End of Tax Year Tips 2011-12

Guide to end of tax year 2010/11

Full colour pdf available for download at:
http://www.iangreen.com/downloads/ENDOFTAXYEAR_SPREADS.pdf

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.

FYE, Tips Pension – Earner OVER £130,000

FYE, Tips Pension – Earner OVER £130,000

Anti-Forestalling rules will restrict the level of tax relief for individuals with ‘relevant income’ of £130,000 or more (in this or one of the previous two tax years)

This blog post will show you how some people could actually pay up to 12x more than they thought (£255,000 instead of £20,000) into a pension and still obtain full tax relief

Two options are:
1.
Reducing relevant income by making
a) a pension payment of up to £20,000
b) a gift aid payment

2.
Closing the pension input period (see yesterday’s blog for a jargon buster on pension input periods) before tax year end – then making higher payments as soon as the new tax year begins

Case Study
Brian Jenkins earns £149,999. He could make a gross pension payment of £20,000, thus reducing his total relevant income to £129,999. At this level the anti-forestalling rules don’t apply so Brian can now make full use of the £255,000 annual allowance!

FYE Tips, Pension - 57% tax relief?

Almost 60% tax relief?

Anyone with a taxable income of MORE than £100,000 loses £1 of their income tax free personal allowance for every £2 earned.
This means any client whose income exceeds £112,950 effectively loses their entire personal allowance of £6,475 (2010/11)

However if you earn over £100,000 and are able to manipulate your income - for example you own and run your own business - you can legally receive almost 60% income tax relief on pension contributions

Example:
John Smith has taxable income of £115,000. He makes a net (before tax relief) contribution to his pension of £12,000 - this is the amount that leaves his bank account.

This is immediately grossed up with the addition of basic rate tax (20% 2010/11) to £15,000 - so John now has this in his pension.

This pension contribution has now reduced John's taxble income to £100,000 and reinstates his entire personal allowance, making a saving.

In addition, as usual, John will benefit from higher rate tax relief (40% 2010/11) on the pension payment. The total saving is £8,590 - equivalent to 57.26% tax relief on John's payment.

John might also want to read yesterday's blog (!) in case he can have his company make further payments up to a maximum of £255,000 - another opportunity that will disappear after this tax year ends.

I am grateful to the good and clever people at Standard Life Technical Support for pointing out this opportunity to me and my clients

FYE Tips, Pension - Earner UNDER £130,000

Financial Year End April 2011 Tips
- Pension -
3 Tips for those earning UNDER £130,000

1. Until this tax year end individuals with income below £130,000 can make pension payments equivalent to 100% of their income.
Their employer could also top up payments to a maximum of £255,000

So if you earn £100,000 (say) with tax relief you will only need to contribute £60,000 net. The remaining 40% (£40,000!) will be income tax relief
Your employer could contribute a further £150,000 (say) and have that amount as an allowable business expense.

What a deal!

2. Individuals over age 55 who are able to take pension benefits before 6 April 2011 are exempt from the annual allowance (see jargon buster below)

3. From 6 April the option to disregard the annual allowance (see jargon buster below) in the year benefits are taken will no longer be avilable

Remember, contribution payments are measured against the annual allowance are those made during the input period (see jargon buster below) ending in the tax year - not those made during the tax year overall.

Jargon Buster
Annual allowance
An annual allowance for pension savings applies each year, which is based on an input period (see below). This limits the amount of tax privileges available on pension savings each year.

Members are subject to a 40% tax charge on the amount of any contribution (both member, contributions on behalf of the member and employer) paid in excess of the annual allowance each year.

In Tax Year 2006/07 the Annual Allowance was £215,000

In 2010/11 as mentioned in the text above it is £255,000

The annual allowance applies in total to all pension benefits a member may have.


Input Period
Since 6th April 2006, members of a pension have been able to set a Pension Input Period to make contributions. A Pension Input Period is a period (usually, but not always, a year) in which a contribution can be made. The original idea was to make things easier for companies that had year ends that were different to the tax year end i.e. company year end of 31st December.


- PIPs are fiendishly complex but can be used to great effect for higher earners to make sizeable contributions - more in a later blog or contact us for more details or examples

E&OE - Please remember this is just a blog with a few tips - Please don't take this as personal or specific financial advice. Pension legislation is huge, varied, complex and subject to almost constant change. What is right for you will be wrong for someone else - what you should do will depend greatly on your specific circumstances - PLEASE take professional advice in this area before acting unless you are really confident you know what you are doing.