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

End of Tax Year Tips 2011-12

Retirement + 2 children = 49%

New research among 45-65 year olds by Standard Life reveals having children living in your household can have a big impact on your retirement decisions.
Almost half of respondents (49 per cent) with two children in the household have no financial plans to provide for the future, compared to just over a third (35 per cent) without children. Children also impact decisions on when to stop working and retire. You are more likely to retire later if you have children in the household with 10 per cent of adults who aren’t retired not planning to retire until 71-75 compared to only 2 per cent who don’t have children living with them.

Price inflation

Taking a career break or deciding to work part time can have a significant impact on your pension fund at retirement. A female saving £150 a month, increasing annually in line with price inflation from age 20 to age 65, could have a pension fund of £559,000 *1.
Taking a 5-year career break from age 30 during which pension contributions stop reduces the pension fund to £480,000 - a decrease of over 14 per cent. If you work part-time and cut in half your contributions from age 30 onwards this could reduce the pension fund to £380,000 - a decrease of over 31per cent.

Loss of pension

John Lawson, Head of Pensions Policy at Standard Life said: “It isn’t surprising that those with children living in the household have even more financial constraints than those without. Apart from the actual cost of bringing children up there are so many other considerations these days - such as childcare costs, then for some there are school and university fees to consider. There is obviously only so much money to go round. But the loss of pension can be a forgotten cost for many when making decisions, in particular by going part time."
But there are things you can do, and it’s never too late. If we can save even a small amount for retirement it can make a difference. How and when we retire has changed, we no longer have to retire at age 65, we can work flexibly for much longer.

Other findings from the research of 45-65 year olds include:
- 34 per cent of those with two children in the household will make up for lost time and travel the world in retirement
- 63 per cent with two children in the household are looking forward to spending their time with their children and grandchildren in retirement
- 44 per cent of those questioned without children in their household and who haven’t yet retired intend to stop working completely.

If you have one child in the household, 42 per cent intend to stop work completely but if you have two children only 27 per cent intend to stop working completely

As part of the Changing Face of Retirement research, Standard Life has published a list of top tips to help people re-engage with their financial planning:

- Don’t panic!
- Seek professional financial advice - see also http://www.iangreen.com/
- Continually review your financial goals
- If you don’t have one, make a plan.
- Ask for a state pension forecast and calculate your state pension retirement age)
see also http://greenfinancial.blogspot.com/2012/01/state-pensions-and-missing-14462581.html

- Review your investments
- Consider deferring taking the state pension at your default retirement age - for every year you defer taking benefits you can increase the pension by 10.4 per cent *2

- If you have moved jobs, ensure you have kept your old employer up to date with address changes so you can claim any workplace pension when you retire

If you can, increase your savings If you’re a higher rate tax payer, ensure you claim the tax-relief. Standard Life estimates 300,000 people are not claiming this currently

The above article is available in the Green Financial January/February client magazine at http://www.iangreen.com/magazine.php or via www.facebook.com/GreenFinancial

Notes:
*1. The pension fund figures assume investment returns of 7 per cent p.a. before charges, an annual management charge of 1.7 per cent p.a. and price inflation of 2.57 per cent p.a. The first monthly contribution is made at exactly age 20 and the last contribution is one month before the 65th birthday. The pension fund of £559,000 adjusted for price inflation in today’s terms would be £184,000 at age 65. A five year career break would reduce the figure to £158,000 in today’s terms.
Reducing contributions by half from age 30 would reduce the figure to £124,000 in today’s terms.


2. Source: DirectGov.

Tax & Wealth Tips 2011/12

The latest edition of my Tax & Wealth Planning tips booklet is out.
50 tips, split into chapters, covering
- Personal & family
- Property
- Retirement
- Savings & investment
- Business
- Employment
- Overseas income
- Your estate
- General approach

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

After the budget 2011I had to wait until the Finance Act was given royal assent. This happened on July 19 2011. So now I have been able to produce this. I hope you find it useful and it saves you money.
The aim is that the tips act as a prompt, either to review, take action or contact me for further information.

Please remember the guide is just that, a guide. It should not be taken as advice to any specific person.

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.

FYE Tips - 5.5 Reasons - ISA

5 and a half reasons to use your ISA allowance before April 5th 2011

This is not intended to be a political statement. As with all my blog posts professionally I remain neutral. Of course I have a personal political point of view but that has no place here.

But have you, like me, noticed that the Government is getting better at taking our money off us?

