How am I affected by the tax changes by mhc53003

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									How am I affected by the tax changes?
Finance Act 2009
Customer Guide
February 2010
> Contents





Removal of Personal Income Tax Allowances                                 3

The change to tax relief on pension contributions                         4

Introduction of a 50% Income Tax                                          5

Timetable of changes                                                      6

Glossary of terms                                                         7




                                                                              Background
   The following is based on our understanding as at February 2010            The Government has introduced several
   of the Finance Act 2009 and of current taxation, legislation and           changes which are aimed at those with
   HM Revenue & Customs practice, all of which are subject to change          high income, whether employed or self
   without notice. Some of the areas covered in this brochure are still       employed. These include changes to tax
   under consultation by the government and also subject to political         relief on pensions, personal allowances
   changes which may result in this legislation changing.                     and the introduction of a 50% rate band
                                                                              of income tax.
   The impact of taxation (and any tax relief) depends on individual
   circumstances.                                                             We would like to ensure that you are
                                                                              aware of these changes and consider
   None of the information or case studies contained in this brochure
                                                                              how these changes might affect you.
   constitutes investment advice and you should obtain financial advice
   before making any investment decision.




2 :: How does the Finance Act 2009 affect me?
> Removal of Personal Income Tax Allowances




From 6 April 2010 changes are being
made to personal allowances for              Emma has income for 2010/11 of £108,000 her personal allowance for that year will
individuals with income over £100,000.       be reduced by:

                                             (£108,000 – £100,000) / 2 = £4,000
The personal allowance will be reduced
by £1 for every £2 of income between         Assuming that the personal income tax allowance for 2010/11 is £6,475 her available
£100,000 and £112,950.                       allowance will be reduced to £2,475 and her tax liability for that year will be:

This means that there will be an effective   Income                                         £108,000
tax charge of 60%, on earnings over          Personal Income Tax Allowance                    £2,475
£100,000, for those in that income
                                             Taxable Income                                 £105,525
bracket. This is made up of existing
income tax and the additional tax payable    Tax          £37,400 @ 20%                        £7,480
on the lost personal allowance.                           £68,125 @ 40%                       £27,250

To demonstrate this, the following is an                  Total tax liability               £34,730
example of how personal income tax
                                             The effect of planning is most apparent where an individual’s income falls between
allowances will be reduced. These
                                             £100,000 and £112,950 (assuming personal allowance remains at £6,475).
assume no deductions other than tax:
                                             The following shows the impact on Emma’s tax liability if she makes an AVC
                                             contribution of £5,000:

                                             Income                                         £ 108,000
                                             AVC contribution                                  £5,000
                                             Taxable Income                                 £ 103,000

                                             Her personal allowance for that year will be reduced by:

                                             (£103,000 – £100,000) / 2 = £1,500

                                             Assuming that the personal income tax allowance for 2010/11 is £6,475 her available
                                             allowance will be reduced to £4,975 and her tax liability for that year will be:

                                             Taxable Income                                 £103,000
                                             Personal Income Tax Allowance                    £4,975

                                             Taxable                                          £98,025

                                             Tax          £37,400 @ 20%                        £7,480
                                                          £60,625 @ 40%                       £24,250

                                                          Total tax liability              £ 31,730

                                             Emma has achieved a reduction in her tax liability of £3,000 – equivalent to 60% of
                                             her pension contribution.




                                                                                                 How am I affected by the tax changes? :: 3
> Introduction of a 50% Income Tax called ‘Additional Rate’ of Tax




                                             From 6 April 2010 a new 50% rate of income tax is being introduced on income
                                             over £150,000.

                                             Here’s an example of how the increase in income tax would be applied:


                                              Brian has an income for 2010/11 of £170,000. He will have no entitlement to
                                              personal allowance. His tax liability will therefore be:

                                              Taxable Income                                   £170,000

                                              Tax            £37,400 @20%                         £7,480

                                                             £112,600 @40%                      £45,040

                                                             £20,000 @50%                       £10,000

                                                             Total tax liability               £62,520



                                             The proposals mean that for people earning over £100,000 the effective rate of tax will
                                             increase. The table below shows the effective rate of tax at different salary levels. The
                                             effective rate includes the effect of the loss of personal allowance and the introduction
                                             of the new 'Additional Rate' of 50%, where applicable.



                                              Taxable income                       Total rate of taxation

                                              £0 – £37,399                         20%

                                              £37,400 – £99,999                    40%

                                              £100,000 – £112,950                  60%

                                              At £150,000                          45.18%


                                              At £170,000                          66.19%


                                              This effective rate of income tax calculation is complicated and you should speak to

                                              the financial adviser.





