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Income tax relief cap – the Government’s new proposals

John Housden, 24 Aug 2012


 

HMRC and the Treasury have published a joint consultation on capping income tax relief following the contentious 2012 Budget proposal.

One of the most controversial aspects of Mr Osborne’s March Budget was the proposal to cap income available for tax relief from 2013/14 at the greater of £50,000 and 25% of income. A wave of protests from charities appeared almost instantly and by the end of May the Chancellor had excluded gift aid and associated charitable reliefs from the cap. However, the Treasury stood by the principle of capping income tax relief. How this can be achieved has now been set out in a joint HMRC/Treasury consultation paper.

The paper lists ten income tax reliefs which will be within the cap, the main ones being trade loss relief against general income, early trade losses relief and qualifying loan interest. Income tax reliefs that are already capped are excluded, such as VCT and EIS new share purchase.

The income on which the 25% will be calculated is an adjusted version of the normal ‘total income’ figure (s23 ITA 2007). The adjustment is a reduction by the gross amount of any personally made pension contribution where relief is given either at source or through self assessment. Pension contributions made under the ‘net pay’ system are already excluded from the total income figure. If a taxpayer makes payroll gifts, the adjustment is an increase in the total income figure equal to the gross gift. Other charity reliefs do not affect the ‘total income’ number.

The cap will apply to the tax year of the claim and any other earlier or later tax year in which the relief claimed is allocated. Thus relief for a loss claimed in 2013/14 will still suffer a cap if part of it is carried back to the current tax year.

The limit on qualifying loan interest could create problems for self-employed farmers and unincorporated owners of large buy-to-let portfolios.

This article appeared in the August edition of Financial Timesaver – the monthly digital newsletter for the busy financial adviser.

 

 


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John Housden

Editorial Consultant

John Housden is a qualified actuary who has worked in the personal financial services industry for 40 years.

A former technical director for a life company and longstanding contributor to a wide variety of Taxbriefs publications.

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