Tax update
April 2010 Tax Update
Pension claw back for higher income earners
From 6 April 2011, people with annual income of £150,000 or over will see the higher rate tax relief on their pension contributions (including the value of any employer contributions) tapered. The taper will reduce the relief by 1% for every £1,000 of income over the level of £150,000 until the basic rate is reached. This means that where income reaches £180,000 and over, tax relief on pension contributions shall be restricted to 20%.
The claw back of this relief will be via a new high income excess relief charge payable through the self assessment system.
Anyone considering making large pension contributions prior to the introduction of the new rules will be caught by the anti-forestalling regulations already in place. These rules restrict tax relief on 'irregular' pension payments to 20% (the 'special charge') and care needs to be taken for anyone with income over £130,000. These rules are complex.
The impact of the relief claw-back can lead to eye watering effective tax rates.
For example, if an individual earning £165,000 makes a contribution of £40,000 into a pension plan, under the new rules their pension relief will be tapered to 35% (£14,000). If their earnings increase by just £10,000, the level of pension's relief is reduced to 25% (£10,000) so the claw back is an additional £4,000. On top of the additional claw back is the normal income tax and national insurance contributions they pay on the additional earnings of 52% (£5,200). So from a £10,000 salary increase an individual will receive just £800 in their pockets.
In a further blow, there will be no further increases to the lifetime allowance and annual contribution limits. These limits will now be frozen at £1.8 million and £255,000 respectively for a further five tax years.
VAT Input deductions
VAT registered traders can deduct the full cost of any input VAT they pay on supplies of goods, equipment or services unless one of two criteria applies:
1. The expenditure has a mix of business and private use, or
2. The business has taxable and exempt supplies.
And of course in certain circumstances both may apply.
Private Use
If expenditure has an element of private use there are two methods of restricting the claim for input VAT:
- The trader can reclaim a percentage of the input tax at the time of purchase i.e. to reflect the business use percentage that is anticipated (we will assume here that he has no exempt income where input tax could be further restricted), or
- The trader can adopt the Lennartz mechanism, which means he reclaims 100% of the input tax at the time of buying the asset, and then accounts for output tax on the private use element over the life of the asset. This method has obvious cash flow advantages especially when the input VAT is significant.
From January 2010 the Lennartz method cannot be applied to assets used in a non-economic business activity. For instance:
Consider a Homeless Charity that is VAT registered and has just bought new kitchen equipment costing £30,000 plus VAT. The equipment is partly used to provide meals to customers at commercial rates (to raise funds for the charity) and partly to provide free meals to homeless people. The latter activity is funded by donations and grants from various bodies. The Lennartz approach cannot be adopted (from 22 January 2010) because the free meals activity is classed as a non-economic business activity. Input tax apportionment is the only route to claim some input tax on the kitchen equipment (i.e. relevant to the taxable activity of selling meals to customers at commercial rates).
Partial Exemption
There are now two new tests to determine if your business is partly exempt for VAT purposes. In certain circumstances the new rules are more relaxed than the previous rules. If you are a partially exempt trader it may be worth revisiting the issue if you are at present only marginally affected.
Submitted by Mark Brooker on Friday 23rd April 2010