4 :: How am I affected by the tax changes?
> Changes to tax relief on pension contributions




Post April 2011 changes                       The 'anti-forestalling' rules will not affect you unless:
In the Government’s 2009 Budget they
                                              >   Your net income' is £130,000 or higher in the current or previous two tax years, and
announced their intention to bring in new
rules for pensions tax relief to apply from   >   You increase your normal ongoing regular pension savings, and
6 April 2011. Under these rules
individuals who receive income from all
                                              >   Your regular pension contributions exceed £20,000 each year or

sources, including pension contributions      >   The lower of £30,000 and the average contributions over the past three years if
paid by an employer, of more than                 contributions are less regular than quarterly, for example single payments
£150,000 will receive reduced tax relief
on pension contributions.                     Here are some examples of the impact:

Although the government has not                Total           Contributions paid for       Impact for 2010/11 tax year
announced a scale that this relief will be     income          each of the last 3 years
reduced, they have said that this will fall
to 20% for those with total income of
£180,000.                                      Over            £500 each month              Can continue the regular payments and
                                               £130,000        (£6000 each year) and        pay a further £19,000 as a single and/or
The government also announced in their                         a single payment of          regular (must not exceed the £25,000 that
December pre-budget report that from                           £25,000                      has been paid for 3 years – see bullet point
that date only those with total income of                                                   4 above) and still receive 40% tax relief
more than £130,000 will need to include
contributions paid by an employer to
                                               Over            £1,000 each month            Can continue the regular payments and
check if they have exceed the £150,000
                                               £130,000        (£12,000 each year)          pay a further £18,000 as single and/or
threshold.
                                                               and a single payment         regular (due to a cap of £30,000 – see
                                                               of £40,000                   bullet point 4 above) and still receive 40%
Pre April 2011 changes
                                                                                            tax relief
In the 2009 Budget the Government also
introduced new ‘anti-forestalling rules’
that applied from 22 April 2009. These         Over            £2,500 each quarter          Continue to pay regular payments and up
rules are intended to prevent people           £130,000        (£10,000 each year)          to a further £10,000 as single and/or
making substantial additional pension                                                       regular (due to a cap of £20,000 – see
contributions, taking advantage of the full                                                 bullet point 3 above) as regular or single
tax relief available, before the changes in                                                 contributions and still receive 40% tax relief
2011 come into force. These rules initially
covered those earning over £150,000 but        Over            £3000 per month              Continue to pay regular payments at this
were extended to cover anyone with an          £130,000                                     level and receive 40% tax relief. However
income above £130,000 from 9th                                                              tax relief would be restricted on any further
December 2009.                                                                              contributions (due to a cap of £20,000 – see
                                                                                            bullet point 3 above).




                                                                                                          How am I affected by the tax changes? :: 5
> Timetable of changes





 Now                                         From 6th April 2010                     From 6th April 2011


 Restrictions in tax relief on larger        Personal Income tax Allowance reduced   Restrictions in tax relief on all pension
 pension contributions for those with        for those earning over £100,000.        contributions for those with total gross
 total relevant income above £130,000                                                income above £150,000. Those with a
                                             Higher rate of income tax of 50%
                                                                                     relevant income over £130,000 will need
                                             (Additional Rate) for those earning
                                                                                     to add the value of any employers
                                             over £150,000.
                                                                                     contributions when assessing if they
                                                                                     breach the gross income limit.




6 :: How am I affected by the tax changes?
>	Glossary of terms



Relevant income                                                                            Gross income
From December 2009:                                                                        From 6 April 2011:
An individual’s total taxable income for the year                                          An individual’s total taxable income for
                                                                                           the year,
>    plus any pension contributions they make under net pay (and corresponding relief)

>    less any qualifying losses                                                            >	   plus any amount under payroll
                                                                                                giving, and
>    less their total relievable pension contributions up to a maximum of £20,000
                                                                                           >	   plus any pension contributions they
>    plus any salary sacrifice made to provide pension benefits to the individual during        make under net pay (and
     the year agreed since 9 December 2009, or for those with ‘relevant income’ of              corresponding basic rate relief),
     above £150,000, any salary sacrifice agreed since 22 April 2009
                                                                                           >	   minus any qualifying relief
>	   less the amount of any grossed up gift aid donations.                                      excluding any gifts of qualifying
                                                                                                investments to charities
From 6 April 2011:
An individual’s total taxable income for the year                                          >	   plus the total pension savings paid
                                                                                                by your employer on your behalf.
>	   plus any pension contributions they make under net pay (and corresponding
                                                                                           The definitions of ‘Relevant Income ‘and
     relief) plus any amount paid under payroll giving
                                                                                           ‘Gross Income’ are very technical – to
>	   less any qualifying reliefs, but excluding any gifts of qualifying investments        fully understand these please speak to
     to charities                                                                          your financial adviser.

>	   plus any salary sacrifice made to provide pension benefits to the individual.



     The definitions of ‘Relevant Income ‘and ‘Gross Income’ are
     very technical – to fully understand these please speak to
     your financial adviser.




                                                                                                    How am I affected by the tax changes? :: 7
                                                                     www.pru.co.uk
                                                                                                                                                                           GENM10867 02/2010




‘Prudential’ is a trading name of The Prudential Assurance Company Limited (which is also used by other companies within the Prudential Group). The Prudential Assurance
Company Limited is registered in England and Wales. Registered Office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454.

February 2010

								
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