24

Sep

The 2009 Budget announcements could have a major impact on the pockets of some higher rate taxpayers and here we look at potential solutions to the issues raised.

Firstly, a pension contribution may provide a solution for someone with income of between £150,000 and £169,999 who wants to preserve their higher rate tax relief. This is because you can deduct up to £20,000 of individual tax relievable pension contributions to determine whether your income is at the £150,000 limit. Provided your income was below £150,000 in both of the two previous tax years this may prevent a 20% charge in 2009/2010 and/or a possible 30% charge in 2010/2011.

People with income between £150,000 and £169,999 can also benefit from up to 50% tax relief on a pension contribution in the 2010/2011 tax year. In addition those with income of £170,000 or more in 2010/2011 can benefit from up to 50% tax relief on a pension contribution of up to £20,000. This is because a £20,000 contribution does not exceed the special annual allowance.

A pension contribution may also provide a solution for a person with income between £100,000 and £112,950 or even £169,999 in 2010/2011 who wants to preserve their personal allowance. (£112,950 is based on the current personal allowance of £6,475; this may be higher in 2010/2011 if the personal allowance is increased.)

From 2010/2011 an individual’s personal allowance will be reduced by £1 for each £2 of their income over £100,000. A person can deduct relievable pension contributions from their income to reduce it below the £100,000 limit. This means that a pension contribution can preserve help preserve your personal allowance, and save up to 60% tax. 

Regular monthly and quarterly pension contributions set up before 22 April 2009 will normally be protected. Protected pension contributions can continue to benefit from 40% tax relief in 2009/2010 and 50% tax relief in 2010/2011. It might be an idea not to change them.

However, if someone wants higher rate tax relief on their non-protected pension contributions it’s vital for you to be certain of your total income. It’s likely to be safer if you confirm your income with your accountant or tax adviser, where possible, and it may be prudent to delay your pension contribution until just before the end of the tax year if you cannot be certain any earlier about your income. Alternatively, gift aid may provide a solution, because it can reduce current or previous year’s total income.

You may also want to consider non-income producing investments as a means of controlling your taxable income.

Onshore and Offshore investment bonds may become far more appealing to high earners. This is because income tax can be deferred, perhaps until a lower tax rate applies upon encashment in retirement. From a tax perspective Offshore bonds can also provide an added boost to your investment monies through the effects of gross roll up. While tax charges within an Onshore bond fund are often lower than the available 20% tax credit on encashment. In addition to this, investment bonds can be assigned without triggering a tax charge. The new owner may pay a lower rate of tax, or no tax at all, upon encashment of an Onshore or Offshore bond. As an investment bond does not produce income you can largely control the timing of the point at which you are taxed. This will mean no tax charge for you unless or until a chargeable event occurs. In the meantime, you can make withdrawals of up to 5% of the original investment over a 20 year period. These withdrawals are not deemed income payments and can therefore be taken without causing a tax charge.

ISAs provide a tax efficient method of saving and as with investment bonds do not produce taxable income. This means they can also be useful in helping to keep the investor’s total income below the new £100,000 and £150,000 income limits.

There are other investment options all of which have positive and negative factors attached to them in terms of tax relief, costs and exposure to risk. One of these is a qualifying maximum investment plan. These products do not produce taxable income. Tax charges within the policy are often lower than 20% and they provide the additional advantage of there being no tax charge on encashment, even in the hands of a higher rate taxpayer. This means the gain is not included in total income of the investor, provided qualifying rules are adhered to. Although, charges and the cost of providing life cover may be an issue and they also require a commitment to regular savings over a minimum time period.

(This article represents Stiles & Company Financial Services (Petersfield) Limited’ interpretation of the law and HMRC practice at this time. Tax assumptions are subject to statutory change and the value of any advantages depends upon your personal circumstances.)

Stiles & Company Financial Services (Petersfield) Limited is a firm of Independent Financial Advisers dedicated to providing a highly professional service to our clients, spread predominately across Hampshire, Sussex & Surrey.

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