Business people on modest incomes are under threat from the government’s proposed cap on income tax relief, tax specialists have warned.
The limit of the higher of 25 per cent of income or £50,000 – set to take effect from April next year – is aimed at high earners but will also hit those in businesses with modest earnings, leading to them being taxed on more than they actually receive, according to the Chartered Institute of Taxation (CIOT).
The professional body’s president, Patrick Stevens, said on 25 October that in its current form, the measure would have unintended consequences where a taxpayer’s business interests are separated for commercial or regulatory purposes.
“Currently, these are effectively aggregated, and the person is taxed on the net income from all activities. The cap will prevent this happening, taxing many in business on more than they earn,” said Stevens.
The CIOT has set out its concerns in a response to a government consultation on the proposals. Its key recommendation is that business profits and losses, including relief for interest on a loan, should be able to be offset against each other before considering if the cap on income tax relief applies.
“In its current form, the measure will be seen by many as anti-business. Restricting the ability to offset genuine business losses and interest relief could suppress UK entrepreneurship,” said Stevens.
The government has estimated that around 8,000 individuals each year will be affected by the proposed measure. It says those affected are likely to have high incomes, with over 90 per cent on an income of more than £150,000, resulting in an average loss of £20,000 per person.
A consultation on the proposals closed on 5 October.