In 2010 the Government introduced a measure meaning for every £2 an individual earns over £100,000 per annum, £1 will be deducted from their personal allowance. The pension annual allowance also reduced from £255,000 to £50,000 and the Stocks and Shares Individual Savings (ISA) maximum has increased from £10,200 to £10,680. As a result this tax year represents you with opportunities to lower your tax bill and increase your savings.
Reclaim your tax allowance and benefit from tax relief at up to 60%
If you earn over £100,000 you may still be able to reclaim tax at your highest rate and also reclaim your personal allowance by making payments to a personal pension.
For example, if you earn £115,000, a net payment of £12,000 per annum to your pension would take your income to £100,000 and reinstate your full personal allowance. As a higher rate tax payer you’ll also be able to claim back more tax through your self-assessment. The net effect is that you’ll benefit from tax relief at somewhere between 40% and 60% – the actual benefit depends on the level of pension payment and your taxable earnings.
Tax relief may be altered and the value to you depends on your financial circumstances.
Pay even more than £50,000 into your pension this tax year
The new carry forward rules let you use up any unused pension annual allowance from pension input period (PIPs) ending in the past three years as well as your annual allowance of £50,000 for 2011/12. This means you can pay more than the annual allowance into your pension this tax year without paying any extra tax. This may be beneficial to people who might have an unusually high level of pension savings in a certain tax year (for example, due to a promotion or redundancy).
More tax planning options which may be available to you
Capital Gains Tax:
You may benefit from making use of capital gains exemptions by investing in a range of mutual funds, shares or similar investments. You currently have the opportunity to withdraw up to £10,600 of capital gains tax-free.
For example, if you held a range of mutual funds worth £120,000 at 6th April 2010 and these are worth £130,500 on 5th April 2011 you could encash the whole amount and have no tax to pay. This is because the “profit” is less than your annual exemption.
Invest in offshore bonds
Offshore bonds offer a wide choice of investments, payment flexibility, trust and assignments making them ideal for helping with estate, retirement, university and school fees planning. And each year, 5% of the original investment in an offshore bond can be withdrawn without any immediate tax liability. This can be used to maintain income levels whilst helping to avoid breaching income tax thresholds. Taking money out of the bond will reduce its value.
By switching some of your income from mutual funds or shares to a bond, you can reduce your taxable income to £100,000. Your income level can remain the same but you benefit by keeping your personal allowance.
Make full use of the increased ISA allowance
This year you can now invest £10,680 into a Stocks and Shares ISA. As a higher rate tax payer and likely to pay capital gains tax, buying share-based investments (such as unit trusts and OEICs) through ISAs saves you tax as you don’t pay tax on capital gains through these.
