Beyond the Budget

With the focus firmly on high earners, Budget 2009 happily brought little change for those specialising in the estate planning market. However, major changes to tax relief on pension contributions and increases in income tax rates will have an impact on high earners and the previously announced increases to National Insurance will impact on everyone. sets out, in full, the tax rates and allowances for 2009/10.

Income tax and National Insurance

Higher rate taxpayers will have already noticed an increase in National Insurance contributions from 6 April 2009 because of a significant rise to the upper earnings limit, tempering the increases in personal allowances and the basic rate band for the current tax year.

All taxpayers will suffer a 0.5% increase in National Insurance from April 2011, according to the Chancellor’s statement in November last year.

In addition, tax increases for higher earners have been brought forward with individuals earning above £150,000 now facing the prospect of 10% rate rises from 6 April 2010 instead of 5% increases from April 2011 as previously announced. These tax increases will also apply to trustees wherever income, which falls to be assessed at trust rates, exceeds the £1,000 standard rate band.

The Budget also confirmed that those earning above £100,000 will see their personal allowance reduced or removed entirely. From April 2010, if an individual’s total gross income is above £100,000, the amount of their allowance will be reduced by £1 for every £2 of income above £100,000. Those earning above around £112,950 will therefore receive no personal allowance at all.

This means there is a band of income where the marginal tax rate is 60%. For example someone earning £112,950 would pay tax of £37,700, while a £100,000 earner will pay tax of £29,930. shows how these figures were arrived at.

However it is not all bad news:

o It appears that it will be possible to deduct pension contributions to reduce income below the £100,000 income limit to preserve the personal allowance;

o Employees can reduce the impact of increased National Insurance charges by using salary sacrifice;

o Trustees may not be affected by the proposed income tax increases where, as in many cases, tax will fall to be charged on a lower taxpaying settlor or beneficiary.

Investment bonds may become of increased appeal to high earners and trustees, as income tax can be deferred, perhaps until a lower tax rate applies on encashment in retirement. In addition to this, bonds can be given away without triggering a tax charge, which can be particularly useful for making gifts into trust and for appointing benefits out of trust to beneficiaries, who may pay a lower rate of tax on encashment.

Pension contributions

Although, contrary to pre-Budget rumours, the Chancellor did not withdraw higher rate tax relief (HRT) on pension contributions for all, he did announce plans to remove HRT relief for those with incomes above £150,000 with effect from 6 April 2011.