'Ask the Experts'
05 March 2010
At this time of year should I be taking any action to reduce my tax liability or utilise my allowances and exemptions? Brian
Dear Brian
There are a number of areas to consider by reviewing your affairs prior to the end of the tax year, including:
• Any individual, including children, can contribute £2,880 net (£3,600 gross) per annum into a personal pension policy.
• If you want to pay more than this, you can pay up to your earnings for that year.
• However, for those individuals earning £150,000 or more, in any of the past 3 years; specific financial advice should be sought in view of the rules introduced to limit higher rate tax relief on contributions of more than £20,000 gross per annum from 22 April 2009 by HMRC.
• If you are a higher rate tax payer in 2009-10, but won’t be in 2010-11, you will obtain additional tax relief by making the contribution prior to 5 April 2010.
• Higher rate tax payers obtain further tax relief on donations to charity:
• Charitable donations obtain basic rate tax relief at source for taxpayers. Higher rate tax payers will obtain additional tax relief of 20%.
• Consider the timing of your donation based on the rate of tax relief that will be obtained in 2009-10 or 2010-11.
• As if you are a higher rate tax payer in 2009-10, but won’t be in 2010-11, you will obtain
• However if you are a higher rate tax payer and will be paying the new 50% tax rate in
2010-11 as your income is above £150,000, you will obtain higher relief by delaying the donation until 2010-11.
• If you operate your business as a company, and the company has sufficient profits and reserves; have you considered the timing of dividends?
• To fully utilise your basic rate tax band, when considering all income for 2009-10. As dividends falling into the basic rate of tax do not give rise to a tax liability.
• If you will be paying the new 50% tax rate (42.5% on dividends) in 2010-11 for taxable income in excess of £150,000, you may wish to advance dividend income to 2009-10 so that tax is payable at a lower rate, although 1 year earlier.
• If your spouse, civil partner, other family member, works in your business and has an unused personal allowance (£6,475 in 2009-10), consider paying them a salary for the work they do on a justifiable commercial basis. There could however be National Insurance implications, where more than £476 /month is paid.
• If you are paying tax at either at 40% or will be at the new 50% tax rate for 2010-11; have you considered:
• Transferring income producing assets to your spouse or civil partner, if they are paying a lower rate of tax.
• For 50% taxpayers: closing bank accounts will trigger the early receipt of interest income, so it falls into 2009-10 rather than 2010-11, and is taxed at 40% rather than 50%.
• Gifts totalling £3,000 per annum are exempt from IHT. If the exemption from 2008-09 was not utilised, this too is available in 2009-10.
• You may be able to save CGT by first transferring assets to your spouse or civil partner, if they have an unused annual exemption or capital losses brought forward to utilise.
• Tax Credits are available to a significant number of families, with £545 of tax credits still received with household income of £50,000; this is tapered away so from around £58,000 of income, no tax credits will be received.
• Claims can only be backdated 3 months so it is advisable to submit one, even if your income is in excess of £58,000 and the current assessment will be nil; as if your income decreases the assessment will be revised and credits repaid for the whole period, rather than just backdated three months if the claim is only first submitted at the point the income decreases.
• The tax credit entitlement for 2010-11 is based on the income figures for 2009-10 and the entitlement for 2010-11 will only change if income for 2010-11 increases by more than £25,000.
• Individuals 16 years old or over can invest up to £3,600 (£5,100 for those aged 50 or over) in a cash ISA and up to £7,200 (£10,200 for those aged 50 or over) in a stocks and shares ISA in 2009-10. Investment income generated from an ISA is free of UK tax. From 2010-11 the limits will be increased to £5,100 for a cash ISA and £10,200 for a stocks and shares ISA for all individuals irrespective of age.
• Investing in new shares in small unquoted trading companies which qualify under the Enterprise Investment Scheme (EIS), obtain income tax relief at 20% of the amount invested up to a maximum investment of £500,000 provided you are unconnected to the company. You have to have a sufficient income tax liability for the year which can be reduced by the relief given. From 6 April 2009 it is possible to carry back the full amount subscribed to obtain relief in the previous tax year.
• For Venture Capital Trusts (VCT’s) you can also obtain income tax relief for subscribing for shares and this is at 30% up to a maximum of £200,000 invested.
• Gains are also generally exempt from CGT.
For more information on any of these points please feel free to contact Claire Avery Tax manager on 01635 265265 or email c.avery@griffins.co.uk.