Budget 2012: Limit to be set on uncapped income tax reliefs

21 March 2012

A limit on the amount of income tax relief that can be used each year will be introduced in 2013. However, it will not affect pensions, enterprise investment schemes and ISAs.

While the pensions industry breathed a huge sigh of relief that no changes to pensions – such as limiting higher-rate tax relief or reducing the annual allowance – were unveiled in today's Budget, Chancellor George Osborne said a limit on currently uncapped tax reliefs would apply from 6 April 2013.

He said: "It can't be right that some people make unlimited use of these reliefs year after year.

"Some reliefs – like the enterprise investment scheme and pensions relief are already capped – and I don't intend to make any significant changes to pensions relief in this Budget.

"But to make sure that those on the highest income contribute a fair share I am introducing a new cap on those reliefs that are currently uncapped."

From next year, anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25 per cent of their income, or £50,000, whichever is greater.

But it is unclear what tax reliefs the new cap will affect. Sanjay Jha at brokers Hybridan tells Money Observer: "If it doesn't affect pensions and enterprise investment schemes, what does it apply to? What's left? I don't understand. This announcement just raises questions."

Gary Heynes, head of private client at accountants Baker Tilly, adds: "It's a bit mysterious to us too. It will affect Gift Aid, and maybe loss relief too. This is where you offset a loss in your business against your earnings."

On charity donations, Toby Ryland, a senior tax partner at London Chartered Accountants Blick Rothenberg, warns that the move "would make it substantially less attractive for individuals to make substantial charitable donations' and the government will need to address this in order to protect charities.

However, in the Budget document it says the government will look at this area as it explores with philanthropists ways to ensure that the cap will not impact significantly on charities that depend on large donations.

When asked by Money Observer this afternoon, the Treasury could not give any examples as to what the income tax relief cap would apply to.

Despite the confusion, there was no containing the glee coming from the pensions industry when rumoured changes to pensions tax relief failed to materialise in the Budget.

Francesca Lagerberg, head of tax at business and financial adviser Grant Thornton UK, comments: "The chancellor decided against restricting higher-rate pension tax relief as once again the popular pre-Budget rumour becomes the dog that didn't bark. Had it gone ahead, it would have felt like a tax rise for those on higher earnings and reduced the effectiveness of a relief aimed at encouraging savings."

The editor's view

Andrew Pitts, editor of Money Observer, comments: "By far the most important announcement for well-heeled investors in George Osborne's third Budget was the bombshell on uncapped tax reliefs, to be introduced in 2013.

"Charities could also be hard hit, although Osborne claimed the Treasury was looking at ways to minimise the impact."

This article was written for our sister website Money Observer

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