The Financial Year End, The Budget & A Tax Planning Ticklist

Financial folk speak of the end of the tax year and rush to finalise fiscal matters.

But what exactly is the tax year, what needs to be done and why?


Whether a layperson, interested observer, lapsed expert or those simply in need of a memory jog there follows a quick introduction to the tax year, a brief guide to the budget and a short tax planning ticklist.

THE FINANCIAL YEAR END

The UK tax year, or financial year, runs from 6th April until 5th April the following year. It is a twelve month period used for, amongst other things, measuring earnings and calculating income and the tax payable on them. Confusingly for the purposes of corporation tax and government financial statements the year starts April 1st (no fooling!) and finishes March 31. And those readers who run companies or know someone that does will know a company year can start and end whenever the owner wants and a company year can even be longer than 12 months! But that is for another blog post…

Back to the UK taxpayer fiscal year. Why April 6th? Surely running the tax year the same as the calendar year would make life easier? The sensible Swedes and the economical Germans do exactly that. But we Brits are not alone in our quirky dates. Across the pond Americans run from October to September and down under our Australian cousins have a tax year that starts in July and ends in June.

The April 5th year end for personal tax and benefits reflects the old ecclesiastical calendar, with New Year falling on March 25 (which was known as ‘Lady Day’), the difference being accounted for by the eleven days "missed out" when Great Britain converted from the Julian Calendar to the Gregorian Calendar in 1752. The British tax authorities and landlords were unwilling to lose 11 days of tax and rent revenue so under the ‘Times of Payment of Rents, Annuities, &c’ of the Calendar Act 1750, the 1752–3 tax year was extended by 11 days. From 1753 until 1799, the tax year in Great Britain began on April 5, which was the "old style" new year of March 25. A 12th skipped Julian leap day in 1800 changed its start to April 6. It was not changed when a 13th Julian leap day was skipped in 1900. So since 1800 the start of the personal tax year in the United Kingdom has been April 6th.


THE BUDGET

The next Budget will take place on Wednesday 21 March 2012. Readers who are up to speed with social media will be able to follow the official HM Treasury Twitter channel with the #Budget2012 hashtag.
Or me at @ianjamesgreen

Most of us recognise budget day as when the Chancellor appears on his doorstep with the famous red box. The Budget box or 'Gladstone box' was used to carry the Chancellors speech from Number 11 to the House for over 100 consecutive years. The wooden box was hand-crafted for Gladstone, lined in black satin and covered in scarlet leather. The word “budget” derives from the term “bougette” – a wallet in which either documents or money could be kept. And one more fascinating budget fact … Chancellors are allowed to refresh themselves with alcoholic drinks during their Budget speech - no other Member of Parliament can do this although we could be forgiven for thinking otherwise with some of the hullabaloo we witness!

The Budget is the single most important economic and financial statement made each year by the Chancellor of the Exchequer to Parliament and the nation. There is an act of parliament that requires the Government to produce a Budget Report for each financial year. There is a ‘Charter for Budget Responsibility’ which sets out what the Budget Report must cover.

The Office for Budget Responsibility (OBR) has to publish two economic and fiscal forecasts for each financial year, one of which is to be the official forecast on which the Chancellor sets out the Government’s fiscal policy in the Budget. The OBR’s duty is to examine and report on the sustainability of the public finances and it is required to do so objectively, transparently and impartially.

The Budget is actually the Chancellor’s response to the OBR’s forecasts.

Historically, the chancellor would often announce in the budget (end of March) a new measure, such as the removal of a benefit, or an increase in an allowance, and give a number of days to act, normally the start of the new tax year (first week of April). Buy now, while stocks last, in other words. Sadly, those days are gone with any new measures (that usually make us worse off!) implemented immediately. This is why the market for budget forecasters is now so big, as those of us that read the financial pages know too well. In the run up to the budget the press is full of ‘what might happen’

Rather than go over here what can be read elsewhere with a quick google, let’s look at just one personal financial matter, that has been mentioned as possibly going every single year I can remember since starting as a financial planner in 1995. Higher rate tax relief on pension contributions. Will this finally be the year it goes? Those against say it is the last thing that should happen. We need to be encouraging private pension provision, not the opposite. Those for say it is a fair tax, that only hits higher earners and will raise billions. Which camp are you in? Tune in to George on March 21 to find out…

What are my predictions? Clients of Green Financial will know that in all matters, whether financial, legal, political or investment I do NOT claim to own a functioning crystal ball! But climbing down off the fence, albeit briefly, I think a budget for growth is needed. I think there will be a few hard decisions for the chancellor and a few unpopular items, normally hidden away in the small print rather than announced in the House. But I also think the nation needs good news, so maybe a few pleasant surprises could be in store.


