.

New regime from 6 April 2011

With effect from 6 April 2011, the Government plans to restrict the income tax relief on pensions contributions for anyone with taxable income of £150,000 or more.

Tax relief will be tapered down for those with incomes between £150,000 and £180,000 so that effectively it will be worth 20% for incomes over £180,000 which is the same as it is for a basic rate taxpayer.

Example 1

Brian has income of £145,000 in 2011/12 and makes pension contributions of £50,000. 

He will obtain higher rate tax relief on his contributions as his earnings are less than £150,000.

Example 2

Angela has income of £190,000 in 2011/12 and makes pension contributions of £50,000.

She will obtain basic tax relief only as her income exceeds £180,000.

Special Annual Allowance (applies from 22 April 2009 to 5 April 2011)

Between 22 April 2009 and 5 April 2011 special provisions will apply. Tax relief on contributions will be limited for individuals: 

• With income in excess of £150,000 in the tax year, or any of the preceding two tax years; AND
• Who increase the level of their regular ongoing pension contributions from the levels before 22 April 2009; AND
• Who make total pension contributions in excess of £20,000 in the tax year.

For such individuals a 'special annual allowance' will apply to set a limit on the pension contributions paid in the tax year that will obtain maximum tax relief. This allowance will be the greater of £20,000, or the 'protected pension input'. The protected pension input is the level of the regular ongoing pension contributions as established before 22 April 2009 (as below). Tax relief on pension contributions above that level will be restricted effectively to the basic rate by the application of a special annual allowance tax charge to recover the tax relief obtained above the basic rate of tax relief.

We only need to consider the protected pension input if you have already been making regular ongoing pension contributions before 22 April 2009 which exceed £20,000. This will be potentially very valuable as this will set the limit on the pension contributions that obtain maximum tax relief in the period 22 April 2009 to 5 April 2011. 

Regular ongoing contributions are the normal level of your pension contributions that you have made at least on a quarterly basis before 22 April 2009. This means that regular annual lump sum payments would not count towards the protected pension input.   

For example, if you have made regular monthly pension contributions totalling £30,000 in 2007/2008 and 2008/2009, this should count as your protected pension input. This would mean that you could contribute another £30,000 on this basis in 2009/2010 that would not exceed the protected input and would qualify for maximum tax relief.

Example 3

David has income of £160,000 in 2008/09 and £145,000 in 2009/10. He makes pension contributions of £15,000 in 2008/09 and £25,000 in 2009/10.

He is subject to the special annual allowance tax charge in 2009/10 as his income exceeds £150,000 in the preceding tax year. He has increased the level of his pension contributions in the year, and the total exceeds £20,000. The charge applies to the excess of £25,000 over £20,000.

Example 4

Ann has income of £200,000 in 2009/10. She makes regular monthly pension contributions totalling £50,000 in the year and also made similar contributions in 2008/09.

She is not subject to the special annual allowance tax charge as although her income exceeds £150,000 and total contributions exceed £20,000, she has not increased the level of her regular contributions.

Example 5

Paul has income of £160,000 in 2009/10. He makes a pension contribution of £15,000 in the year, having made no previous contributions.

He is not subject to the special annual allowance tax charge because whilst his income exceeds £150,000 and he has increased the level of his regular contributions, his total contributions are less than £20,000.

There are many points of detail in these interim rules and therefore each individual case would need to be considered on the basis of all relevant facts. 

It should also be stressed that these rules fall away from 6 April 2011 and from that date there will be no limit of £20,000, or the protected pension input, that will continue to obtain higher rate tax relief where earnings exceed £150,000.

Comment on this blog in the space provided below. Barry Hallam is a Tax Manager at Mercer & Hole. 

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With effect from Budget Day (22 April 2009), companies may release debts owed to them by connected companies (often, those under common ownership) without triggering a tax charge. Until now, a company that was released from a trading debt owed to a connected company would be taxed on this release – but the other company would not benefit from tax relief for granting the release. If the companies are not connected, the existing rules will continue to apply - the company that owes the trading debt will be taxed (unless the release is part of a statutory insolvency arrangement) and the creditor will continue to get tax relief.

For accounting periods beginning on or after 1 April 2009, the rule that only allows a company a tax deduction for interest payable to a connected company outside the loan relationship rules (normally when the lender is not resident in the UK) when it is paid, will be changed. In future, this will remain the case only where the lender is resident in a ‘non-qualifying territory’ (broadly, a tax haven).

Tax deductions for other interest will be granted on an accruals basis (ie they will follow the treatment in the accounts).

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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Currently interest paid by individuals on loans used to invest in certain companies or in partnerships may qualify for income tax relief.

However, HMRC believe that this relief is being exploited and so relief is being withdrawn where the loan and investment are part of an arrangement that eliminates any real commercial risk.

This may cause a problem for people who have invested in tax saving schemes in the past as the restriction applies to interest paid on or after 19 March 2009 irrespective of when the loan was taken out. 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Cathy Corns is a Corporate Tax Partner at Mercer & Hole.

