From April 2010, a 50% income tax rate for those with taxable income over £150,000

• The Trust rate of tax to increase to 50% from April 2010
• Tax relief for pension contributions restricted for those earning over £150,000
• Increased ability to carry back Enterprise Investment Scheme (EIS) income tax relief
• Extension to 3 year carry back for business losses up to £50,000
• First Year Allowances of 40% for capital expenditure
• Tax breaks for Furnished Holiday Lettings (FHL) to be repealed from 2010/11
• VAT to return to 17.5% from 1 January 2010
• Stamp Duty Land Tax (SDLT) exemption for properties up to £175,000 to be extended until 31 December 2009
• Worldwide debt cap rules to begin for companies with accounting periods beginning on or after 1 January 2010 
  

UK Chancellor Alistair Darling hit the wealthy with a triple whammy of a 50 per cent UK Income Tax rate, for those earning over GBP150,000 , a cut in personal allowances to nil for income over GBP100,000 and a reduction in the top-rate of pension tax relief, to 20%.

About 700,000 high earners will be thousands of pounds worse off as a result of the tax rises, which will be introduced next April 2010 and net the UK Government an extra £7 billion a year.

Accountants said that the changes might lead to an exodus of high-earners from Britain. Our comments is that Hong Kong is an ideal location for such high earners/investors to locate to.

Sean Drury, of PricewaterhouseCoopers, said: “From next April the UK will rank 18th among the G20 economies in terms of income tax and social security rates for senior executives. Lower-tax countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of recession.”

Louise Somerset, of RBC Wealth Management, said: “We have already lost a lot of nondomiciled high earners as a result of last year’s tax changes and I worry that London’s preeminence as a financial centre is at serious risk.”

Wealth managers are concerned that the plan to lower tax relief for pensions will discourage the wealthy from saving for their retirement. From April 2011 tax relief on pension contributions will be cut for those earning £150,000, tapering to 20 per cent for those earning more than £180,000.

Ian Parker, of Alexander Forbes Financial Services, said: “If today’s higher earners have to settle for a lower pension income in the future, that means less money for the future economy and lower tax receipts for future governments.

“All the Government is doing is robbing tomorrow’s generations to make up for the fiscal mess it has created today.”

The new 50 per cent income tax rate for those earning £150,000 or more will replace the 45 per cent top rate Mr Darling announced in last November’s PreBudget Report.

Personal allowances will be reduced by £1 for every £2 of income above £100,000, falling to zero for those earning £112,950 or more. Someone earning between £100,000 and £112,950 will have a marginal tax rate of 60 per cent.

Chris Sanger, of Ernst & Young, said: “Once you factor in national insurance, people in this band will really be losing 61.5 per cent in tax.” The marginal incoem tax arte for peoeple earning between GBP100,000 and GBP114,000 will be 67%.

The tax sting will be even sharper when national insurance is increased from 11 per cent to 11.5 per cent in 2011, a change announced in the PreBudget Report.

Damage for lower earners will be offset by the starting point for national insurance being aligned with that of income tax, but not for the high earners.

From 2011 someone earning £150,000 will pay £3,307 more in income tax and national insurance. Those earning £200,000 will pay an extra £8,557.

Toby Ryland, of the accountant Blick Rothenberg, said: “This is a major attack on higher earners. For the first time in many years, an individual earning over £150,000 a year will be giving more to the Exchequer in income tax and national insurance than they keep themselves. It is not just the fat cats who will suffer, it is people like GPs and headteachers.”

Families using trusts, often set up for children, will also be disadvantaged by the tax changes, irrespective of their income. The rate on discretionary trusts, often used to pass on assets to heirs, will rise from 40 per cent to 50 per cent from next April.

Matthew Woods, of the law firm Withers, said: “Despite concerns raised last autumn, this rate will apply whatever the level of trust income. This is further evidence of the Government’s dislike of trusts and will disproportionately penalise trusts set up for the benefit of children where income is being accumulated for their benefit.”

The only good news for high earners is that they may be able to claim 50 per cent tax relief on their pension contributions as the new rules on lowering tax relief do not come into force until 2011.

Laith Khalaf, of the financial adviser Hargreaves Lansdown, said: “Whether or not the Treasury has realised this remains to be seen, so watch this space.”

Other opportunities to escape the tax crackdown appear limited, after the Government announced a number of measures to counter tax avoidance. HM Revenue & Customs (HMRC) said that it would name and shame those who “deliberately understated” more than £25,000 of tax.

It will also tackle high earners who try to increase their pension contributions before 2011 to take advantage of higher tax relief. From yesterday anyone earning more than £150,000 who changes their normal pattern of pension contributions and contributes more than £20,000 may face an additional charge of 20 per cent.

HMRC has given notice to those earning more than £150,000 who might be tempted to use “salary sacrifice” to reduce their earnings.

Salary sacrifice involves an employee taking a pay cut and their employer paying that money directly into a pension, which allows both to avoid paying national insurance.

However, the door is still open to those earning between £100,000 and £150,000 to take advantage of the measures.

Mike Warburton, of Grant Thornton, said that tax changes would encourage the self-employed to take more of their profits as capital gain rather than income. “Profits taken as a capital gain pay a maximum tax rate of 18 per cent. Unfortunately, this isn’t an option for professional firms of lawyers, architects, doctors and accountants, which, because they are run as limited liability partnerships, have to pay income tax on all profits. They will be particularly badly hit.” 

 

Debbie Annells
Managing Director
AzureTax Ltd
Chartered Tax Advisers
www.azuretax.com

Debbie Annells is the author of Hong Kong Tax Planning: Legal Tax Loopholes, published by LexisNexis (2007).