Insights

Budget 2020: Income Taxes

  • Written By: Ami Jack
  • Published: Wed, 11 Mar 2020 17:35 GMT

Pension changes for high earners will apply from April 2020. The threshold at which the annual allowance of £40,000 begins to reduce will be raised by £90,000. This is designed to combat the pension problems faced by senior NHS workers, but will apply to all taxpayers at these levels of income. The minimum annual allowance has been cut by 60% to £4,000, but this will not affect those earning under £300,000.

Income Tax and National Insurance rates and thresholds

As previously announced, the main income tax bands and rates will not change from 6 April 2020. The primary threshold and lower profits limit for Class 1 and Class 4 national insurance contributions will both increase from £8,632 to £9,500.

The income tax personal allowance, basic and higher rate bands will remain unchanged from 6 April 2020 at £12,500, £37,500 and £150,000 respectively. Income tax rates also remain unchanged as does the 0% starting rate band for savings income, which is £5,000.

The primary threshold and lower profits limit for Class 1 primary and Class 4 national insurance contributions (NICs) will increase from £166 per week and £8,632 per year respectively to £183 per week and £9,500 per year.

The upper earnings limit and the upper profits limit remain unchanged, so NIC savings will apply to all individuals with earning in excess of £8,632 per year. This will result in reduced NIC liabilities of up to £106 per year for an employee and £78 per year for a self-employed individual. There is a smaller saving for employers as the Class 1 secondary threshold is increased from £166 per week to £169 a week, representing a reduced NIC liability of up to around £21 per employee per year.

Our comment

Although taxpayers will not experience a reduction in their income tax liabilities, this is in accordance with previous announcements so is not unexpected.

Taxpayers will benefit from the adjustments to the NIC bands which result in a real tax reduction for all taxpayers earning in excess of £8,632 per year.

When will it apply?

From 6 April 2020

Thresholds for pension tapered annual allowance calculation to be increased

Both the 'threshold income' and 'adjusted income' measures used to test whether or not an individual's annual pension contribution allowance will be tapered will increase by £90,000. The minimum amount an individual's tapered annual allowance can be reduced to will however decrease from £10,000 to £4,000.

The announced £90,000 increase to both thresholds will see the current ‘threshold income’ measure rise from £110,000 to £200,000. This means that individuals with income below this level will not be affected by the tapered annual allowance. The current ‘adjusted income’ threshold will increase from £150,000 to £240,000. The tapering of an individual’s pension annual allowance will only begin when both their threshold income and adjusted income exceed these amounts.

The Chancellor explained that this increase is the Government’s way of showing further commitment to doctors and the NHS, although it will apply to all taxpayers. The current tapered annual allowance thresholds have discouraged doctors from accepting more hours. This is because increased pay can result in their pension contributions being restricted and can leave them with unexpected annual allowance tax charges.

The minimum tapered annual allowance will also be decreased from £10,000 to £4,000

Our comment

The increases of £90,000 to both threshold income and adjusted income measures will be welcome news to many high income individuals, not only doctors. This increase provides more scope for pension contributions and planning opportunities for individuals who were previously caught by the lower thresholds.

Individuals with income of £312,000 or more will however see their tapered annual allowance limited to £4,000. The new rules mean that those earning more than £300,000 will see their annual allowance reduced.

When will it apply?

From 6 April 2020

Call for evidence on raising standards in the market for tax advice

The Chancellor has announced that, in the spring, he will issue a call for evidence on raising standards in the market for tax advice. The aim is to reassure taxpayers that they are receiving reliable advice, and several aspects will be considered.

There is little detail in the announcement, but the Government has said that it will seek evidence on "providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards”. This comes alongside measures to tackle tax avoidance, and increased funding for HMRC.

Publication of the call for evidence is expected in the spring, and the stated aim is to give taxpayers more assurance that the advice they are receiving is reliable. It remains to be seen whether or not this will lead to a more formal review, and, if so, which body will conduct it.

Our comment 

Though light on detail, the scope of this call seems wide, and we expect further detail to emerge when the call for evidence is published in the spring. Depending on the evidence received we would expect the next step, if any, to be a review or a consultation on new measures.

We expect that the professional bodies will take a leading role in any action that follows. Currently, as well as engaging with the Government on tax policy, these bodies collaborate on upholding standards in the profession, particularly through qualifications. The seven main bodies have also produced a code of professional conduct and ethics with extensive guidance, which is followed by their members and students, and enforced by the Taxation Disciplinary Board.

When will it apply? 

The call for evidence will be published in the spring.

