Income tax and personal savings

Income tax rates

		2009/10	2008/09
Starting rate band limit*		£2,440	£2,320
Tax rate*		10%	10%
Basic rate band		£37,400	£34,800
Basic rate		20%	20%
Savings rate		20%	20%
Dividend ordinary rate		10%	10%
Higher rate - income over		£37,400	£34,800
Tax rate excluding dividends		40%	40%
Dividend upper rate		32.5%	32.5%
* Where taxable non-savings income does not fully occupy the starting rate limit, the remainder of the limit is available for savings income at the 10% starting rate.
Personal allowances (ages are as at the end of the tax year)
Allowances that reduce taxable income		2009/10	2008/09
		£	£
Personal allowance (PA)	under 65	6,475	6,035
	65 to 74*	9,490	9,030
	75 and over*	9,640	9,180
	minimum	6,475	6,035
Allowances that reduce tax
Married couple's allowance (MCA)
Age of elder partner	74*	n/a	653.50
	75 and over*	696.50	662.50
	minimum	267	254.00
*Higher allowances for those aged 65 or more are scaled back when income exceeds £22,900 (2008/09 £21,800). MCA is only available where at least one partner was born before 6 April 1935.

Starting rate example

In 2009/10, Mr Morris has earnings from employment of £7,000 and savings income of £4,000. His personal allowance is £6,475 which is completely used against his earnings, leaving £525 taxable at 20%. The rest of the starting rate limit for savings (£2,440 - £525) can be used to tax £1,915 of his savings income at 10%. The balance of his savings income of £2,085 (£4,000 - £1,915) remains taxable at 20%.

Mr Morris's employer has deducted £105 through PAYE and his bank will have taken tax off all of his interest at 20%, so he can claim a repayment of tax of £191.50 (£1,915 at 10%) from HMRC.

Pensions savings

• From 6th April 2011, individuals earning £150,000 or more will have their tax relief on pension contributions restricted.
• Relief will be tapered so that for those earning £180,000 or more, tax relief will be restricted to 20%.
• Anti-forestalling measures also restrict higher rate relief for certain individuals from 22 April 2009.
• The individuals affected are those whose income is £150,000 or more (for the current or either of the previous two tax years) who change their regular pension saving habit and whose total annual pension savings exceed the “special” annual allowance of £20,000. It is too early to say whether payments made on an annual regular basis will in fact be deemed regular enough.
• Tax relief will be restricted to basic rate (20%) on additional contributions in excess of the greater of £20,000 or the normal regular level of contributions. Care must be taken when establishing what would be deemed a regular payment.

Positive issues arising from the new pension changes include:

• Full higher rate pension tax relief remains available for those with income of less than £150,000 per annum and on a limited, temporary basis (up to 5 April 2011) for those with higher income where they have a track record of making pension payments in excess of £20,000 per annum.
• Payments made between the 5th April and the 22nd April 2009 would attract 40% tax relief .
• Bonus sacrifice will have a major part to play for high earners as a means of funding future pension payments.

Personal allowances for non-resident individuals

Certain non-residents are entitled to claim UK personal allowances by virtue of being Commonwealth citizens. Following advice that this particular condition is not compliant with the Human Rights Act, the entitlement of such non-residents will be withdrawn with effect from 6 April 2010. However the vast majority of individuals affected will still benefit through other means, for example double taxation treaties.

Entitlement will continue for those qualifying as, for example, EEA nationals, Crown servants and residents of the Channel Islands and Isle of Man.

Not ordinarily resident employees

On 18 March 2009 HMRC issued a new Statement of Practice 1/09 detailing how they will treat transfers made from an offshore account which contains only the income relating to a single employment contract, and how earnings should be apportioned between UK and non-UK employment where an employee is taxed on the remittance basis. SP 1/09 applies from 6 April 2009 and replaces the earlier SP 5/84 which was withdrawn from the same date.

The Government has announced a period of consultation on the most effective way of legislating SP 1/09 with the intention of introducing legislation in Finance Bill 2010. It is recommended that those affected review their banking arrangements in the light of the new Statement of Practice.