TAX PLANNING TICKLIST

In terms of personal financial planning, a few items to consider. Please remember, if you are in any doubt as to whether any of these tips apply to you or your family, either please ensure you know exactly what you are doing or preferably seek professional independent financial advice.

ISA – open and use your ISA allowance. You’ll pay no income tax or capital gains tax on any gains. You can choose cash or stocks and shares versions. This year’s allowance is £10,680 per person.

ISA – next year. The allowance rises to £11,280 on 6th April but you can apply now. For those that contribute monthly amounts you’ll need to change your direct debit amount from £890pm to £940 per month

Junior ISA – introduced in November 2011 the allowance is £3,600 per eligible child and the benefits are similar to adult ISAs

Capital gains – we all have a CGT allowance of £10,600 a year. Many of our clients sell shares to realise a gain and use the proceeds to fund the next year’s ISA.

Pension – Will this be the last hurrah for higher rate tax relief? (see above). Currently tax relief up to 50% is available. But pensions are a long term commitment with seemingly ever changing rules. Weigh up the pros and cons for your situation before committing too much.

Junior pension – parents and grandparents can contribute to a pension for a child, placing up to £3,600 away at a cost of only £2,880, a tax break of £800. But will the child thank you for a present they can only open when age 55?!

National Savings – the rates have dropped massively and the number of accounts on sale has also fallen. But there are still tax shelters available including the ever popular premium bonds

Inheritance Tax – There are a number of gifts one can make to reduce the liability including giving away up to £3,000 from capital.

Personal allowances – Ensure you make full use of these, especially if one of a couple is a lower rate tax payer than the other.

As at the start of this part of the article, PLEASE seek professional advice if in any doubt whatsoever over the suitability of these tips for your own situation.

There is a FREE download on end of year tax planning here:

http://www.iangreen.com/downloads/tax2012.pdf


and a FREE wealth & tax tips guide with FIFTY tips here:

http://www.iangreen.com/GFA-Tax&WealthTips2011.pdf


Both of the above are also available as photos to view at www.facebook.com/GreenFinancial

Budget endorses Green Investment

To be fair, I don’t think George was actually talking about me, but nice to be name-checked anyway!

On a more serious note, near the start, Mr Osborne announced this would be a fiscally neutral budget. Economically it may well be that but for financial planning it erred on the side of positive for me.

Nobody expected a give-away Budget, so we were not disappointed. The HM Treasury document totalling 101 pages provided a good summary of George Osborne's plans and the numbers behind it.

One of the headline grabbers was Income Tax and National Insurance to be merged (possibly, after lengthy consultation). Another was that the 50% tax rate is temporary. With apologies for having my cynicism to the fore but even if the 50% rate is scrapped, the next 40% band + 12% NI still equals a potential new rate of 52%!
As has already hit this morning’s front pages and cornerstone of the opposition response on the day was that the ‘Plan for Growth’ is anything but.
The newly appointed Office for Budget Responsibility (OBR) will in future provide “independent” forecasts on which the Budget will be set, rather than the figures being “fixed to suit the Budget”. Growth forecasts announced are:
2011 1.7%
2012 2.5%
2013 2.9%
2014 2.9%
2015 2.8%
Inflation (OBR figures) is expected to be in the range of 4% to 5% this year, 2.5% in 2012 and 2% in 2013. The target, based on CPI, remains and was reiterated at 2%. The debt figures remain mind bogglingly huge, at c. £146 billion this year, around £122 billion next year and falling to £29 billion in 2015/16. Oh yes, and our foreign currency reserves will be rebuilt, but not by buying gold!


The Chancellor stated four overarching ambitions for the British economy. These measures to aid the 'Plan for Growth' are:

• To create the most competitive tax system in the G20.
• Make the UK the best place in Europe to start, finance and grow a business.
• Encourage investment and exports as a route to a more balanced economy.
• Create a more educated workforce that is the most flexible in Europe.

In July last year, the Government set up the Office of Tax Simplification to provide independent advice on how to simplify the UK tax code – which recently overtook India’s to become the longest in the world. As a result of this review, the Budget abolished 43 tax reliefs.
He also said 100 pages would be removed from the tax book. My followers on Twitter will have noted I suggested this would simply be by printing it using a smaller font size, boom-boom.

HMRC and HM Treasury's "Overview of Tax Legislation and Rates" ran to some 240 pages and although in initial skim I have seen some tax reliefs abolished, in the main, there appears to be no major impact on core financial planning strategies (phew…!). But, as with any Budget, further analysis will be required once more detail is issued.

