INTRODUCTION
Fiscal tightening was expected in the Budget, driven by the current economic challenges and the long-term need to reduce public borrowing. The Chancellor has delivered on these expectations through the introduction of a number of measures which will significantly increase the tax burden for higher paid employees. While the changes targeted specifically at employers were limited, the National Insurance Contributions (NIC) increase announced in the November Pre Budget report, the increases in the top rate of tax to 50%, phase out of allowances and pension changes will all adversely impact higher earners and their employers.
These changes will provide additional incentive for the highest paid employees and their employers to investigate tax structuring of remuneration, in particular those companies employing expatriates.
Tax Rate Changes
Currently, the top rate of income tax in the UK is 40%, payable by those earning more than £43,875, with the income tax-free personal allowance available regardless of income level. For 2010/2011 a new 50% tax rate is to be introduced for those earning more than £150,000, and a phase-out of the personal allowances for those earning £100,000 or more.
The income tax-free personal allowances will be phased out where taxable income (less allowable pension contributions, trading losses and gift aid payments) exceeds £100,000. The allowance will be reduced by £1 for every £2 of income above the threshold, with complete phase out occurring when income reaches £112,950. The changes will introduce a 60% effective rate of tax for income between £100,000 and £112,950.
The tax rate increase and phase out of the personal allowance will have a significant impact on the cost of bringing expatriate employees to the UK on a tax equalised basis, as the top grossed-up income tax rate will rise from 67% to 100% (assuming UK National Insurance is not also payable).
Our view
The increase in higher rate tax places the UK amongst the highest of any major G20 country, which, combined with the relatively low levels of income at which the new rates are triggered, and the withdrawal of higher rate tax relief for pension contributions, is likely to make the UK a less attractive location for expatriate assignments. By comparison, the top tax rate in Germany of 45% (excluding solidarity surcharge and the Church Tax) only applies to earnings in excess of £430,000.
Tax relief for pension contributions to be restricted
Higher rate income tax relief is being restricted for contributions by or on behalf of individuals to UK registered pension schemes and qualifying overseas pension schemes. Higher rate relief will be tapered away for those with taxable incomes of between £150,000 and £180,000 from 6 April 2011 so that for those with incomes above £180,000 contributions will only benefit from basic rate tax relief. The exact mechanism for applying these rules has not yet been decided.
Provisions applying from 22 April 2009 will prevent the forestalling of the new rules. For the tax years 2009/10 and 2010/11 individuals with incomes of at least £150,000 in the year, or any of the preceding two tax years could be affected. Steps taken to reduce income below £150,000, for example by entering into salary sacrifice arrangements set up after 22 April 2009, will be negated by adding back the amount sacrificed.
There will be a special annual allowance of £20,000. This will be applied to any pension savings that exceed the individual's normal established pattern of contributions. Contributions in excess of this level will be taxed at 20% for 2009/10 will be collected via self-assessment. From 2010/11, when the 50% top income tax rate takes effect, indications are that this special allowance charge may increase to 30%. Enhanced protection does not prevent this charge arising.
The special annual allowance is eaten up first by any protected pension savings (i.e. normal ongoing regular pension savings) and any one-off amounts paid between 6 April 2009 and 22 April 2009.
Our view
This represents yet another nail in the coffin of pensions tax simplification. A mere three years after the introduction of the new regime, employers, individuals and the pensions industry have another set of complexities to grapple with. It is inevitable that the administrative costs of running a pension scheme are going to remain high for a further period of time before these new rules bed down.
Whilst the restriction of higher rate relief is billed as coming into effect on 6 April 2011, the forestalling rules have immediate effect, and we would urge caution to employees considering waiving bonuses into pensions as this could now trigger penal tax charges.
Another potential inequity relates to the way in which the forestalling rules look back to earnings arising since 2007/08.
Employer Provided Accommodation – Lease Premiums
The chancellor has closed the long standing technique of minimising the tax and national insurance payable on the provision of accommodation by an employer through the payment of a lease premium and a small rent, instead of a market rent, with effect from Budget Day.
The legislation is designed to ensure that where a lease premium is paid for a lease of 10 years or less, the lease premium will be treated for tax purposes as if it was payment of rent. The taxable amount in any tax year will be treated as the amount of the lease premium spread over the duration of the lease plus the amount of any rent paid by the person at whose cost the accommodation is provided less any amount made good by the employee.
Our view
This change was expected given that this has been an area of interest from HMRC for a number of years. The change will significantly increase the cost of accommodation for expatriate employers who have used this structure in the past. Many employers will now wish to focus on ensuring that their employees are eligible for relief under the qualifying travel and subsistence rules applying for temporary workers. The statement does not suggest that HMRC will abandon their challenge to certain existing short-term lease arrangements.
Relaxation of Remittances rules
The government has announced a number of relaxations and clarifications to the remittance rules which are to be retrospectively applied from 6 April 2008. Previously the key exemptions were limited to assets purchased out of 'relevant foreign income' (e.g. foreign investment income). The rules are to be relaxed so that these exemptions also apply to assets purchased out of offshore employment income and/or capital gains. This is helpful relaxation for expatriates who would previously have found it difficult to identify the source of the purchase funds.
