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Finance Act 2014 summary: Income tax

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23rd Jul 2014
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In the first in a series of AccountingWEB articles summarising the key measures in Finance Act 2014, Andrew Goodall sets out the main income tax provisions in Part 1 of the Act.

Income tax rates and allowances

Section 1 fixes the main rates of income tax – 20%, 40% and 45% – for 2014/15.  The basic personal allowance for those born after 5 April 1948 is £10,000 and basic rate limit is £31,865.

The higher rate threshold – the sum of the personal allowance and the basic rate limit – is increased by 1%, and statutory indexation is over-ridden. Section 2 fixes the basic personal allowance and the basic rate limit for 2015/16, at £10,500 and £31,785 respectively.

The basic personal allowance for 2015/16 will be the same amount, therefore, as the current age-related allowance for those born between 6 April 1938 and 5 April 1948, so the age-related allowance will be unnecessary and will be abolished from 2015/16.

Section 3 changes the starting rate for savings from 2015/16. The rate will be reduced from 10% to 0% and the starting rate limit will be increased from £2,880 to £5,000.

Section 4 provides that from 2015/16 personal allowances, the starting rate limit and the basic rate limit will be increased – except where statutory indexation is over-ridden – by reference to the consumer prices index instead of the retail prices index.

Current income tax rates and allowances are set out on HMRC’s website.

Capital allowances

Section 10 introduces a temporary increase in the annual investment allowance (AIA) for expenditure on plant and machinery. FA 2013 increased the maximum AIA from £25,000 to £250,000 for the period 1 January 2013 to 31 December 2014, and the limit was set to revert to £25,000 from 1 January 2015.

Section 10 provides for a maximum AIA of £500,000 a year between 6 April 2014 for income tax (1 April 2014 for corporation tax) and 31 December 2015. Schedule 2 has complex transitional rules.

HMRC’s June 2014 update to the Capital allowances for plant and machinery toolkit identified changes to the maximum AIA during a chargeable period as a “new risk” to be considered in the preparation of a tax return.

Marriage and civil partnerships

Section 11 enacts a controversial new measure “recognising marriage and civil partnerships in the income tax system”. A new transferable tax allowance for married couples and civil partners, worth up to £210 in 2015/16, was announced at Autumn Statement 2013.

The measure was opposed by both Labour and the Liberal Democrats – who were able to abstain by virtue of a clause in coalition agreement – and was criticised by the Institute for Fiscal Studies, whose director Paul Johnson said the rules would create an “infinite” marginal rate of tax.

A “tax reduction“ will be available to a taxpayer whose spouse or civil partner has elected for a reduced personal allowance, so long as neither spouse or partner is liable at the higher rate or the additional rate and certain other conditions are met. The reduction will be equivalent to basic rate tax on (a) £1,050 for 2015/16 and (b) 10% of the personal allowance for subsequent years.

Medical treatment

Section 12 relates to employment income and provides an exemption, limited to £500, where an employer provides or meets the cost of “recommended medical treatment” as defined. The exemption is expected to take effect when a new Health and Work Service is launched later this year.

Relief for loan interest

Sections 13 and 14 widen the scope of income tax relief for interest paid on a loan to buy an interest in a close company or an employee-controlled company so that the reliefs remain compatible with EU law.

Remittance basis and dual contracts

Section 15 and Schedule 3 introduce new restrictions on the remittance basis of taxation of employment income. With effect from 6 April 2014 certain income from overseas employments is taxable on the arising basis where the conditions in new section 24A of Income Tax (Earnings and Pensions) Act 2003 are met.

HMRC published guidance on 18 July for foreign domiciled employees working both inside and outside the UK and claiming the remittance basis.

Agency workers

Section 16 amends the rules on tax treatment of agency workers to tackle the use of intermediaries to facilitate “false self-employment”.

Sections 17, 18 and 20 support the reforms by allowing for a PAYE debt to be recovered from a company director in specified circumstances; amending HMRC information powers and related penalties; and providing that a UK agency is responsible for operating PAYE where the worker is engaged by or through a non-UK company and works for a UK company. Section 21 makes corresponding changes to clarify who is required to operate PAYE in respect of workers on the UK continental shelf.

Section 19 changes the deadline for an employee to “make good” to his or her employer the amount the employer must pay to HMRC in respect of tax due on a “notional payment”, for example on the exercise of a share option, where tax cannot be deducted at source.

HMRC updated its Employment Status Manual guidance on agency workers in May, and published further detailed guidance on 1 July.

Cheap loans

Section 22 doubles the threshold for the benefit of a taxable cheap or interest-free loan to be treated as earnings. The threshold, which had been unchanged since 1994, is £10,000 for 2014/15.

Company cars

Section 23 repeals a measure that was designed to prevent an employee being taxed twice on the same benefit in kind. The government said a recent tribunal decision had indicated that the measure could be used to over-ride the benefits code, giving priority to an income tax charge on “money’s worth”.

Section 24 amends for 2016/17 the “appropriate percentages” to be used in the calculation of the taxable benefit arising when a car is made available by reason of employment and is available for private use.

Section 25 changes with effect from 2014/15 the rule allowing a deduction for a payment for private use in calculating the taxable benefit. Such a payment must now be made before the end of the tax year in which the car was made available for private use.

HMRC has updated its “appropriate percentage” ready reckoner for company cars.

Other measures

The measures summarised above are found in Chapters 1 and 2 of Part 1 of the Finance Act 2014.

Chapter 4 of Part 1 has detailed provisions on tax reliefs including those pension savings, employee share schemes, the seed enterprise investment scheme, venture capital trusts, investment in social enterprises and capital allowances for renovation of business premises. It also contains detailed provisions to tackle the “disguising of employment relationships” through limited liability partnerships.

Further articles in this series will cover those measures, as well as those relating to corporation tax and other taxes and the controversial measures to increase HMRC powers in relation to tax avoidance schemes.

Andrew Goodall is a freelance tax writer: see www.andrewgoodallcta.com

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