2012 AUTUMN STATEMENT INTRODUCTION »

PERSONAL TAX

The personal allowance for 2013/14

For those aged under 65 the personal allowance will be increased from £8,105 to £9,440. This increase in the personal allowance is greater than the amount previously announced and is part of the plan of the Coalition Government to ultimately raise the allowance to £10,000.

The reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So, for this year, there is no allowance when net adjusted income exceeds £116,210. Next year the allowance ceases when net adjusted income exceeds £118,880.

From 2013/14 the higher age related personal allowances will not be increased and their availability will be restricted to people who were born before 6 April 1948.

Tax band and rates 2013/14

The basic rate of tax is currently 20%. The band of income taxable at this rate is being reduced from £34,370 to £32,010 so that the threshold at which the 40% band applies will fall from £42,475 to £41,450.

The 50% band currently applies where taxable income exceeds £150,000 but the rate will fall to 45% next year.

Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 42.5% this year and 37.5% next year.

Tax bands for 2014/15 and 2015/16

For 2014/15 and 2015/16 the increase in the higher rate threshold will be capped at 1%.

Pensions Saving

For tax year 2014/15 onwards:

• the annual allowance for pensions tax relieved savings will be reduced from £50,000 to £40,000
• the standard lifetime allowance for pensions tax relieved savings will be reduced from £1.5 million to £1.25 million
• a transitional 'fixed protection' regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance

Legislation will be introduced in Finance Bill 2013 to make these changes.

The Government has also announced that it will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.

Drawdown limits

The Government has listened to concerns about drawdown limits. The Chancellor has announced that the Government will raise the capped drawdown limit from 100% to 120% giving pensioners with these arrangements the option of increasing their incomes.

Individual Savings Accounts (ISAs)

From April 2013 the overall ISA savings limit will be uprated to £11,520.

The Government will consult on allowing investment in SME equity markets like AIM to be held directly in stocks and shares ISAs, to encourage investment in growing businesses.

General Anti-Abuse Rule (GAAR)

The Government has been consulting on the introduction of a GAAR into the UK tax system in an attempt to cut down on the use of ‘abusive arrangements’. The aim is to target artificial and abusive tax avoidance schemes.

The key points are:

• the legislation will counteract tax advantages arising from tax arrangements that are abusive. Abusive tax advantages would be counteracted on a just and reasonable basis
• tax arrangements are abusive if they are arrangements which cannot ‘reasonably be regarded as a reasonable course of action’
• a GAAR Advisory Panel will be established to give opinions on specific cases and to approve HMRC guidance on GAAR. HMRC will not be represented on the Advisory Panel
• if there is a dispute about whether HMRC’s proposed counteraction is appropriate, on appeal a Tribunal or court should be able to reach its own conclusion.

Further anti avoidance measures

As announced earlier this month, the Government is investing a further £77 million in HMRC to increase revenues raised from tackling tax avoidance and evasion. This investment is expected to secure additional revenues of £22 billion a year by the end of this Parliament. This investment will allow HMRC to go further in tackling avoidance and evasion, by:

• accelerating resolution of avoidance schemes
• expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million
• increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax and
• improving HMRC’s risk analysis technology, including increased use of third party data.

Swiss agreement

On 1 January 2013 the Government’s agreement with Switzerland to recover previously unpaid UK tax on money hidden in Switzerland comes into force. It is expected to yield £5 billion over the next six years. In addition to a one-off levy in respect of past tax evasion, the agreement provides for a withholding tax on future investment income and gains arising in Switzerland.

US agreement

The Government has also signed an agreement with the United States which will significantly increase the amount of information on potentially taxable income automatically exchanged between the two countries. This sets a new standard in tax transparency aimed at tackling evasion. The Government will look to conclude similar agreements with other jurisdictions.

PREVIOUSLY ANNOUNCED CHANGES

Child Benefit

A new tax charge is being introduced from 7 January 2013. It will apply to a taxpayer who has ‘adjusted net income’ in excess of £50,000, where either they or their partner is in receipt of Child Benefit. The effect of the charge is to claw back some or all of the Child Benefit paid. Where both partners have income in excess of £50,000 the charge will apply to the partner with the higher income.

