Description of the measure

Currently individuals can offset their entire income against income tax reliefs, and as a result pay no income tax at all. Budget 2012 announced from 6 April 2013 there will be limits to the amount of income tax relief individuals can claim.

This cap will apply only to reliefs which are currently unlimited. This cap will be set at 25 per cent of income (or £50,000, whichever is greater).

That means an individual with an income of £4 million will still be able to give £1 million to charity-or offset £1 million of income against their business losses – and still get full tax relief for that £1 million.

Of course individuals who want to give more than 25%, or £50,000, of their income to charity will still be able to do so from their taxed income.

A consultation document on the detail of the policy, including the implications for philanthropic giving, will be published in the summer. Draft legislation will be published for consultation later in the year.

Policy objective

Tax reliefs exist to support a range of policy objectives, promoting activities such as business investment and philanthropy. The Government remains committed to the principle that people investing in businesses and donating to charity should benefit from tax reliefs.

However, some individuals on very high incomes have used reliefs to pay little or no tax, sometimes year after year. This Government believes it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs.

Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to Government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.

As explained in more detail below, the cap will not impact on the tax reclaimed by charities under the Gift Aid scheme.

Consultation

The Government is aware that there are details to finalise about how the reliefs cap will work in practice, including how this will fit in to the Self-Assessment process. Details of how this policy will be implemented will be finalised over the next few months.

Whilst the Government has decided that unlimited income tax reliefs, including charitable reliefs, should be capped, it is committed to exploring with the philanthropy and charity sectors ways to ensure that this change does not significantly impact on charities which depend on large donations.

A consultation document will be published in the summer. Before that point, Treasury and HMRC will be making contact with representatives from the sector to gather evidence and views that will inform the development of that consultation.

Technical detail

Reliefs included and excluded

The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. There will also be a number of smaller reliefs which are currently uncapped that will be affected.

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.

Nor is the new business investment incentive for resident non-domiciled individuals affected, as this does not apply as a relief against total income but rather relieves income that would not otherwise be brought to the UK and so would not be taxable in the UK anyway.

How the cap will actually work

Income tax reliefs enable individuals to reduce the amount of income they pay tax on, and therefore the amount of tax they pay. Reliefs are usually in place to incentivise or support certain activities such as philanthropy and business investment. In most cases the reliefs work by subtracting the value of the relief from total income before tax is calculated, thereby “offsetting income”.

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. It will be set at 25% of income or £50,000, whichever is greater. In other words, for someone with income of below £200,000, £50,000 will be the larger figure. For someone with income above this, 25% of their income will be larger.

To ensure that there is a level playing field regardless of, e.g. how pension contributions are made, there will be a new definition of income for the purposes of calculating the reliefs individuals are able to claim. And as some reliefs (such as Gift Aid) reduce tax liability in a different way the self assessment return will calculate the amount of relief to make it equivalent to those reliefs that offset income.

The cap will not 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.

Other avenues of relief, such as carrying losses forwards or back against profits of the same trade are not affected.

For an example of how the cap will work, consider an individual who has a total income of £250,000 under the new definition, who 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 unaffected¹.

Enquiries

Further enquiries should be directed:

By email to: public.enquiries@hm-treasury.gov.uk

By post to:

The Correspondence & Enquiry Unit HM Treasury 1 Horse Guards Road London SW1A 2HQ

1However if the EIS shares are later disposed of at a loss, any loss relief claimed may potentially be subject to restriction if the total reliefs claimed in the same year exceed £50,000.

Source: HM Revenue & Customs and HM Treasurywww.hm-treasury.gov.ukCopyright Acknowledged.