Amendments to the remittance basis

Finance Bill 2009 will introduce minor changes to the remittance basis regime designed to make the rules simpler to operate in practice. The regime applies to individuals who are resident but not domiciled or not ordinarily resident in the UK for tax purposes and was itself subject to significant change with effect from 6 April 2008.

Individuals with overseas employment income of less than £10,000 and overseas bank interest of less than £100 in any tax year, all of which is subject to a foreign tax, will no longer have an obligation to file a Self Assessment Tax Return. Prior to these changes an obligation existed in these circumstances even where there was little or no tax to pay in the UK.

Existing exemptions, allowing an individual using the remittance basis to bring property into the UK purchased from overseas investment income without triggering a UK tax liability, will be extended to also include property purchased out of foreign employment income and foreign chargeable gains.

Existing legislation will be amended to put beyond doubt that individuals wishing to use the remittance basis of taxation with unremitted foreign income and gains of less than £2,000 in any tax year will not be required to file a Self Assessment Tax Return to make such a claim. The situations where a claim will not be required will also be extended to cover cases where an individual has total UK income or gains of no more than £100 which has been taxed in the UK provided they make no remittances to the UK in that tax year.

Changes will be made clarifying the interaction between the remittance basis regime and the rules relating to settlor interested settlements to ensure the legislation operates as intended.

The remittance basis rules will be amended to ensure that the £30,000 Remittance Basis Charge is treated in the same way as other types of income tax or capital gains tax for the purpose of supporting tax relief claims in relation to charitable payments under Gift Aid.

Furnished holiday lettings in the EEA

Landlords with income from furnished holiday accommodation in the UK are treated as if they are trading for certain tax purposes provided that they can satisfy the conditions under the furnished holiday lettings (FHL) rules.

Currently, landlords with income from furnished holiday accommodation elsewhere in the EEA cannot qualify for this treatment and they are instead treated as receiving income from an ordinary overseas property business.

The Government has decided to repeal the FHL rules from 2010/11. Until the rules are repealed, HMRC will regard the FHL rules as applying to furnished holiday accommodation in the EEA.

Countries in the EEA

Austria	Liechtenstein
Belgium	Latvia (since May 2004)
Bulgaria (since Jan 2007)	Lithuania (since May 2004)
Cyprus (since May 2004)	Luxembourg
Czech Republic (since May 2004)	Malta (since May 2004)
Denmark	Netherlands
Estonia (since May 2004)	Norway
Finland	Poland (since May 2004)
France	Portugal
Germany	Romania (since Jan 2007)
Greece	Slovakia (since May 2004)
Hungary (since May 2004)	Slovenia (since May 2004)
Iceland	Spain
Ireland	Sweden
Italy	United Kingdom

If you own furnished holiday accommodation in any of the above countries, providing that you satisfy all the FHL conditions, there may be certain circumstances under which you may wish to amend prior years Tax Returns to claim for the treatment to apply.

These could include a claim for capital gains tax hold-over or roll-over relief, relief for losses carried forward, terminal loss relief and landlord's energy saving allowance. Any claim made would be subject to the normal time limits for making the relevant claim or amending the return.

Until 31 July 2009 HMRC will accept late return amendments for the year ended 5 April 2007.

Offshore disclosure

A New Disclosure Opportunity (NDO) for UK residents with unpaid tax connected to an offshore account will run from autumn 2009 until March 2010. This will give holders of these accounts one final opportunity to disclose, and put their affairs in order. Whilst HMRC will still charge penalties, these are likely to be lower than under normal rules. HMRC is also seeking to issue notices requiring financial institutions to provide information about offshore account holders.

Employer-provided (rented) living accommodation

An employee has typically been charged to tax on the amount of rent the employer pays for the accommodation. Avoidance through payment of substantial premiums and small rents will be stopped for leases entered into or extended from 22 April 2009 by treating a premium paid for a lease of 10 years or less as rent paid.

Taxation of overseas dividends

Since 6 April 2008, individuals with shareholdings of less than 10% in non-UK resident companies have been entitled to a non-payable tax credit. From 22 April 2009, individuals with shareholdings of 10% or more in receipt of dividends from non-UK resident companies will become entitled to a non-payable tax credit, subject to certain conditions.