With taxes rising and inflation eating into the purchasing power of our salaries and savings there has never been a better time to take advantage of one the easiest and arguably most generous tax break of all – investing in an ISA (Individual Savings Account)

Still not convinced? Here are 5 reasons to use your ISA before April 5th this year:

1. Avoid Higher Taxes
More and more of us are being caught in the higher taxation net. No matter what individual tax seems to go down, the overall tax burden is continuing to rise. The so-called ‘tax freedom day’ when we stop contributing to Govt coffers and start to keep our own money (see http://greenfinancial.blogspot.com/2010_12_01_archive.html) is getting later and later in the year – This year it is May 30th.

The Government’s stated desire to take increasing numbers out of the tax system altogether by raising the personal allowance (They are aiming for the first £10,000 everyone earns to be tax free) has come at a price. It is being paid for by those who would have been at the top end of the basic rate tax band but have now tipped into the ranks of the “higher paid” (even if bringing up a family on £40,000 or so doesn’t exactly feel like the high life!).

For those fortunate or hard working enough to earn over £100,000 the personal allowance is progressively taken away until at about £113,000 there is no personal allowance at all. So if you earn over £150,000 half of your earnings go straight to the government. All earners are about to pay another 1% a year on National Insurance (surely now just income tax by any another name!). I could go on

2. Save More Tax Free
The ISA tax break is actually getting better.
Having been increased to £10,200 last year, the annual allowance is due to rise by the rate of inflation in April to £10,680. That means that a couple can put aside more than £21,000 a year between them completely free of further income tax and with no capital gains tax to pay - ever. Mixing both cash based and shares based ISAs means that for most people the ISA allowance, coupled with the £50,000 a year that they can put in their pension each year, means they don’t need to worry so much about tax on any of their short, medium and long-term savings.

3. Use It or Lose It
If you choose not to take advantage of it by 5 April you can’t roll it over into the next tax year. Many people have built up really sizeable pots over time – At Green Financial with have many clients with six figure plus ISAs
We have many more clients with far more modest amounts gradually accruing via the discipline of regular monthly savings. But if you miss the opportunity there is no going back.

4. Flexibility
Sure, Pensions are great, they have their place in long term saving and the upfront benefit of tax relief on contributions is especially attractive to higher rate taxpayers (and even more so to those paying the top rate of 50% income tax). But there is a price to pay for the tax relief uplift and it is that your money is locked away until at least the age of 55 … and even then there are restrictions on what you can do with your money … and you pay tax on the income you earn from your pension pot. With an ISA there’s no upfront benefit but there is also no additional tax to pay ever again … and there’s no restriction on when and how much money you can take out of an ISA. For some this freedom is the difference between starting to save and not. ISAs are flexible in other ways too. You can shelter most forms of savings and investments in an ISA. With some limitations, you can mix and match cash and stocks and shares and funds (including property funds) within the ISA tax wrapper. If you don’t know where you want to put your money and are still deciding whether to go the ‘DIY’ route or to seek fee based professional independent financial advice then a ‘cash park’ type ISA could be a good stopping off point while you make up your mind.

5. Avoid CGT
Some people say that ISAs are not really all they are cracked up to be, especially for basic rate taxpayers. It is true that most people never exceed the £10,000 or so of CGT (capital gains tax) we are all allowed to incur each tax year before we are liable for tax. But you only need to accumulate a £100,000 pot for a 10% annual return to tip you into tax-paying territory. Steady saving and a tail-wind from the market could easily get you there but if you have not bothered with the ISA tax wrapper in years past you cannot rewind the clock later on. When CGT was just 18% that might not have seemed such a problem but at 28% it is much more of a consideration and who knows where it might go in future.

5.5 And finally … One of the best things about the use it or lose it ISA allowance is the way that around this time of year (often referred to as ‘ISA season’) it forces us to be disciplined about saving over time. The astute investor can, over time, benefit from the phenomenon known as ‘pound cost averaging’ – see http://greenfinancial.blogspot.com/2011/02/pound-cost-averaging.html)

Whether month by month or viewed as year by year, what this means is that we are obliged to invest in the market in all phases of the investment cycle and so we benefit from buying when markets are depressed and when, left to our own devices, we might shy away from committing ourselves.


So there we have it, five and a half reasons to use your ISA allowance before April 5th 2011.


The required small print: Please don’t take this article as personal or specific financial advice. It is intended to be guidance only. The value of any tax break will depend on your personal circumstances. Tax and the associated laws are subject to almost constant change. This is correct as at the time of writing. E&OE. If you are in any doubt as to whether this information is of benefit to you please seek independent financial advice, ideally fee based. Please remember if you invest in stocks and shares the value of your investment can go up as well as down. Other elements such as currency exchange fluctuations could affect the value of your investment. If you have property based investments you may not be able to sell when you wish to realise your funds. Past performance is no guarantee of future returns. If you invest in cash based investments inflation may erode the purchasing power of your savings.