A tax rate of 50 per cent was detailed in the Budget 2009 plus increases in national insurance rates. Those earning more than £100,000 because of a loss of personal allowance will pay 60 per cent on a proportion of their income.
Don’t look away if your income is around £40,000. I’ll be amazed if high rate tax relief on pensions is still available at all in five years time.
Some pre-planning can avoid some or all of these taxes. Time is of the essence, action now could save thousands.
Tax saving ideas
1. If you are married (or civil partner) and your spouse pays less tax than you, move your savings and investments and therefore the income thereon, into your spouse’s name.
Always make as much use of both of your personal allowances. These are the amounts you can earn before you start to pay tax. These allowances are £6,475 for the under 65s and £9,490 for the over 65s (2009/10). For the wealthy you may wish to use your partner’s basic rate tax band rather than be taxed at your higher rates.
2. Apart from moving cash savings and investments to the spouse who pays the least tax, also consider pension contributions for them. This is one of the best ways to help maximise personal allowances in retirement and is covered in the pension section.
3. Shelter as much of your investment capital in ISAs by using your full allowance every year. For those over 50, the ISA allowance increases from 6th October 2009 to £10,200 of which £5,100 can be cash. Eligible investors under 50, ISA allowance remain at £7,200 of which £3,600 can be cash until April 2010 when the limits for all increase to £10,200. If married make sure that you both use your ISA allowances, even if one spouse is a non tax payer – they might become a tax payer one day and the difference can be considerable. It costs no more to hold an investment in an ISA. A high rate tax payer with £100,000 in an equity income unit trust portfolio generating a 4 per cent yield will suffer up to £900 a year more tax than the same portfolio sheltered in ISA. A higher rate tax payer with a £100,000 fixed interest unit trust portfolio generating a 5 per cent yield will suffer up to £2,000 a year more tax than the same portfolio sheltered in ISA. For those earning more than £150,000, when the 50 per cent band comes in, the difference is even greater. From April 2010 the extra tax on the equity income portfolio is £1,300 and for a fixed interest portfolio £2,500 a year.
4. Use your ISA allowance at the start of the tax year not the end. Sheltering £7,200 in a fixed interest unit trust in an ISA, in April will save up to £144 in tax in this tax year. This is based on a 5 per cent yield.
5. Consider using tax free National Savings and Investments products to shelter some of your cash from income tax. Premium Bonds and Index linked Certificates are probably the two most popular http://www.nsandi.com. Both offer tax free returns.
6. Consider taking profits from onshore investment bonds in this tax year:
- Use poor stock markets to your advantage. Benefit from poor stock markets, the profits on your investment bonds are likely to be suffering and therefore there should be less tax to pay upon encashment
- Tax on profits from investment bonds could increase from April 2010. The profits from an investment bond are taxed as income. If the profits take your total income above £100,000, they could cost you part of all of your personal allowance from April 2010
- Tax on profits from investments bond might increase further. If the profits take your income above £150,000, from April 2010 you could be taxed a further 30 per cent making a total of 50 per cent including their internal tax
8. Consider using Venture Capital Trusts (VCTs) where income tax rebates of up 30 per cent a year are available. The maximum contribution to new issues which qualifies for tax relief is £200,000 per annum. VCTs have to be held for 5 years for you to be able to keep your tax rebate. For more details on VCTs their potential tax benefits and risks please go to our website.
9. Consider Enterprise Investment Schemes (EIS) where income tax rebates of up to 20 per cent is available. The maximum contribution to new issues which will qualify for tax relief is £500,000 per annum. EIS have to be held for 3 years for you to keep your rebate. For more details on EIS their tax benefits and risks please go to our website. They also have inheritance tax advantages.
10. Business owners should consider taking dividends or making pension contributions in this tax year, rather than taking a bonus which attracts NIC and before tax rates go up.
11. Use pensions to protect your personal allowances (from April 2010). If you want to ensure that you retain your personal allowances, reduce your taxable income to £100,000 by making a pension contribution via salary sacrifice. For example, if your income is £106,000, on the income above £100,000, loss of personal allowance will result in you paying £3,600 income tax, effectively a 60 per cent tax rate. Part of this is the 40 per cent income tax (£2,400) and part is because you lose £3,000 of your personal allowances, meaning that you pay an extra £1,200 tax. To solve this 60 per cent tax rate problem, make a pension contribution of £6,000 gross. This effectively reduces your taxable income to £100,000 meaning that you keep your personal allowance.
12. Pension for non earners or non tax payers. Almost everyone aged under 75 can invest in a pension and pay 100 per cent of their earnings or £3,600 whichever is greater. Even if you have no earnings or pay no tax, still pay into pension. Tax relief means that a £3,600 contribution costs just £2,880. If still a non tax payer when you retire, the income from the pension is not taxed. Spouse’s pensions are an excellent way to help maximise personal allowances and lower rate tax bands in retirement.
13. If your income is less than £150,000 enjoy higher rate tax relief (while it lasts). For those whose income is less than £150,000 the higher rate tax relief which pension contributions attract are a must for savers. At this stage there is no suggestion that higher rate tax relief for this group of savers will go but the erosion of higher rate tax relief for those with income over £150,000 has set a dangerous precedent. If you can afford to, it makes sense to make the most of this tax break now.
14. If your income is over £150,000, enjoy what higher rate tax relief you can, while it lasts. You can still pay the greater of your normal regular contributions or £20,000 into a pension for only the next two tax years. Thereafter you will not get the same level of higher rate tax relief.
15. If you are employed, make use of salary sacrifice (or bonus sacrifice). In lieu of part or your salary or bonus ask your employer to make the equivalent pension contribution. This will save both tax and national insurance. In simple terms, rather than taking a bonus or a pay rise have this money paid into a pension. Some employers add in their national insurance saving boosting your pension contribution by up to a further 12.8%.
Danny Cox is a chartered financial planner at IFA Hargreaves Lansdown. The comments are his own and do not necessarily reflect those of his company.