Flat rate income tax deduction increased for employees working from home

The maximum flat rate income tax deduction for employees under home-working arrangements will increase from £4 to £6 per week from 6 April 2020. The deduction is not available to employees who voluntarily choose to work from home.

HMRC introduced a flat rate deduction for employees required to work from home as part of their contract of employment, who were not reimbursed for such expenses by their employer.

The flat rate deduction that could be claimed by the employee was originally set at £4 per week and this will increase to a weekly deduction of £6 from 6 April 2020.

Our comment

The alternative to claiming a flat rate deduction would be to submit a claim for the actual amount of additional costs reasonably incurred for working at home, typically electricity and gas. While this approach may result in a larger tax deduction, it involves keeping records of all expenditure and the extent to which work has been carried out at home.

This allowance should not be confused with the tax exemption for money reimbursed by an employer to an employee for working at home, either contractually or voluntarily. This is also currently set at £4 per week, but no announcements have yet been made to align this rate.

When will it apply?

From 6 April 2020

ISA, Junior ISA and child trust fund annual subscription limits

The ISA annual subscription limit will remain unchanged, at £20,000 per year. The Junior ISA and child trust fund annual subscription limits will both increase from £4,368 to £9,000 per year.

The amount that an individual can contribute to an ISA will remain unchanged from 6 April 2020, at £20,000 per year.

The annual subscription limits for both Junior ISAs and child trust funds are to be increased from £4,368 to £9,000 per year. These measures apply to the whole of the UK.

It has not been possible to open a child trust fund since 2011, however it is possible to add funds to an existing child trust fund or to transfer the fund to a Junior ISA. Any money held in a child trust fund or a Junior ISA cannot be accessed until the child turns 18.

Our comment

ISAs are an increasingly popular option for individuals to save in a tax efficient way. The annual allowance has been increased significantly over recent years, so while some taxpayers may have hoped for a further increase, the current allowance remains generous.

Parents will welcome the option to increase their contributions to Junior ISAs, which can allow the option to provide a significant financial asset to children when they reach adulthood.

When will it apply?

6 April 2020

Government to review pension tax relief options for low income individuals

Many individuals earning at or below the level of the personal allowance are making pension contributions through their employment without receiving any tax relief. There is a discrepancy however in that other such individuals may receive tax relief at source. The Government will review options to address this discrepancy.

Low earning employees are generally in one of two types of pension schemes, net pay arrangements or relief at source schemes.

Those in relief at source schemes will have basic rate tax relief added to their pension contributions at source by the provider. Those in net pay arrangements do not benefit from the same advantage as it is assumed by the provider that tax relief was given by HMRC when tax was paid on their salary. As the individual is not liable to tax on their salary however they will have received no relief at all.

The Government will review options to address this discrepancy by calling for evidence on pensions tax relief administration.

Our comment

This is welcome news to those low earning employees who are currently making pension contributions via net pay arrangements that cannot administer tax relief at source.

When will it apply?

Ongoing review

Taxation of collective defined contribution pensions

The Government will legislate to ensure that collective money pension schemes, to be introduced by the Pension Schemes Bill 2019-20, can operate as registered pension schemes for tax purposes.

The existing UK workplace pensions framework enables employers to offer either Defined Benefit (DB) or Defined Contribution (DC) schemes. There are downsides to both of these types of scheme: DC schemes may give a less predictable retirement income for scheme members and DB schemes can create significant risks to the employer.

The Government is introducing a third type of scheme: Collective Defined Contribution (CDC) pension schemes (referred to in the Bill as ‘Collective Money Purchase’ schemes). In CDC schemes, both the employer and employee would contribute to a collective fund from which retirement incomes are drawn. The funding risk would be borne collectively by the individuals whose investments make up the fund. Similar to a DC scheme, the employer carries no ongoing risk.

CDC schemes will offer a target income at retirement rather than a specified income like a DB scheme. If the scheme is under (or over) funded then the level of member benefits can be adjusted to ensure the assets of the collective fund are equal to the liabilities relating to the target incomes.

The Government will ensure that these new schemes can operate as registered pension schemes for tax purposes.

Our comment

Collective defined contribution (CDC) schemes might be an alternative for employers to offer their employees rather than taking on the risk associated with defined benefit schemes.

CDC schemes are already widely used in other countries.

When will it apply?

The change will have effect after Royal Assent of the Pension Schemes Bill 2019-20.

Increase in the pension lifetime allowance

The lifetime allowance for pensions will increase to £1,073,100 for the 2020/21 tax year. The increase is in line with inflation.