Some recent Government announcements were also referred to in the Budget, but not much more detail was provided. Of interest to me as a financial planner will be the forthcoming consultations on:

• Simplifying and merging the Income Tax and National Insurance Contribution regimes; not an easy task if Government revenues are to be protected.
• Moving towards a Universal Pension of £140 a week, which will include the abolition of contracting-out through defined benefit pension schemes.
• The abolition of Life Assurance Premium Relief (for those Green Financial clients with life insurance policies still running but started before 1984)
In line with the first stated key economic ambition, the Chancellor announced that he would reduce the rate of Corporation Tax by 2% from April this year with a further 1% reduction over the next three years, which will mean a corporate tax rate of 23% in four years time – lower than all of the current rates in the other G7 countries.

However, in recognition of the support received by the UK banking system over the last couple of the years, the bank levy will be increased to offset the reduction in the rate of Corporation Tax.

Moving onto the second ambition, George Osborne, as well as confirming an agreement with the banks to increase lending to smaller companies by 15%, announced changes for the provision of start-up capital, particularly to Enterprise Investment Schemes in which a number of my more risk and volatility accepting clients have previously invested (definitely NOT investment vehicles for the faint hearted or loss/risk averse!). From April this year, the income tax relief for investors will increase from 20% to 30%. From April 2012, the eligible investment amount will be doubled, the size of eligible companies will be increased and the limit on amount invested per company raised substantially.

The third stated ambition was for a more balanced economy and the Chancellor touched upon a number of changes to legislation to broaden out the contributions of different industries within the UK economy such as the one year extension of the current rate relief holiday for small businesses until October 2012 at a cost of £370 million to the Exchequer.

To assist first time buyers, the Chancellor announced that £250 million raised from the bank levy will be used to fund a new shared equity scheme, First Buy.

21 new Enterprise Zones are to be created, and the currently interesting Business Premises Renovation Allowance, due to end, has been extended.

As regular readers of my output will be aware, the State Pension Age is due to rise to 66 by 2020 but the Chancellor has announced plans to set up an automatic mechanism for future increases in the State Pension Age based on regular, independent reviews of longevity. In addition, following the completion of John Hutton’s report on pension benefits, the Pensions Minister, Pensions Secretary and the Chancellor will be working towards a new simplified single tier pension. It is anticipated that this will result, in future years for future pensioners, in a c. £140 per week state pension but that it won’t apply to existing pensioners.


I recently wrote to many longer term clients with a letter regarding elements of the ‘Retail Distribution Review’ (RDR)

In a separate announcement issued by HMRC to the "Financial Services sector" they identify and note again that the RDR will introduce a new regulatory framework into the retail financial services market.

HM Treasury and HMRC have been working closely with the FSA and industry bodies to understand the changes required to deliver the RDR and to provide clarity on areas of concern for advisers and providers around charging structures and the tax implications the new environment creates. HMRC are exploring their options and will be updating their technical guidance on:

• The HMRC VAT Guidance and Registered Pension Schemes Manual.
• Technical Advice on CGT
• Products written in trust.

Once further guidance is issued I will provide more detailed analysis on this and implications for clients if applicable.

Personal taxation and duties
Amongst changes (improvements in my opinion) to Gift Aid, a big announcement on Inheritance Tax (IHT). In future (where death occurs on or after 6th April 2012) if one donates (leaves, gifts) 10% of the net estate to charity, the Government will provide a 10% discount on IHT – no beneficiaries will be better off, he says. We think this should encourage charitable giving and has the effect of reducing the well-known 40% rate to only 36%, though expect more after consultation.

Tax evasion AND avoidance are to be targeted (surely that raises the question, “aren’t they anyway?”) and Capital Gains Tax schemes seem sure to be in the firing line. As ever, I will restate my oft used phrase that “no client of mine will ever be an HMRC test case”. It remains that I do not get involved in schemes that are untried or untested. All my financial planning is sensible, tried & tested and well within the established rules

Personal allowances will, as expected, rise by £1,000 on 6th April, to £7,475, rising again in April 2012 to £8,105 as the Coalition keeps its promise to take this up to £10,000 in this Parliament.
As regards excise duties, no changes on alcohol, tobacco up by 2% above inflation (from 6pm), vehicle excise duty by inflation except on commercial vehicles where it is frozen, and mileage allowances up to 45p per mile.

However, the BIG news was saved to last as regards personal finances for anyone with a car (OK, not those of you with electric cars!!)