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A client company has a subsidiary which will shortly cease trading and will eventually be wound up. The holding company will realise a capital loss which we want to set against a capital gain arising in another subsidiary. However, there is a problem – the rules which permit a group to 'deem' an asset to have been transferred within the group only apply to actual disposals of assets to someone outside the group. They do not therefore apply to liquidations or negligible value claims, etc and we were having to consider whether we needed to make actual transfers of assets to ensure that the gains and losses were both realised within one company.

Our problem may now be solved. With effect from the date that the Finance Bill 2009 receives Royal Assent (expected late July 2009) the rules governing group capital gains and losses will be changed to allow the gains and losses to be transferred. The former restrictions on transactions not involving disposals to third parties will no longer apply. This should make it much easier to ensure that capital gains and losses within groups can be matched.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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The Budget has seen the temporary re-introduction of first year allowances (FYAs) for purchases of qualifying plant and machinery. Allowances of 40% will be available to companies, partnerships and individuals carrying on qualifying activities (which includes trades and ‘normal’ property businesses) in excess of the annual investment allowance (see below) subject to the following:

• the expenditure must be incurred in the year to 31 March 2010 (for companies) and 5 April 2010 (partnerships and individuals).
• must not relate to specific proscribed assets, including for example, long life assets, cars and assets for leasing.

Unusually, there appears to be no restriction on the amount of the expenditure or the size of business incurring the costs.

The annual investment allowance (AIA), introduced last year, allows businesses (or groups, where related businesses carry on similar activities) to claim a 100% deduction from taxable profits for £50,000 of expenditure on eligible plant and machinery. 

Confusingly, the definition of eligible plant and machinery for AIA purposes differs quite significantly from that for qualifying plant and machinery for FYAs.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

David Mansell is a Corporate Tax Partner at Mercer & Hole.

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The normal rule for company trading losses is that they can be carried back and set off against the profits of the previous year. With the onset of the recession many companies did not have sufficient profits to make use of their losses in this way. In the Pre-budget Report last year it was therefore announced that losses of up to £50,000 could be carried back for three years. However, this only applied to losses made in accounting periods ending in the period 24 November 2008 to 23 November 2009.

The three year carry back is to be extended for a further year, to accounting periods ending in the period 24 November 2009 to 23 November 2010. The extension will again be limited to £50,000, giving a total of £100,000 over two accounting periods. The losses will be offset against later years first.

Equivalent changes will be made to the carry back rules for sole traders and partnerships for losses in the tax years 2008/09 and 2009/10.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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Investors in small, relatively high-risk, trading companies may be eligible for special tax reliefs under the Enterprise Investment Scheme (EIS) or the Venture Capital Trust (VCT) scheme. The equivalent scheme for companies is the Corporate Venturing Scheme (CVS). Some welcome changes to these reliefs have been announced today.

Previously it was necessary for 80% of the money to be used by the company for a qualifying purpose within 12 months of the investment and the remaining 20% to be used within 24 months. This rule has been relaxed and, for investments made on or after 22 April 2009, it will simply be necessary for 100% of the money to be used within 24 months.

For individual EIS investors, an even more useful change is made to the ability to claim relief in the previous tax year. Subject to there being sufficient income in charge to tax, the individual can claim for the income tax relief (20% of the amount subscribed) to be given in the tax year prior to the year of investment. This was previously limited to shares issued before 6 October and to half of EIS subscriptions up to an overall limit of £50,000 subscribed. For 2009/10 these restrictions are lifted, allowing the relief for the total EIS investment (limited to £500,000 subscribed) to be carried back.

Comment on this blog in the space provided below. Rachel Haddow is a Corporate Tax Manager at Mercer & Hole. 

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On the individual capital gains tax exemption - this has been set at £10,100 for 2009/10.

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The last few days have seen a number of issues of draft legislation that will be confirmed in the Budget and included in the Finance Bill but taking effect well before the Act is passed.  These include:

• Business cars - changes to the first draft legislation - http://www.hmrc.gov.uk/briefs/company-tax/brief2009.htm.
• Anti-avoidance on life policies - http://www.hmrc.gov.uk/offshorefunds/statement-finance-sec.htm.
• Anti-avoidance on employment income - http://www.hmrc.gov.uk/news/pta-announcement.htm.

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As mentioned in earlier blogs, this year’s Budget will be given by the Chancellor on 22 April 2009 – it has been delayed until after the G20 summit, which is then immediately followed by the Easter recess.

At this time of year many tax professionals try to second-guess what the Chancellor may announce in his Budget. Turmoil in the world’s markets makes these predictions harder than ever – he needs to increase the tax take, but will higher taxes cripple an already weakened economy?

We do know that the rate of VAT is set to revert to 17.5% on 1 January 2010. There are already cries for the 15% to be retained, but if it does go up next year would he be tempted to fix the rate at 20%?

Scrapping higher rate tax relief on pension contributions has often been put forward as something the Chancellor might consider – will this be the year that it happens?

As usual, we will just have to wait and see! 

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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The Chancellor will make his Budget statement on Wednesday 22 April 2009.  We will be providing analysis of Budget announcements on the day.
 

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