You've still got time to minimise tax burden
Mar 6 2010 By Stephen Hall, The Journal
There are just a few weeks of the current tax year left representing a brief window of opportunity for tax reliefs to be used. If they have not already done so, individual taxpayers should be considering whether there is any potential to use the basic reliefs, says Stephen Hall.
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If you are entitled to any allowances or benefits, make sure you use them or you’ll lose them once the tax year ends.
It is also a good time to consider possible actions to mitigate the 50% tax rate which will apply from April 6.
Here are a few tips to start with:
Personal allowances
Maximise income tax rate bands – make a gift to a spouse to make use of his or her personal allowance (£6,475) and basic/lower rate band (£37,400) for 2009/10.
Capital gains tax (CGT) – make use of the annual exemption for 2009/10. If already used, you can consider delaying the disposal until 2010/11.
Inheritance tax – make use of the AE for 2009/10 of £3,000 each for husband and wife, plus any unused balance from 2008/09, and the small exemption of £250 in relation to individuals. Also, make use of this tax year’s £325,000 nil rate band.
Individual Savings Accounts (ISAs) – make use of the yearly ISA allowance.
Pensions
Consider making a pension contribution. However, great care should be taken, as higher rate relief may not be available.
Lifetime allowance – for the 2009/10 tax year, the limit on the value of retirement benefits that you can accumulate in a UK registered pension scheme before tax penalties apply is £1.75m.
From April 6, 2011, higher rate tax relief on pension contributions will be gradually phased out for individuals with gross incomes of at least £150,000, so that for those with gross incomes of more than £180,000 tax relief will be restricted to the basic rate.
Anti-forestalling measures were introduced from April 22, 2009 imposing a special annual allowance charge in 2009/10 and 2010/11 on certain contributions in excess of an individual’s normal ongoing savings pattern. From December 9, 2009 the level of relevant income was dropped to take effect from £130,000.
For those making contributions less frequently than quarterly, the special annual allowance may be up to a maximum of £30,000. For example, an individual who made a relevant single one-off contribution in 2006/7 of £75,000 will have a special annual allowance for 2009/10 and 2010/11 of £25,000 (ie £75,000/3).
Those who have income of less than £130,000 are not affected by the new rules and continue to get higher rate relief on pension contributions. People with income of between £100,000 and approximately £113,000 would find pension contributions particularly tax efficient.
The 50% tax rate
Coming into effect from April 6, 2010, there are some simple steps which may assist in mitigating the 50% tax rate to some extent, although as with all planning, the overall commercial picture must be considered as well as the tax issues.
Accelerating income to the 2009/10 tax year will mean that it is taxed at 40% rather than 50%, albeit with a cash flow disadvantage of having to pay tax one year earlier.
Closing a bank account in 2009/10 will mean that interest becomes payable in that year.
Exercising unapproved share options will trigger an income tax charge in 2009/10.
Deferring deductions to 2010/11 will have the same effect. However, this may present difficulties for those affected by the anti-forestalling provisions. For example, an individual with an income in 2010/11 between £100,000 and approximately £113,000 will have a marginal rate of 60% due to the tapered withdrawal of the personal allowance, so deductions of this nature are particularly beneficial.
Wrappers, such as investment bonds, are useful, as they allow 5% withdrawals made annually without triggering a charge to tax, and the bond can be cashed at a later date when the individual is no longer a 50% taxpayer.