The “Fair Fuel Stabiliser” is introduced, whereby the oil companies will be taxed (to the tune, the Chancellor calculates, of £2 billion), thereby paying for:
The immediate cancellation of the escalator
A deferment of the 2011 inflation-linked fuel duty rise (to April 2012 and the April 2012 one to 2013)
A cut of 1p per litre off fuel duty from 6pm on the evening of the budget
This will apply whilst, subject to clarification after consultation, the oil price is above $75 a barrel – at that point the oil company tax will be reduced and the escalator re-instated.

And to return to where I started this correspondence, a further £2 billion was added to the Green Investment Bank (no relation!) which will now have £3 billion for use in green projects from 2012, starting a year ahead of schedule.

So in summary, a neutral Budget as regards the nation’s finances, but certainly not for my clients where, on balance, I see positives and as usual, much more will come out in the coming days…

Ian's Budget 2011 Predictions (ahem!)

Sore Throats to be taxed

Everyone in UK to receive a free canary (source: typo in original civil service pre-budgie report)

Variable levy on Ogres and Giants living under gap spanning structures (so called Troll Tax)

£100m to fill potholes announced followed by £100m for unemployed to dig holes in road (apologies to G Hoffnung, R Barker et al)

1p Tax on each and every email sent (incredibly a real idea put forward by RMTBobCrow)

Free WiFi for the under 5s

New 10% VAT rate on existing 20% VAT rate reduced by 5% if pass means testing at till (what do you mean, you don’t understand?)

£1.50 Charge on everyone that listens to budget, legislation to take effect at end of this sentence

New Tariff payable by people who leave the tops off pens & tubes of toothpaste (this one will hit my wife hard, but gets my vote)

To reduce deficit: Higher taxes and lower pensions for ALL public sector staff (I say all, not MPs, let’s not get silly about this)

Stamp Duty on property purchase to be called House Tax (idea immediately scuppered by Sir Humphrey)

2021 Census to be replaced by info collection using Tesco Clubcard and Nectar (will give better data)

Exercise Excise to be exorcised

NHS to be rebranded SNH – cost estimated at £5billion, patient care will not be affected

Betting Odds: Most uttered word by chancellor, 7/1 Supercalifragilisticexpialidocious (MSWord spellchecker got that!)

7 Financial Year End Tips – Checklist 2011

The weekends are passing fast in the run up to the end of the tax year. Before we know it, it will be 23rd March when the budget will be announced so why not get a head start on the financial planning needed before the end of the tax year and check the list below.

1. National Savings
The interest rates may not be market leading but as National Savings and Investments is 100% backed and guaranteed by the UK Treasury it is arguably the safest place for your money. Disappointingly they currently have no tax free savings certificates on offer – But you can save up to £30,000 tax free into Premium Bonds with a chance every month to win £1 million or one of hundreds of thousands of other tax-free cash prizes. And you can get your original money back at any time.

2. Capital Gains Tax
Got Gains? - Have you incurred capital gains this year? Each individual, even children, have a Capital Gains Tax (CGT) allowance of up to £10,100. You could crystallise gains (for example from gains in the value of shares you hold) without paying a penny of tax.

3. Use your ISA allowance
You can shelter up to £10,200 this tax year. Funds saved in an ISA (cash or stocks & shares) means you pay no further income tax and no tax on any gains.
For more reasons why to use your ISA allowance see the article on:
http://greenfinancial.blogspot.com/2011/03/fye-tips-55-reasons-isa.html

4. Use your pension allowance
Depending on your situation you could contribute anywhere from up to £3,600 to £255,000 before April.
Everyone, even non-earners or non taxpayers can pay in up to £2,880. If you pay this amount the tax man automatically adds £720! Making a total of £3,600 invested.
So real cost to you is £2,880 for £3,600 in your pension
Parents and Grandparents can even do this for their children or grandchildren.
See previous blog posts for more end of tax year pension tips


5. Inheritance Tax
There are numerous ways to mitigate or reduce your liability but a simple end of year allowance that is often missed is the ability to give away £3,000 from your capital each year without any inheritance tax implications. This saves £1,200 per person in potential future inheritance tax liability.
Remember you can also give away smaller gifts of up to £250 per donee

6. Venture Capital Trusts
Often only for the brave of heart or very risk orientated Venture Capital Trusts (VCTs) offer adventurous investors the chance to invest in some of the smaller companies in the UK. In return for taking on more risk a generous tax rebate of up to 30% could be available. Definitely one for professional advice though, not generally a ‘DIY’ product.

7. Will Review (or finances in general)
Have your circumstances changed this year. Births, Deaths & Marriages and all sorts of other happenings can be the catalyst for reviewing and changing your Will, or even triggering a review of your finances in general. Financial Spring Clean anyone?

And finally, want to keep one step ahead?
Why not plan for next year’s ISA contribution now? The annual allowance will rise to £10,680, with half of that available to invest in cash if you wish.