Preserving personal allowances by making a pension contribution
When ‘adjusted net income’ exceeds £100,000 the personal allowance of £7,475 for tax year 2011/12 is reduced by £1 for every £2 over this limit meaning that earned income between £100,000 – £114,950 is effectively taxed at 60%!
For those who reach the age of 65 or 75 during the tax year they are entitled to an additional age-related personal allowance of £9,940 or £10,090, respectively. These will increase to £10,500 and £10,660 respectively in 2012/2013 and are also reduced on the same 2:1 basis if income exceeds £24,000 until the additional allowance has been reduced down to the standard personal allowance. The income limit increases to £25,400 for 2012/2013.
Clients under 75 years old can consider making a pension contribution by 5 April 2012. This can be a very tax-effective means of preserving personal and age-related allowances, because it reduces adjusted net income. So for someone earning, say £110,000, making a £10,000 pension contribution will save £6,000 in tax!
The same objective can be achieved by making a charitable donation as well as making a pension contribution.
With effect from 6 April 2012, the ‘lifetime allowance’ for pensions will reduce from £1.8 million to £1.5 million. The lifetime allowance is the total amount you can accumulate in UK registered pension schemes without incurring a tax charge. The charge normally arises at the point that benefits are drawn from a scheme.
If you had made pension savings with the £1.8 million limit in mind, it is possible to elect for ‘Fixed Protection’ to retain the £1.8 million lifetime allowance after 5 April 2012. This will be of particular interest if your pension’s savings have already exceeded £1.5 million but it is not necessary to have breached this threshold to qualify.
In order to benefit from this protection, you must make an election by 5 April 2012 and must not accrue any further pension savings after that date. If any pension savings do arise, the fixed protection will be lost. Given the strict HM Revenue and Customs deadline of 5 April 2012 to make the election, you should take financial advice from a FSA regulated pensions adviser as soon as possible.
Pensions for non-workers
Any UK resident individual under the age of 75 can contribute, or have contributed for them, up to £2,880 (net) into a pension each year, irrespective of their earnings. The pension provider will reclaim 20% tax relief direct from HM Revenue & Customs, and therefore the policy will be credited with a gross contribution of £3,600. Therefore, a pension can be set up for individuals who are not working (e.g. a non-working spouse or children) but it is important to note that the funds will not be accessible until retirement age.
The annual exemption
An annual exemption of £3,000 is available to every individual. This allows gifts of up to £3,000 per annum to be made to an individual or to a trust with no IHT implications during lifetime or upon death.
This can be used to exempt part of a larger gift and can be carried forward to the following tax year, but can only be used when the exemption for the later year has been used.
An alternative use of the annual exemption would be to fund a pension scheme for a child or grandchild via a third party contribution. This may also be exempt under the normal expenditure out of income exemption. The maximum that could be contributed in respect of a minor is £2,880, a gross contribution of £3,600.
The small gifts exemption
A gift of up to £250 can be made to any number of individuals each tax year, with no IHT consequences. The gift cannot be used to exempt part of a larger gift and cannot be used in conjunction with the annual exemption.
Clients with a substantial IHT problem, and who are able to make gifts of capital, may consider making an outright gift to an individual or create a bare or absolute trust to take advantage of the potentially exempt transfer regime.
IHT and the Autumn Statement
From 6th April 2012, a new relief will apply to reduce the rate of IHT from 40% to 36% where the deceased leaves more than 10% of their estate to charity.
There were no other significant announcements made regarding IHT in last year’s Autumn Statement, the nil-rate band being frozen at £325,000 until the 2014/2015 tax year when it will increase in line with CPI inflation.
Individual Savings Accounts (ISAs)
An ISA does not result in any taxable income or capital gains and should, therefore, be the first step when considering tax planning for clients. An ISA can allow clients to preserve their income tax allowances and capital gains tax annual exemptions when compared to the position when investing in taxable investments.
The current subscription limit of £10,680 (of which £5,340 can be invested in a cash Isa) is being raised to £11,280 (£5,640) from 6th April 2012.
Up to £3,600 can also now be paid into a Junior ISA (JISA) opened by a parent or guardian on behalf of a minor (or by the minor if they are aged 16 plus) who is not already eligible for a child trust fund (CTF). The CTF subscription limit has also been increased to £3,600 a year. JISA s and CTFs are not subject to the parental settlement rules.
Capital Gains Tax (CGT)
Reduce tax charges from 28% to 18%
Taxable capital gains are subject to CGT at 18% if they are less than the client’s unused basic rate income tax band. If taxable capital gains exceed the unused basic rate income tax band, the excess is subject to CGT at 28%.
Basic rate taxpayers, therefore, with large gains may find themselves paying CGT at 28% on part of their gains. Careful planning will be required to ensure potentially affected investors make full use of all available exemptions and losses.
The CGT exemption has been frozen at £10,600 for 2012/2013.
The Government will launch a new tax advantaged investment in April 2012, the Seed Enterprise Investment Scheme (SEIS). This aims to attract investment into new start up companies by offering generous tax incentives. The scheme will offer 50% income tax relief for individuals investing in qualifying companies. It also offers CGT benefits, as an exemption will be available for gains on assets disposed of and reinvested through SEIS in the 2012/2013 tax year. The annual investment limit for individuals will be £100,000.
Please feel free to contact Jeff Crewdson should you wish to discuss any of these points.