United Kingdom: Budget 2012 Announced with Important Changes for Individuals
George Osborne, the U.K.’s Chancellor of the Exchequer, presented the 2012 Budget speech on 22 March 2012. The Finance Bill 2012 is due to be published on 29 March 2012, and an update will follow at that time.
Below, we highlight some of the important measures that may impact employees – including those on international assignment – and their employers.
For a more complete analysis by the KPMG International member firm in the U.K. of the 2012 Budget speech, you may visit: http://www.kpmg.com/uk/chancellor-budget-2012.
Please note that the U.K. tax year ends on 5 April; therefore, “2012/13” refers to the year commencing 6 April 2012.
Income Tax Rates and Allowances
Income Tax Bands
For the 2012/13 tax year, the income tax bands are proposed as follows:
|Starting rate for savings *||10%||£0 – £2,710||£0 – £2,560|
|Basic rate||20%||£0 – £34,370||£0 – £35,000|
|Higher rate||40%||£34,371 – £150,000||£35,001 – £150,000|
|Additional rate||50%||Over £150,000||Over £150,000|
* There is a 10-percent starting rate of tax – but only for savings income. If an individual’s non-savings taxable income exceeds the starting-rate limit, then the 10-percent starting rate for savings will not be available for savings income. The rates applicable to dividends are 10 percent for dividend income up to the basic rate limit and 32.5 percent up to the additional rate above that. The rate applicable to dividend income above the additional tax rate limit is 42.5 percent.
Lower Top Rate in 2013, but Higher Stamp Duty Land Tax
As widely reported in the press, the Chancellor has decided to remove the 50-percent tax band with effect from 6 April 2013, which will make the top rate of tax in the U.K. 45 percent. In order to generate additional revenue to compensate for the reduction in income taxes paid, changes to Stamp Duty Land Tax have been introduced increasing the rates of tax on properties purchased worth more than £2 million and on properties bought through “non-natural persons.” Income Tax Allowances
For the 2012/13 tax year, the basic personal allowance for individuals under 65 will be increased by £630 to £8,105.
For 2012/13, as for 2011/12, the basic personal allowance will be withdrawn for individuals with ‘adjusted net income’ over £100,000 per annum, subject to tapering of the withdrawal. Their personal allowance will be reduced by £1 for every £2 in excess of £100,000, until the personal allowance is extinguished at an income level of £116,210.
Although the top rate of tax has been the subject of press speculation, this phase-out of the personal allowance still causes individuals with income in this range to have a marginal rate of tax of 60 percent.
‘Adjusted net income’ takes into account specific deductions including payments made gross to pension schemes and trading losses.
The Chancellor announced that the personal allowance will rise to £9,205 for 2013/14. It is expected that it will again be subject to tapering.
The Chancellor also announced the abolition of age-related personal allowances for taxpayers reaching the age of 65 on or after 6 April 2013. The age-related allowances already in force will be frozen until they are brought in line with the basic personal allowance, at which point they will be removed.
U.K. Social Security: National Insurance Contributions (NIC)
The NIC rates were previously announced and are as follows:
|Employee and Employer NIC Rates and Thresholds|
|Employee(Class 1 Primary)||Employer(Class 1 Secondary)|
|Earnings per week (£)|
|Below £107 (Lower Earnings Limit)||0%||Below £144 (Secondary Threshold)||0%|
|£102 to £146 (Primary Threshold)||0%||Above £144||13.8%|
|£146 to £817 (Upper Earnings Limit)||12%|
Details of rates and allowances can be found on HMRC’s Web site at:
Capital Gains Tax
For the 2012/13 tax year, the Capital Gains Tax rates and allowances are proposed as follows:
|Individuals, personal representatives and trustees for disabled people||£10,600||£10,600|
Rates of Capital Gains Tax
Capital Gains Tax is charged at 18 percent where the basic rate tax band has not been fully utilized against other income. Where the basic rate band has been fully utilized, Capital Gains Tax is charged at 28 percent. The rate of Capital Gains Tax for trustees and personal representatives is 28 percent. Gains which qualify for Entrepreneurs’ Relief are charged at 10 percent.
Capital Gains Tax is charged on all aggregated gains over the annual exemption.
Despite press speculation, the Chancellor has opted to retain the differential rates between income tax and Capital Gains Tax.
Taxpayers may continue to look for ways to convert income to capital in light of the preferential rates of tax.
Statutory Residence Test
Based on previous announcements, a statutory residence test is expected to be introduced from 6 April 2013. The Chancellor made no comment on this on Budget day, but proposals and draft legislation are expected within the next month.
The Chancellor however has confirmed that the concept of ordinary residence for tax purposes will be abolished from 6 April 2013.
Overseas Work-day Relief
Currently, individuals can be regarded as U.K. resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR). The distinction is important because, with one exception (i.e., of non-U.K.-domiciled employees of a non-U.K.-resident employer where there are no U.K. duties), ROR employees are taxable on their worldwide earnings whether remitted to the U.K. or not. RNOR employees are taxable on their earnings for U.K. duties whether the employee’s earnings are paid in the U.K. or not. Such employees, however, can elect for the “remittance basis,” and then their earnings for non-U.K. duties are only taxed in the United Kingdom if remitted to the United Kingdom. This situation, where an employee’s earnings for non-U.K. duties are not taxed in the U.K. because they are not remitted, is commonly known as “Overseas Work-day Relief.” It has been confirmed that Overseas Work-day Relief will continue and will be legislated even though the concept of ordinary residence will be abolished.
