From the 2010/11 tax year two major changes to the income tax regime announced in the 2009 Budget (see Aries article) will take effect. The first is the basic personal allowance will be gradually reduced for people with adjusted net incomes above £100,000, up to a maximum of their total personal allowance. The reduction is £1 for every £2 that the individual's income exceeds the income limit. The reduction applies regardless of an individual's age (i.e. it applies equally to people aged under 65, 65 to 74 and 75 and over). This change was enacted in s.4 FA 2009.

The second change is an additional tax rate of 50%, to apply to individuals with taxable income above £150,000 (s.6 FA 2009). Some consequential secondary legislation has been required, including The Special Annual Allowance Charge (Variation of Rate) Order 2010 (SI 2010/572) on which we reported earlier this month.

Another new SI based on the new 50% rate is The Taxation of Pensions Schemes (Rates, etc) Order 2010 (SI 2010/536), coming into force on 24 March 2010, which makes amendments to the rate of two tax charges applicable to pension schemes:

1. the charge on "relevant benefits" received under employer financed retirement benefits schemes (EFRBS), when the recipient of the benefit is not an individual, goes up from 40% to 50%.
2. the rules on taxation of short service refund lump sums in s.205 FA 2004 change. Instead of 20% on the first £10,800 of the refund and 40% on the rest, the rate will now be 20% on the first £20,000 and 50% on any excess.

The amendments will take effect for the tax year 2010/11 and subsequent tax years.

HMRC has also announced two changes to Pension Schemes Online which are scheduled to be implemented from 6 April 2010.

Described as improvements, these are:

An increase in the number of amendments to online returns

This will allow you in future to amend Accounting for Tax, Event Report and Pension Scheme Returns up to 998 times. The announcement goes on to warn frequent visitors that

"Once you reach the 900th amendment the following warning message will appear on screen when you make each subsequent amendment: 'You may only amend any return 998 times. You have now amended this return at least 900 times. If you are likely to reach this limit please contact Pension Schemes Helpline who will provide advice'. The helpline will be able to review with you why it has been necessary to make so many changes and what can be done going forward to reduce the number of amendments that need to be made to ensure that the limit is not breached."

2) Removal of tax rates from Accounting For Tax

As noted above, the introduction of a 50% tax rate affects the tax chargeable on short service refunds. The AFT for periods ending 30 June 2010 onwards will allow reporting of any tax deducted at the higher rate. HMRC notes that this is the first time that any tax rates on the AFT have changed since A-Day and adds ominously

"to make it easier in the future we are removing all tax rates from the AFT input screens and adding additional helptext to clarify the tax rate which applies to that field."

Still outstanding are long-promised amendments to the pensions tax regime to facilitate payment of benefits, in cases where an individual with both DB and DC rights is entitled to protected tax-free cash (ie a protected entitlement to a lump sum of greater than 25% of uncrystallised rights). FA 2004 requires that the entitlement to all the pensions in the scheme must arise on the same day. For those with DB and DC rights in a scheme, for example where they have AVC benefits, this is often not practically possible. It is intended that in these circumstances, an SI will allow a certain amount of time for all the pensions to come into payment. This has been with HMRC's solicitors for some considerable time. When the draft eventually emerges, we understand it will be retrospective to A-Day.