Budget 2012 announced that as from 6th April 2013 there will be limits to the amount of income tax relief individuals can claim with the aim to prevent individuals offsetting their entire income against income tax reliefs.
Income tax reliefs enable individuals to reduce the amount of income they pay tax on and therefore the tax they pay. Reliefs are usually in place to incentivise or support certain activities such as philanthropy and business investment.
The cap will only apply to tax reliefs that are currently unlimited and will set a limit on how much of an individual’s income can be offset using such reliefs. This will be set at 25% of income or £50,000, whichever is the greater. For a person with income below £200,000 their limit will be £50,000 whereas for someone with income in excess of £200,000, their cap will be higher.
The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. A number of smaller reliefs which are currently unlimited will also be affected. Other reliefs such as carrying losses forwards or backwards against profits of the same trade remain untouched.
Whilst the Government remains committed to the principle that people investing in business and donating to charity should benefit from tax reliefs, it believes it is not right that some very high earners should be able to use reliefs to pay little or no tax, year after year.
The Government points towards other countries that already restrict tax reliefs, such as the U.S.A that caps the income tax relief available for charitable donations. It is, however, committed to exploring with the philanthropy and charity sectors ways to ensure that any changes do not significantly impact on charities which depend on large donations.
A consultation document on policy detail, including the implications for philanthropic giving, will be published in the summer. Draft legislation will be published for consultation later in the year.