End of Year Tax Planning 2009-10
A few weeks before the end of the fiscal year is an ideal time to review your financial affairs to ensure that they are as tax efficient as possible.
This is particularly important as the new year (2010/11) will see introduced, already announced tax increases and possibly a change in Government, which could bring in yet more changes.
The following are points for your consideration:
Tax Increases and Restricted Allowances
As you are probably aware, the top rate of tax will rise to 50% from 6th April 2010 for income in excess of £150,000.
The higher rate will only apply to income over the £150,000, leaving most people with a higher tax rate of 40%.
The tax free allowances are unusually frozen at £6,475 for 2010/11 therefore no increase will be applied. Furthermore, for those with income over £100,000 the personal allowance will taper away and an individual with an income above £112,950 will receive no personal allowance at all. Due to the interaction of the thresholds and tax rates, the marginal rate of tax will be as high as 60% for those affected. Therefore, it is important to consider how you currently receive income and whether there are any better methods that would work for you.
You may also want to consider accelerating income into this current tax year before the higher rate of tax rises occur. We can discuss this further if that would be of help to you.
Married Couples and Civil Partners
Married couples and civil partners have a few additional planning opportunities. Where possible, you should ensure that you both utilise your personal allowances and tax bands. For example, you may be able to transfer income-producing assets, such as a bank account, to your spouse of civil partner to take advantage of their lower tax rate. With the advent of the 50% tax charge and the restricted personal allowances it is worth reviewing the balance of your joint income to see if any tax savings are possible.
Where you have made capital disposals in the current tax year you should also try to ensure that both of your capital gains annual exemptions are used effectively (£10,100 each 2009/10). If you intend to make capital disposals in the near future, it is worth considering whether to spread these over two years to make sure your capital gains tax annual exemption is fully used up against any gains.
The current rate of capital gains tax is 18% (or even 10% if specific reliefs are available). There has been much press speculation that the rate of capital gains tax may increase to lessen the gap between it and the top rate of income tax.
However, there are currently no firm plans being proposed for this to happen. If you are likely to make a significant capital gain in the near future, please let us know so that we can provide further details on various options that could help reduce your tax bill.
Gift Aid Donations
Gift Aid donations should be made by the spouse or civil partner who is the highest rate tax payer as they are able to obtain higher rate tax relief for the payments. Basic rate tax payers just receive basic rate relief.
Individual Savings Accounts (ISA’s)
Individual savings accounts have been around for many years now and where they form part of your wider investment strategy you should consider if your annual allowance is being fully utilised. The amount that most can invest for the current tax year is £7,200. This is set to rise to £10,200 from the 6th
April 2010. However, for those born before the 5th April 1960 the allowance is already £10,200.
Pension Contributions
It is possible to make contributions to a personal pension and contribute up to £3,600 per year (gross), without any evidence of earnings. This could therefore be useful for a non-working spouse, children or for someone with only unearned income.
There are also important pension contribution changes coming in from April 2011, which will restrict higher rate relief for some, but are also already taking some effect. Now is an ideal time to review your overall pension strategy.
Tax-Favoured Investments
Investments in venture capital trusts (VCTs) or the enterprise investment scheme (EIS) can be useful tax planning tools where they are appropriate for your investment strategy. Where qualifying investments are made, you can obtain generous tax relief.
However, these are high-risk investments and, as with any form of investment, financial planning advice should be sought from a qualified individual before making any decisions.
Inheritance Tax
The inheritance tax (IHT) annual exemption is £3,000 and can be carried forward for one year. Therefore, If you have not made any gifts in the past two tax years you will have an exempt amount of £6,000. The annual exemption can only be carried forward for one year and if not used in that year is lost and cannot be rolled forward again.
In addition, there are some other useful IHT exemptions to remember, such as small gifts exemption of £250 to each individual and gifts out of surplus income, which, if they qualify as such, are free from IHT. Where outright gifts are made and the donor survives seven years, the gift would not be subject to IHT in any event.
Where appropriate, it may be necessary to take advice from a qualified financial advised before making any investment decisions.
We can introduce you to our sister company if you need independent advice.
Any action you do take needs, as always, to take into account the wider effects of the planning as well as any tax advantages gained.