50% tax rate and the remittance basis

This was the headline grabbing change in the 2009 Budget As from April 2010 there is a 50% income tax rate on anyone earning over £150,000. It was originally announced as a 45% tax rate in the 2008 Pre-Budget Report but the Chancellor increased it to 50% in the April 2009 Budget. He has also brought the tax increase forward as the 45% tax rate was not due to be implemented until 6 April 2011, whereas the 50% tax rate will apply from 6 April 2010. So as from 6 April 2010 we will end up with:

20% tax for income within the basic rate band

40% tax for income in the higher rate band but below the new super tax band (for example, £37,400 - £150,000) .

50% tax for income above £150,000. For high-income earners this would be coupled with the loss of personal allowances (worth an additional £6,475 for 2010/2011). Dividends From April 2010 there will be three tax rates for dividends:

Dividends within the basic rate band will be taxed at 10%.

Dividends within the higher rate band but below the new super tax band (eg £37,400 to £150,000) will be taxed at 32.5%.

Dividends above £150,000 will be taxed at a new income tax rate of 42.5%. Note that these tax rates apply to gross dividends, so you will be able to offset the 10% tax credit when calculating the actual income tax you have to pay. This means that the effective income tax rates on dividends will be 0%, 25% and 36.1% respectively. The 36.1% rate is calculated as follows: Net dividend £90
Grossed up to £100
Income tax at 42.5% £42.5
Less tax credit £10
Income tax payable £32.5

Effective income tax rate = £32.5/£90 = 36.1% How Will these New Tax Rates Affect Non-Doms? The above rules apply to non-doms in the same way as other UK residents. Therefore non-doms who have taxable income above £100,000 will see their personal allowance restricted/withdrawn and anyone earning over £150,000 will need to pay the new income tax rate of 50% or 36.1%. Non-doms with overseas unremitted income should take these new rules into account when deciding whether to claim the remittance basis or the arising basis. If for instance you will be subject to the 50% income tax rate because you have a high UK income and you have substantial overseas investment (non dividend) income you would have a choice of either:

Claiming the remittance basis and paying the £30,000 tax charge. You could then keep the income abroad to avoid UK tax. There would be no loss of the UK personal allowance as it would have been taken away anyway because you have income well above £100,000.

Opting for the arising basis and paying income tax at 50% on the overseas income. The fact that you would now be paying UK tax at a much higher rate and that filing a claim for the remittance basis would not cause you to lose your personal allowance would certainly affect your decision. We've already seen in other articles that for 2009/2010 if you are a higher rate taxpayer you should claim the remittance basis if your overseas unremitted income is above £81,475. This is because at this point the loss of the personal allowance and the saving of tax at 40% would cover the £30,000 remittance tax charge. However for 2010/2011 if you're paying tax at 50% there would be no loss of personal allowance to take into account. In this case if you had overseas unremitted income of £60,000 or more this may make claiming the remittance basis more attractive due to the higher rate of tax. (ie 50% * £60,000 = £30,000).