The lifetime allowance represents the limit on the amount of value that can be held in an individual’s pensions without a tax charge being incurred.

After a series of cuts from £1,800,000 to £1,000,000, the allowance has increased in line with inflation each year from 2018/19 onward. It will increase from the current figure of £1,055,000 to £1,073,100 for the 2020/21 tax year.

Our comment

This increase was expected, and it will be welcomed by those with pensions approaching the existing lifetime allowance who do not already have a form of lifetime allowance protection in place.

It should be noted however that the lifetime allowance will still remain well below its historic peak of £1,800,000 in 2011/12.

When will it apply?

From 6 April 2020

Clarification of the calculation of top-slicing relief on life insurance gains

Legislation will be introduced to confirm the application of allowances and reliefs in calculating top-slicing relief on life insurance policy gains.

A life insurance bond is a 'wrapper' within which investment income and gains are not subject to UK income tax or capital gains tax as they arise. Instead, broadly, the individual investor is subject to income tax on any gains realised when they withdraw their funds from the wrapper. This is known as an 'income gain'.

The income gain is taxable in the year of receipt, which means that a taxpayer’s taxable income can be significantly increased in that tax year. If taxable income exceeds £100,000, the tax-free personal allowance is restricted.

Top-slicing relief (TSR) is intended to mitigate the impact of large income gains that cause a taxpayer to be subject to higher or additional rate income tax when they would otherwise not have been.

Where income gains straddle two tax bands, the implications of TSR are uncontroversial, but where the income gain causes the taxpayer’s personal allowance to be restricted, there has been some difference of opinion as to whether or not the personal allowance should be taken into account when calculating TSR. This is because the relief is calculated to reduce the tax as though the gain were spread over the years the bond was held, and often the fraction of the income in any one year would not result in a restriction to the personal allowance on its own.

The Government has now confirmed that it will amend the TSR legislation to clarify that the personal allowance is taken into account in calculating TSR where the taxpayer would have received the allowance had they not realised an income gain.

The changes will apply to any income gains occurring on or after 11 March 2020.

Our comment

This is a technical amendment to a complicated relief, and follows a recent First-Tier Tribunal decision in which a taxpayer successfully argued that, as has now been confirmed in this measure, her personal allowance should be taken into account when calculating TSR.

While in practice the change is likely to benefit only a small number of taxpayers, it nevertheless brings clarity to an area that was previously open to considerable debate. The uncertainty arose due to the fact that the legislation in question pre-dates the legislation restricting personal allowances for those whose income exceeds £100,000. The additional clarity is welcome.

When will it apply?

From 11 March 2020

Automatically issued tax notices

The Government will introduce legislation to confirm that specific functions attributed to an officer may be carried out by HMRC using an automated computer process or other means.

The measure will bring the legislation in line with HMRC’s current understanding and practice.

HMRC currently relies on automated processes for particular routine tasks such as issuing notices to file a return and penalty notices. These would be resource intensive if done manually.

A number of recent cases have seen judges consider whether or not penalty determinations made by a computer, rather than an HMRC officer, are valid. In a number of these cases the judge found in favour of the taxpayer.

A written Ministerial statement on 31 October 2019 announced that the Government would legislate to confirm HMRC’s longstanding view that the "use of large-scale automated processes to give certain statutory notices, and to carry out certain functions is, and always has been, fully authorised by tax administration law".

The proposed new legislation will provide that specific functions, including issuing notices to file a return and raise penalty determinations, may be done by HMRC through the use of a computer or other means rather than an individual officer.

Our comment

This proposal does give both HMRC and taxpayers a measure of assurance over the validity of notices raised via a computer rather than an individual officer. Taxpayers and their advisors should still bear in mind however that there are a number of other procedural points that HMRC may need to satisfy for specific types of notices, such as determinations, to be considered valid.

The legislation will also have retrospective effect, in that it will apply to notices already issued by HMRC. The previous Ministerial statement however suggested that any taxpayers who received a settled judgement from a court or tribunal regarding the use of automation by HMRC before the date of the 31 October 2019 announcement will not be subject to the retrospective application of this legislation in respect of the issues covered by that judgment.

When will it apply?

Prospectively and retrospectively

Other income tax measures due to come in

Inflationary increases to the married couple's allowance and blind person's allowance will apply from 6 April 2020.

The income limit for married couple's allowance will increase by 2% to £30,200. It generally increases each year with inflation.

Blind person's allowance will increase by the same percentage to £2,500.

When will it apply?

All allowance changes will apply from 6 April 2020.

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DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

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