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Tax and the BudgetThe tax inspector cometh!! No one likes to pay tax, which is why it so important to plan for it. Whilst Financial Advisers can’t recommend that people ‘avoid’ tax, they are allowed to recommend ways in which you could ‘mitigate’ your tax liability. To most, the words avoidance and mitigation sound similar, to financial adviser they are the difference between what is illegal, and what is just simply just good tax planning. Easy steps, such as ensuring that you fully utilise you annual Individual Savings Account (ISA) allowance can make a difference in how much tax you do pay. For instance, if you have money on deposit, in some kind of savings account, and are not fully using your annual ISA allowance, you’ll be paying 20% or 40% more tax on your interest than you need to. Another excellent way to reduce your Income Tax liability is by paying money into pensions. Recent legislation changes allow for up to 100% of your salary to be paid into a pension if you like, which offers a great opportunity to significantly reduce your tax burden, whilst assisting you to plan for your retirement. Essentially, you pay basic rate and starting rate tax on earnings up to £39,825 (minus any personal allowances you have), but any earnings over this level are subject to tax at the full 40%. The way Personal Pension contributions work is that tax at the basic rate (22%) is added to your initial contribution, but if you are a higher rate tax-payer, the gross contribution (the amount you pay, plus the tax relief which has been applied) is added to the Higher Rate threshold (the £39,825 mentioned earlier). An example: A contribution of £7,936 from yourself into a Personal Pension turns into £10,175 with basic rate tax added. This £10,175 is then added to the Higher Rate threshold (£39,825) which equals £50,000. £50,000 is therefore the new Higher Rate threshold. So essentially, in this example, if you earned £50,000 per annum, but paid £7,936 each year into a Personal Pension, you completely ‘mitigate’ your Higher Rate tax liability.  There are even greater advantages for those of you who are company directors and therefore have discretion over how you get paid (salary, dividends and expenses), as pension contributions are also relievable against Corporation Tax. These are very simple ways in which your Independent Financial Adviser can assist you to reduce your tax bill. There are many other ways which are even more tax efficient which any good adviser should be aware of, but maybe a bit too complicated to discuss in this article. So start asking your adviser how you can reduce your tax bill. The Budget 2007 My impression of this years Budget is that it was intended to be a vote winner for Gordon Brown. In some areas concessions have been given. But being the cynical man that I am, the same hand that gives, has taken away at the same time. Whilst on the face of it, Mr Brown has tried to appease Middle-England, with proposed increases to the basic rate tax band he has also disadvantaged some who are on lower incomes, by taking away the starting rate Income Tax band. The difference is that currently, on the first £2,230 of income over your nil rate allowance, tax of only 10% is due. However, with this being taken away, a full 22% will now be payable on this proportion of your income. Therefore, those on a smaller income will be paying more tax than they are today. Another reason for this Budget seeming to be more about winning votes than anything else, is that most of the ‘positives’ are earmarked for the future, rather than coming into force straight away, therefore leaving the cost of these promises to Gordon Brown’s successor, as it looks ever more likely that the Chancellor will become the next PM. There has been no let up in stealth taxation either (those taxes that you don’t really see, that simply filter through society). Obviously these do impact on your pocket, as services and products will start to cost more, however it has seemed the Chancellor’s agenda on stealth taxation has not subsided, particularly in the way the businesses continue to be targeted. A prime example of how the Treasury has increased its tax receipts without necessarily increasing tax rates can be seen in the housing market. The higher rate thresholds for stamp duty that were introduced over 10 years ago have not been increased since, whilst the housing market has increased in value significantly. The net affect is that a home buyer will pay a much more tax on their property purchase now than they would have done, 5 or 10 years ago. Is this fair? I think not.  So don’t just accept it, do something about it, claim some tax back and mitigate some tax that you’d normally have paid, but make sure that you get some proper advice along the way. Neil is an Associate of the Chartered Insurance Institute, and a Chartered Financial Planner and Director for Knightsbridge Financial Management Ltd |
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