The new income tax cap will apply only to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater).
Therefore for someone with less than £20,000 of income, the cap is the £50,000 and anyone above this will be restricted to the 25%.
The main reliefs that will be effected are:
loss reliefs that can be claimed against total income,
qualifying loan interest relief and
reliefs for charitable giving.
They also state that "...there will also be a number of smaller reliefs which are currently uncapped that will be affected..."
They confirm that the following will not be affected:
Structural credits that acknowledge double taxation such as foreign and dividend tax credits and notional tax on life insurance gains;
Reliefs that are already capped such as:
- pension tax relief,
- front-end Enterprise and Seed Enterprise Investment Scheme income tax relief,
- Venture Capital Trusts and
- the Cultural Gift Scheme;
Computational reliefs which determine only how income from a particular source is calculated.
The new business investment incentive for resident non-doms is also not effected.
What does this mean/
The new cap on reliefs will set a limit on how much of an individual's income can be offset using reliefs which are given against the individual's total income and which do not have internal caps.
Although the cap will not impact reliefs which are already limited, such as pensions and enterprise investment schemes, it will apply to currently 'open-ended' relief, such as qualifying loan interest, and charitable or gift donations of land and shares.
Also as currently outlined, it will cover loss relief against total income, meaning it could threaten the substantial deduction that the self-employed currently benefit from for trading losses against their other income.
However it won't affect traders carrying losses forwards or back against profits of the same trade.
The cap also won't impact on the tax reclaimed by charities under the Gift Aid scheme. However, the grossed up donation (that is the donation made by the donor plus the tax reclaimed by charities) will be taken into account when assessing whether an individual donor has reached the cap. If the cap has been reached the donor will receive no tax relief on the grossed up donation above the cap and, as now, the donor will need to have paid enough tax to cover the tax repaid to the charity.
Example
An individual has a total income of £250,000.
He claims qualifying loan interest relief of £40,000 and relief for a donation of shares, valued at £25,000, to charity, and has invested £50,000 under the Enterprise Investment Scheme (EIS).
As the total uncapped relief claim exceeds £50,000, a cap of 25% of income will apply. This means the total allowable uncapped relief will be £62,500. The investment of £50,000 under the EIS will be unaffected.