The remittance basis rules and the current calculation of Overseas Work-day Relief can be very complex and HMRC had previously introduced a Statement of Practice (SP) 1/09 which relaxed the strict “mixed-fund rules” and allowed RNOR employees to calculate their U.K. tax liability by apportioning the total income received in the tax year by looking at the number of U.K. work-days and number of non-U.K. work-days over the U.K. tax year.
SP 01/09 will be incorporated into law at the same time as the statutory residence test is introduced.
We expect further details to be published shortly.
Saving under Registered Pension Schemes
For the 2012/13 tax year, the registered pension schemes saving allowances are as follows:
The annual allowance sets a limit on the tax-relieved pension savings that an individual can make during a tax year. Full marginal rate tax relief will be available on pension savings up to the allowance, and any excess will be taxed at the individual’s marginal rate.
All contributions (employee and employer) to money-purchase pension arrangements count towards the annual allowance. For defined benefits arrangements, the annual accrual of benefit, valued using a factor of 16:1, counts towards the annual allowance.
Before the Budget announcements, there had been widespread press speculation that relief for pension savings would be restricted either to the basic rate for additional rate taxpayers or that the annual allowance of £50,000 would be reduced. The Chancellor confirmed on Budget day that he is not restricting the tax relief on pensions further at this time.
Merger of Income Tax and NIC
A review/consultation on the merging of income tax and NIC was announced by the Chancellor during his Budget 2011 speech. Subsequently, the government issued a “call for evidence” on 11 July 2011 and in November 2011 a “next steps” document, which summarized the results of the call for evidence, set out objectives and principles for reform, and provided an indicative time-table for further consultation and implementation.
The government wanted to identify proposals that would:
• reduce burdens on employers;
• remove distortions in the economy and improve transparency;
• deliver fairer outcomes;
• cut administrative costs for the government.
The initial discussions on the merger of tax and NIC looked at the high-level options only and stated that the final timetable for reform would be concluded by the time of this Budget. The Chancellor confirmed on Budget Day that a detailed consultation on this topic would be published next month.
Approved Employee Share Plans
Changes are to be made to the rules for HMRC-approved employee share plans following recommendations made in the report on tax-advantaged employee share plans issued by The Office of Tax Simplification (OTS) on 6 March 2012.
There are currently four HMRC-approved plans – the Save As You Earn (SAYE) plan, the Share Incentive Plan (SIP), the Company Share Option Plan (CSOP), and the Enterprise Management Incentive (EMI) scheme.
The government will consult shortly on how to take the OTS proposals forward, with a view to introducing legislation in Finance Bill 2013.
Some useful improvements to the Enterprise Management Incentive (EMI) plan (a tax-advantaged employee share option plan specifically designed for smaller trading companies with fewer than 250 employees and less than £30 million in assets) have been announced including an increase in the limit on the value of shares under option that can be held and an extension of Entrepreneurs’ (CGT) Relief for shares acquired on exercise of an EMI option. These changes will be subject to state aid approval.
No other specific changes to employee share plans have been announced at this stage, although we are expecting further developments in this area fairly shortly.
General Anti-Abuse Rule
Further to the review carried out by Graham Aaronson QC in 2011 into the feasibility of a U.K. general anti-abuse rule (GAAR), the government has confirmed that it is proceeding with the introduction of a General Anti-Abuse Rule. A consultation was announced for the summer of 2012 with the intention that this would be legislated in Finance Bill 2013. The GAAR will be extended from the original proposals to include Stamp Duty Land Tax.
Restriction of Tax Relief
To curtail what the government views as excessive use of tax reliefs, it will introduce a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of reliefs, a cap will be set of 25 percent of income (or £50,000, whichever is greater).
The government also confirmed that it will explore with philanthropists ways to ensure that this new limit of uncapped reliefs will not impact significantly those charities that depend on large donations.
New £50,000 Remittance Basis Charge
Currently, non-U.K.-domiciled individuals who have been resident in the U.K. for at least seven out of the previous nine tax years and wish to claim the remittance basis of taxation, have to pay a £30,000 Remittance Basis Charge (RBC) if their unremitted foreign income and foreign capital gains is £2,000 or more.
With effect from 6 April 2012, the RBC will be increased to £50,000 for non-domiciled individuals who have been U.K. resident for 12 or more years and who wish to retain access to the remittance basis. The current RBC of £30,000, will continue for non-domiciled individuals who have been resident in the U.K. for at least seven years but fewer than 12 years.
Inheritance Tax (IHT): Spouses and Civil Partners Domiciled Outside the U.K.
The Budget documentation announced a consultation by the government on an increase in the IHT-exempt amount that a U.K.-domiciled individual can transfer to his or her non-U.K. domiciled spouse or civil partner. The government is also proposing that individuals who are domiciled outside the U.K. and who have a U.K.-domiciled spouse or civil partner should be able to elect to be treated as domiciled in the U.K. for the purposes of IHT.
Legislation on this point is anticipated in Finance Bill 2013.
PAYE Late Payment and Filing Penalties
HMRC has announced it intends to issue a consultation document before the summer on new models for late payment and late filing penalties under Real Time Information (RTI), ahead of the main roll-out of RTI in October 2013. Legislation will be contained in Finance Bill 2013.
HMRC will also consult later this year on new legislation to enable it to withdraw a notice to file a Self-Assessment tax return in appropriate cases. Legislation will be in Finance Bill 2013. This change is required because currently there is no specific statutory measure which permits the notice to file to be withdrawn. Individuals must file a nil tax return and penalties are triggered for late filing if the tax return is not filed by the filing deadline.
For the Budget speech and related documentation, see the Treasury Web site at:
Also, see: http://www.hmrc.gov.uk/budget2012/index.htm