Practical Tax Planning Strategies

From April 2010, the personal allowance for individuals with income over £100,000 will be reduced by £1 for every £2 of income over this limit, making an effective tax rate of 60% on income between £100,000 and £113,000.

Income over £150,000 will also be subject to a top rate tax of 50% - a double whammy for higher earners.

And from April 2011, all National Insurance rates are set to increase by 0.5%.

To ensure you keep as much as possible of what you earn, we have examined the opportunities for practical tax planning.  Read on to find out how we can help reduce your tax bill.

• If you are part of a couple, one of whom is taxable at a rate higher than the other, consider transferring income‑producing assets to the lower taxed person.  This may include shares, bank accounts or bonds.
• Ensure you fully utilise your Individual Savings Account limits to shelter as much income from tax as possible.
• Employment packages should be reviewed, as company car tax continues to change, now favouring cars with emissions of less than 120g of CO2 per km.  If you receive free private fuel, it is almost certainly worth changing your package to give this up.
• If you can control how your income is received, consider operating both a limited company and as a self-employed person, as this provides flexibility to maximise tax reliefs and minimise personal taxes.
• Investing under the Enterprise Investment Scheme (EIS) qualifies for income tax relief of 20%, while Venture Capital Trust investments qualify for 30% income tax relief.

Capital Gains Tax remains at 18%, meaning that capital profits are taxed at a significantly lower rate than income.  In addition, an annual tax‑free exemption of £10,100 per person is available.

What ways are there to make the most of your Capital Gains Tax (CGT) exemption?

• Use depressed share and property values to your advantage.  Now may be the ideal time to consider selling or transferring assets without incurring a large CGT charge.
• For gains arising from the disposal of a business, Entrepreneurs’ Relief can bring the tax rate down to 10% for the first £1 million of gains.
• Selling a garden of less than half a hectare is often exempt from CGT, but if you sell your house first, then you lose the exemption.  The property itself will also qualify for the CGT exemption.
• If you have a large share portfolio, it can be worth realising gains to use up the annual CGT allowance.
• Transfers between spouses and civil partners are exempt from CGT, so this can be used to ensure both annual exemptions are utilised.

Pension contributions are a great way to build up a retirement fund that accumulates tax-free.  A few issues relating to pensions are also worth noting:-

• For firms with a pension scheme that employees contribute to, you can save on National Insurance Contributions by paying the employees’ contributions for them, and reducing their wages accordingly.
• From Budget Day this year, the government has restricted higher rate tax relief on pension contributions in excess of £20,000 for those with income over £150,000.
• For those with income over £150,000, higher rate relief remains available for regular contributions, and in certain circumstances for irregular contributions up to £30,000.
• Higher rate relief remains available for pension contributions made by those whose income remains below £150,000.
• An alternative to pension contributions can be to use Individual Savings Accounts (ISA) to accumulate a tax-free fund.  It is worth noting that the annual ISA investment limit of £7,200 rises to £10,200 from April 2010, of which £5,100 can be saved in cash.

So how can you ensure you don’t pay back all these savings when you die?

• The most well known way of avoiding paying Inheritance tax (IHT) is by giving assets away providing you survive at least seven years from the date of the gift.
• Putting assets and lump sums from pensions into trusts can be beneficial, as this also takes them out of the estates of your beneficiaries.
• If you set up a regular pattern of giving away surplus income, then those gifts would be outside your estate even if you didn’t survive for seven years.
• Some business assets, including commercial woodlands and some farmland are exempt from IHT, as long as you hold on to them for two years.
• As surviving spouses now inherit any unused nil-rate band from their deceased partner, leaving everything to your spouse is more tax-efficient.
• Other products worth considering include equity release schemes to pass on some of the value of your home, and discounted gift trusts.
• Any gifts to charity in your Will are exempt from IHT.  However, if you make the gift during your lifetime, you can save the IHT and get Income Tax Gift Aid relief too.

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