A limited exemption is to be introduced to ease the administrative burden borne by low income migrant workers coming to the UK to work. Where applicable the exemption, will allow low income foreign workers to exclude from reporting, and hence taxation, a maximum of £10,000 of foreign earnings and £100 of foreign source interest. The rules require that this foreign income be subject to foreign tax. This provides a limited relief for low income migrant workers who may temporarily work in the UK.
Some minor changes have been made to the FA 2008 remittance rules to ease its impact on low-income individuals in receipt of foreign income and gains. The legislation makes it clear that certain non domiciled individuals with annual foreign income and gains of less than £2,000 do not have to apply the remittance basis. If they prefer, they may choose to be taxed on their worldwide income instead.
A further relaxation is to be introduced in respect of an exemption to the remittance basis rules generally used by 'trailing spouses'. This change improves the UK filing exemption given to 'trailing spouses who have unremitted foreign income and gains in excess of £2,000 but receive no UK taxable income. It was pointed out that the exemption would be lost where the spouse received any UK source income at all, even small amounts of interest credited to a joint current account with their partner. The Government now accepts that up to £100 of UK interest income taxed at source may be disregarded in applying this filing exemption.
Our View
The above relaxations follow months of representations by Deloitte has provided some helpful but limited reliefs when operating the very complex new remittance rules.
CARS
In terms of benefits in kind, the current regime will be changed and simplified from 6 April 2011 to remove differentials in the way in which various types of vehicle achieve their CO2 emissions figures. The proposed changes/simplifications include:
- the lower threshold CO2 emissions figure will be reduced by 5g/km to 125g/km;
- the £80,000 price cap will be abolished;
- the reductions in CO2 percentage, currently given for electric/petrol hybrid cars and cars propelled by bifuels, road fuel gas, bioethanol, and Euro IV standard diesel cars, will also be abolished.
To continue to provide an incentive to purchase the lowest emitting vehicles on the market, the Government intends to remove the current 10% band for cars emitting 120g CO2 per km or less in 2012 and instead, extend the current banding system so that benefits in kind start at 10 per cent and increase by 1 percentage point with every 5g CO2 per km increase in emissions. Details of specific rates and thresholds for 2012 will be announced in future Budgets.
Secondly, as an intended boost to the UK market in new cars combined with the environmental benefit of taking older cars off the roads, the Government announced the introduction of a temporary vehicle scrappage scheme providing discounts of £2,000 to consumers buying a new vehicle to replace a vehicle more than ten years old which they have owned for more than twelve months.
Our view
We welcome the proposal to simplify company car benefit in kind taxation and both initiatives as bringing benefits to the environment. The above proposals, combined with corporation tax changes effective from 1 April 2009, should encourage employees and employers to continually review their options and furthers the case for designing benefits packages that make low CO2 company vehicles available to all employees. This is proven to work well in conjunction with salary sacrifice arrangements.
A further boost to UK car manufacturers would be provided if employers could also benefit from the £2,000 discount on purchasing new vehicles to be provided as company cars to employees surrendering their old vehicles. If left to individuals alone, it remains to be seen whether or not the discount offered will be sufficient to change behaviours at a time when many are spending less and have reduced access to credit.
False Self Employment in the Construction Industry
The Government states it remains committed to addressing false self-employment in the construction industry and plans to consult with a view to future legislation to ensure that construction workers and those they work for are taxed appropriately.
The Government will work with the construction industry to ensure that any legislation is effectively targeted and the industry retains a flexible labour supply.
Our view
Recent tribunal cases lost by HMRC show the difficulty encountered in categorising blue collar workers as employees where they are not subject to control by the contractor. We await the detail in the Government's consultation paper.
Penalties for late filing of returns and late payment of tax
Finance Bill 2009 will introduce a more onerous regime in relation to the penalties for late filing of tax returns and late payment of tax. Of particular significance for employers is that HMRC have confirmed their intention (as indicated in the 2008 Pre-Budget report) to charge penalties where PAYE due to HMRC is paid late.
The penalty will depend on the number of late payments in any 12 month period. The first late payment (or default) will not trigger a charge but subsequent defaults will trigger a penalty of at least 2% rising to 5% of the tax unpaid. Additional penalties will be levied if the tax is still unpaid at 6 months (5% of the tax) and 12 months (a further 5%).
Our View
The increased penalties are an unwelcome additional burden for employers. Draft legislation has not been issued so there is still a concern that the legislation could capture not just cash-strapped employers who deliberately defer payment, but also employers who fail to pick up in sufficient time remuneration paid on their behalf by third parties such as on an overseas payroll. This may make it more attractive for employers to use Modified PAYE for tax equalised expatriate employees.
SAYE Plans
A number of procedural changes have been made in relation to the bonus rate payable to participants under an SAYE plan. One of the main changes is that where the bonus rate is amended, the minimum amount of time for the revised rate to take effect is reduced from 28 to 15 days. Most significantly is that where an SAYE invitation is extended to employees and the bonus rate is amended before the employee signs up to the plan, HMRC can specify that the 'old' rate will apply to any applications received within 30 days of the rate change (previously any applications made in these circumstances could be invalid as the invitation referred to a bonus rate that has since been withdrawn).
Our view
These changes are generally welcome as employers and employees will know, at the time of invitation, what bonus rate will actually be available to the employee. They also allow the bonus rates to be adjusted more swiftly to reflect market conditions.
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