Key tax planning tips

With further tax increases on the horizon, there really is no time like the present to consider your tax position carefully and explore what planning can be effectively put in place to help mitigate or defer the upcoming increased income tax liabilities. There are a number of areas that you may like to consider prior to the end of the current fiscal year. Specific matters may be relevant to you or this may be an appropriate moment to review your affairs generally, especially following the announcements in the 2009 Pre-Budget Report.

Budget 2009 contained the following announcements:

50 per cent income tax rate for all income over £150,000 from 6 April 2010.

Top dividend rate to increase to 42.5 per cent.

Personal allowances to be withdrawn for individuals earning more than £100,000, on a phased basis so that there will be a £1 reduction in allowance for every £2 of income earned above this level. This means that there will be no personal allowances for incomes over £112,950.

Higher rate tax relief on pension contributions to be restricted from April 2011 for those with incomes over £150,000, and those with incomes over £180,000 will receive only basic rate relief on pension contributions. In addition, anti-forestalling provisions were introduced so that individuals front-loading pensions in advance of 6 April 2011 could not benefit from increased relief where the amounts contributed were significantly in excess of amounts currently being contributed. The provisions are very detailed and it will be important to review pension contributions carefully to ensure maximum relief is obtained on contributions made between now and April 2011.

Capital gains tax (CGT) set at a flat rate of
18 per cent.

As of this April, there will be a 32 per cent differential between income and capital gains rates, and it follows that investing for gains and seeking to defer income are likely to become ever more important planning strategies.

Capital gains deferral
Properly structured single premium offshore insurance wrappers provide income and capital gains deferral and can be held alongside other wrappers. On exit or sale income will be realised, so it is important to consider the exit strategy, which may involve residence planning (in which case a review of the applicable tax in the jurisdiction in which you anticipate being resident on exit of the policy is key). Insurance is an especially helpful wrapper through which to hold assets such as hedge funds and obtain the benefits of gross income roll-up.

Income tax relief
Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs) grant income tax relief and can be used alongside strategies such as insurance in income tax planning. However, a thorough investment analysis is important before taking such action.

Investment losses
Consider setting certain investment losses on holdings in some unquoted trading businesses against income to reduce the overall effective rate.

Spouse’s income tax allowance
If you are married (or in a civil registered partnership) and your spouse pays less tax than you, consider moving income-yielding savings and investments into their name and make full use of their personal allowances and basic rate tax bands, where applicable.

Use your Individual Savings Account (ISA) allowance
The income you receive from ISAs and any capital growth is tax-free. Therefore, make sure you fully utilise your allowance this year. If you are currently aged 50 or over you can invest up to £10,200 this tax year. If you are under 50 you can invest up to £7,200 this tax year and £10,200 in the next. Married couples should ensure they use both ISA allowances. Even if one spouse is a non-taxpayer, it still makes sense to use their ISA; with changes to the tax regime in future, they might become a taxpayer one day.

Make full use of your pension contributions 
Pensions offer considerable tax incentives, so making full use of your pension allowance is still one of the most tax-efficient ways to save. However, if you earn more than £150,000 you will see the tax relief on your pensions cut from April 2011, tapering from 40 to 20 per cent for those earning more than £180,000. This was announced during last April’s Budget and the restriction will now apply to those with ‘gross’ incomes of more than £150,000, where gross income includes employer pension contributions. This means that if you earn less than the original £150,000 level you could also be caught in the new rules. Earners below £130,000 will not be affected. If you are concerned about how these changes could affect you, please contact us.

Consider making gains
Not only are income and capital gains taxed at different rates but this tax year you can also make gains of up to £10,100 without paying any tax whatsoever. Any gains in excess of this limit are taxed at just 18 per cent, whereas income will be taxed by as much as 40 per cent this year and 50 per cent from 6 April 2010. So you should consider making gains in this tax year before any future tax rises.

More tax facts
Even if you have no earnings or you don’t pay tax, anyone under 75 can still invest £2,880 in a pension and HM Revenue & Customs will top-up their contribution to £3,600. Make full use of pension contributions for you and your spouse. Building up income in both names is one of the most tax-efficient ways of generating income in retirement. At age 65 the current personal allowance, the amount of taxable income you’re allowed to receive each year tax-free, rises to £9,490.

If you plan carefully, this means that married couples can receive income from pensions, savings and investments of almost £20,000 a year tax-free.

Contributions can be made on behalf of a child and also benefit from tax relief. Come retirement, the tax relief and investment returns can turn even a relatively small investment into a sizeable sum.