Pension tax relief changes for high earners
There will be further restrictions on tax relief on pension contributions, starting when net taxable income (after deducting pension contributions) exceeds £110,000. The rules, as usual, are complex and involve calculating pension inputs – that is, the deemed pension contributions based on the increase in pension earned from one year to the next. When the net income plus deemed pension contributions exceeds £150,000, then the £40,000 annual allowance is reduced, £1 for every £2 of excess income until it is reduced to £10,000 at earnings of £210,000.
This will mean that more doctors will fall into the annual allowance charge net and will need to make the decision whether to pay the additional tax or to elect for the scheme to pay it. Expert pensions’ advice is needed to help make this decision.
There is one positive note for 2015-16: a change in the rules relating to pension input periods will mean that there is potentially £80,000 of allowance in 2015-16 rather than £40,000. Broadly the allowance is the amount paid pre-Budget day, up to a maximum of £80,000 of which a maximum of £40,000 can be carried forward against the post-Budget part of the tax year.
This will hopefully give more carry forward relief for some doctors – delaying the time when they breach the annual allowance.
Rented residential property
Interest relief on borrowing to purchase property which is rented out will no longer be given as a deduction from rent, currently effectively getting tax relief at one’s highest rate of tax.
In the long term the relief will be restricted to basic rate – and this will be brought in over 4 years – so that 2017-18 75% will still be deductible against rent, reducing to 50% for 2018-19, 25% for 2019-20 and to zero thereafter.
As an example: for a doctor paying 40% tax, who has a buy to let mortgage of £100,000 at 4% interest – current tax reduction on the £4,000 of interest would be £1,600, this would reduce to £1,400 in 2017-18, £1,200 in 2018-19, £1,000 in 2019-20 and £800 thereafter.
Up until now, dividends have come with a 10% tax credit and basic rate taxpayers pay no more tax, with higher rate taxpayers paying a further 25% of the net amount received.
From next year, dividends will no longer carry a tax credit and, after an allowance of £5,000, will be taxed at 7.5% for basic rate tax payers and 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.
This can make incorporation less worthwhile for locums – particularly where they also have salaried income which uses up the basic rate band, and restricts the national insurance benefit of incorporation.
The detailed legislation will not be enacted until the Finance Bill 2016 to come into effect from 6th April 2016.
Doctors who have distributable profits within their companies should consider whether they should pay the profits out as dividends in the current tax year – taking account of what that might do to other reliefs and allowances, including high income child benefit charge, and the effect on a mortgage application. It needs thinking about!
Doctors who are considering a limited company and wanting to take all the profits out again, need to look carefully at the figures before committing themselves.
Enforcement by deduction from accounts
This new legislation will enable HMRC to take money directly out of your bank or building society account, without any authority from you, if you owe tax and have the funds to pay it but choose not to.
There are several layers of safeguards built in so it should not come as a surprise if they take money, but this could give rise to all sorts of problems. The answer of course is to ensure you are able to pay your tax by the due date, or that you contact HMRC early if you are having problems, rather than adopting a ‘head in the sand’ approach. Don’t just assume it’s an error if you get an unexpected demand, make sure you look into it and sort it. It will be much easier to sort a demand error, than try to get your money back once they’ve taken it.
Payment of tax
One final point that has nothing to do with the Budget. HMRC have said that they are not sending paper demands for January tax; they will still charge you interest if you are late paying though – so please ensure you know what you are due to pay when, and make a diary note so you don’t miss it.
First published in The Sessional GP August 2015