The non-payable dividend tax credit for offshore funds which are largely invested in equities will be restored from 22 April 2009. The new rules will also provide that where the offshore fund is substantially invested in interest bearing assets, individuals receiving distributions will be treated for tax purposes as having received interest and not a dividend or other type of distribution.

Distributions from offshore funds

The non-payable dividend tax credit was withdrawn for offshore funds as some collective investment schemes were exploiting the extension introduced in April 2008.

Legislation will be introduced in the Finance Bill 2009 to restore the non-payable dividend tax credit for offshore funds which are largely invested in equities.

Where the offshore fund is substantially (i.e. more than 60%) invested in interest bearing assets any distribution will be treated as a payment of interest, no tax credit will be available, and the tax rates applying will be those relating to interest and not dividends.

The rules apply equally to all holdings in offshore funds (whether more or less than 10%) and the changes will not affect the taxation for UK investors which remain transparent for tax purposes.

Income shifting

The introduction of controversial legislation designed to prevent 'income shifting' will not take place in April 2009 as previously announced. The Government maintains its stance that it 'firmly believes it is unfair' to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax. However, in the light of the current economic climate the Government has deferred action and is instead keeping the issue under review.

Tax and NICs – What lies ahead?

The Government has already made announcements about increases in tax and NICs over the next few years. However, the personal tax changes have now been replaced and the updated summary is as follows:

• From April 2009, the upper earnings limit for Class 1 and Class 4 NICs has been increased substantially in order to align it with the level at which people generally start to pay higher rate income tax (£844 per week). The new upper accrual point (£770 per week) for Class 1 NICs sets a cap on the level above which there will be no additional pension benefits (there are none for Class 4 NICs in any case).
• The Chancellor announced a new higher income tax rate of 50% to apply from 6 April 2010 for taxable income over £150,000. Also announced were consequent changes to the rate of income tax on dividends, with a top rate of 42.5%.
• From 2010/11 the basic personal allowance for income tax will be gradually reduced to nil for individuals with ‘adjusted net incomes' above £100,000. The effect of the gradual withdrawal of the personal allowance will result in a marginal tax rate of 60% for individuals with taxable income of between £100,000 - £112,950.
• From April 2011, there will be a general increase of 0.5% to the main NIC rates. At the same time, the NIC threshold will be brought back into line with the basic personal allowance.

Trust tax rates

The Chancellor's proposal to introduce a new higher rate band of 50% from April 2010 will have a dramatic impact on discretionary and accumulation trusts. Tax rates for such trusts will increase to 42.5% for dividend income and 50% for other income. Those trusts that distribute more income than can be franked by the trustees' tax pool will see an increase in the notorious “tax pool charge”.

There may be opportunities for some trusts to avoid the higher rates where entitlement to income can be granted to beneficiaries. This has been made easier following the Finance Act 2006 changes to the inheritance tax treatment of trusts. Trustees may also be able to restructure their investments in order to avoid the higher tax rates.

Individual Savings Accounts (ISAs)

The ISA limit will be raised to £10,200, up to £5,100 of which can be saved in cash. The new limits will apply from 6 October 2009 for people aged 50 and over in 2009/10 and for all ISA investors from 2010/11 onwards.

Child Trust Funds

Starting in April 2010, for children in receipt of Disability Living Allowance at any point in 2009/10, the Government will contribute £100 every year to the Child Trust Fund accounts of all disabled children born on or after 1 September 2002, with severely disabled children receiving £200 per year.

Enterprise Investment Scheme (EIS)

Currently an individual who subscribes for shares in a qualifying EIS company can claim to carry back the associated Income Tax relief to the previous tax year. This is restricted to shares issued before 6 October and subject to a limit of half of the subscriptions in that period, up to an overall limit of £50,000 subscribed.

The Finance Bill 2009 will remove the restrictions on carrying back Income Tax relief and from the 2009/10 tax year onwards an investor may claim to treat the full amount of subscriptions of qualifying EIS shares, made at any time in that tax year, as being made in the previous tax year.

The total investment that can be taken into account for the purposes of calculating Income Tax relief for a particular tax year will remain subject to an overall limit, currently £500,000 subscribed.