Adjusted net income has the same meaning as for the withdrawal of the personal allowance for taxpayers with income above £100,000.

Where a taxpayer has adjusted net income of £60,000 or more then the charge has the effect of cancelling out the Child Benefit paid. A sliding scale charge operates where income is between £50,000 and £60,000.

The charge will apply to the Child Benefit paid from 7 January to the end of the tax year. However, the income taken into account will be the full income for 2012/13.

Statutory Residence Test (SRT)

There is currently no definition of ‘residence’ in UK tax law and yet the liability to income tax and capital gains tax (CGT) rests on knowing an individual’s UK residence status for a tax year.

The SRT is designed to provide a clearer outcome for the majority of people whose circumstances are straightforward. The proposed tests have been designed so that it is harder to become non-resident when leaving the UK after a period of residence than it is to become resident when an individual comes to the UK. Once an individual has become resident and built up connections with the UK, they should be required to scale back their ties to the UK significantly or spend far less time here or a combination of the two before they can relinquish residence.

Draft legislation was published in July 2012. This confirmed the start date as 6 April 2013. However residence status for years up to 2012/13 is determined using the present rules (subject to some transitional rules). Further changes are expected to some of the details but it is expected that the principles will remain unchanged.

The SRT is based on three tests and an individual may need to consider all the tests in some cases. However many may need to consider only one or two tests.

The first test is the ‘automatic overseas test’. This test will be satisfied (and therefore the individual will not be UK resident) if any one of the following conditions is satisfied:

• they were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 46 days in the current tax year
• they work full-time overseas for the tax year and they are present in the UK for fewer than 91 days in the tax year and no more than 21 days are spent working (defined as more than 3 hours) in the UK in the tax year
• they were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 16 days in the current tax year.

A day will count as being in the UK if the individual is physically present in the UK at midnight unless they satisfy specific rules for those in transit through the UK.

If an individual cannot satisfy any of these conditions, the next test is the ‘automatic residence test’. This test will be satisfied (and therefore the individual will be UK resident) if any one of the following conditions is satisfied:

• they are present in the UK for 183 days or more in a tax year, or
• they have only one home and that home is in the UK (or have two or more homes and all of these are in the UK) and that remains the case for a period of at least 91 days which falls wholly or partly in the relevant tax year, or
• they carry out full-time work in the UK that meets specified conditions.

The last test, the ‘sufficient ties test’ will only operate if the individual does not meet any of the conditions in the other two tests. The test will be satisfied if the individual has sufficient UK ties for that year. This will depend on two basic conditions:

• whether the individual was resident in the UK for any of the previous three tax years, and
• the number of days the individual spends in the UK in the relevant tax year.

The ‘sufficient ties test’ reflects the principle that the more days someone spends in the UK, the fewer connections they can have with the UK if they want to be non-resident. It also incorporates the principle that residence status should adhere more to those who are already resident than to those who are not currently resident.

Under the ‘sufficient ties test’ an individual will need to compare the number of days they spend in the UK against five clearly defined connection factors. Individuals who know how many days they spend in the UK and how many relevant connection factors they have will then be able to assess whether they are resident.

A cap on income tax relief

The Government announced in Budget 2012 the introduction of a limit on uncapped income tax reliefs from April 2013. Individuals will be able to claim reliefs worth up to £50,000 or 25% of their income, whichever is greater.

The Government has consulted on how an individual’s income will be defined and calculated for the purposes of the cap and when the cap will apply.

The cap will only apply to reliefs that are offset against general income and are not currently capped. Capital allowances and allowable expenses will not be affected by the cap but, to the extent that these computational reliefs create or augment a loss, that loss relief will be capped. So trading losses will be capped to the extent that they can be relieved against general income.

Reliefs that have their own limits will not be affected by the cap. Venture capital reliefs such as the Enterprise Investment Scheme are excluded but losses on shares purchased under the Enterprise Investment Scheme are currently unlimited and so will be included in the relief cap.

Gift Aid, Payroll giving and relief for gifts of land and shares to charity are also excluded.

2012 AUTUMN STATEMENT INTRODUCTION »