TAX ALLOWANCES

In this Tax Year you can earn £6,475.00 before you pay any tax. You can earn a further £37,400 and pay only 20% tax. So you would need to earn in excess of £43,875 before you start being charged the 40% tax. In the new tax year the £6,475.00 threshold is being increased to £7,475.00. However, the amount you can earn above that before you pay 40% tax is being reduced to £35,000. So in the new tax year, those earning over £42,475.00 will be paying 40% tax.

Grey issues – Those who are 65 and older are given a higher personal tax allowance. For those 65 and over in the current tax year it is £9,490. And for those 75 and over it is £9,640. Now that is good but there is a bit of a trap, which it is easy to fall into. If your taxable income is over £22,900 they start taking away this extra allowance on a 2 for 1 basis, so if your income is £28,930, you get none of that extra relief. Here, too, a husband and wife can often balance out their incomes so that they do not get caught in that trap. It is a very important feature of tax planning for those over 65, as these age allowances are likely to increase. In the next tax year they are expected to go up to £9,940 for those over 65 and £10,090 for those over 75.

High earners – Once you are in the higher rate tax bracket the importance of tax planning becomes greater and greater, the more you earn. The use of pension contributions, or “pension sacrifice” can often save you paying quite a bit less tax. Those earning £100,00 and more have the greatest challenges and opportunities. If you are in this category, do contact us for some advice about your options.

Savings

Most of us do some sort of savings. While the interest being offered on cash savings accounts is very low, it will be at least 20% more if your money is building up free of tax. Those who are earning £6000 or so can fill out a simple form to ensure tax is not deducted. For most of us, however, avoiding tax on our savings comes down to putting the money in a Cash ISA (Individual Savings Account). Cash ISAs are easy to arrange. Each individual can save up to £5,100.00 in a Cash ISA in this Tax Year (2010/2011). This is expected to increase in the new Tax Year to £5,340.00.

While looking at your cash savings to avoid having to pay tax, it is a good time to do an equally important action. Find out what interest you are being paid! Usually you will need to ask. Once you know you can then do a quick comparison (moneyfacts.co.uk or moneysupermarket.com) to see how much better you could do elsewhere. At the very least you can find out from your present bank or building society whether they have a higher interest rate they can offer you.

PROFITS!

The Stock Markets generally have gone up over the past 12 months. If you have money invested in stocks and shares, you may well be showing a profit on your investment. Each year you can realise a level of profits on such investments without paying any tax. In this Tax Year it is £10,100. So if you cash in your investments that have made a total profit of £10,100, you will come away with a useful tax-free return. And since it is true for all adults, a husband and wife could come away with £20,200 tax free! And a clever couple who have made substantial profits could get the £20,200 tax free before the 5th of April and then get the same on the 6th of April. That is a total tax-free income of £40,400.

If you have made profits on some investment higher than that, then you will still pay less than you would pay in income tax. A basic rate taxpayer would be charged at 18% and a higher rate taxpayer at 28%. It is important to get some advice on this in order to avoid paying more than you need to. You can also straddle the old and new tax years, to minimise the tax. If a husband and wife are in different tax brackets, e.g. one with a part-time job and the other a higher rate taxpayer, there are various strategies that you can use to reduce your tax. For example, if the lower earning spouse is earning less than the tax threshold (£6,475.00) in the current tax year, then any savings could be put in her sole name to avoid tax.

30th Anniversary

No more compulsory purchase

Britons are set to enjoy greater financial flexibility during retirement under draft legislation released by the UK Treasury ahead of the 2011 Finance Bill. From 6 April 2011, individuals will no longer be forced to buy an annuity by the age of 75 with the money that they have saved in their personal pension scheme. Instead, they will have the additional option of continuing to save or moving to a drawdown arrangement in which their pension pot is left invested and money is drawn out. Nevertheless, the measures include restrictions, notably the amount of money that can be withdrawn from a personal pension scheme at any one time. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds in their pension pot. This restriction is intended to prevent individuals from withdrawing and spending all the money in their pension scheme and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they can take out as much as they like. The increase in flexibility will end a rigid system in which individuals are forced to buy an annuity by the age of 75, even when annuity rates are particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the 75-year cut-off appear progressively more unrealistic and draconian. Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people who are currently in drawdown arrangements could benefit from flexible drawdown, while an additional 12,000 people could access flexible drawdown. The National Association of Pension Funds (NAPF) has welcomed the additional flexibility, but also believes that the new rules are most likely to benefit those with large pension pots and multiple income streams. Many people are still likely to choose to purchase an annuity, which will provide a fixed income over their remaining lifetime. Moreover, NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement.

Time to take action

Total UK personal debt had reached £1,454 billion by November 2010, according to figures from Credit Action – more money than the whole country produces in a year and a sum that equates to around £8,500 per household. Contrast that with the nation’s current savings levels, which have seen the average household save just £996 over the last 12 months – or £2.73 a day. However, in an environment where it has become the norm and, until recently, all too easy for individuals to make purchases with debt, changing this ‘enjoy now, pay later’ mentality is going to be difficult. You may be sure, however, that the coalition government is keen to encourage such a change. Work & Pensions Secretary Iain Duncan Smith has been quoted as saying: “We do not save enough in this country…it is appalling, and changing the culture is critical”. Right now, the main incentives to encourage such saving involve limiting the amount of tax you pay on certain savings products. Certainly, the Government needs to do more if they are going to generate the kind of interest that will push more people to act. Yet, if there was ever a good reason to start changing our behaviour, it is surely the fact it costs the average household £2,500 a year in net income just to meet its interest payments. That is approximately 15% of the average net wage going to lenders that could otherwise be heading into our pockets. That fact really should be an incentive to start saving.

DEATH AND INCAPACITY

Death and incapacity are unpleasant subjects but they are a reality of life. You can either ignore these matters until they affect you or your family or you can do some sensible forward planning. Unfortunately we will all die at some time. At that point our possessions will be shared out. If we have made a will, they will go to those people we have chosen. If we have not made a will, they will go to people other than those we wanted them to go to, including even the Tax Man! The simple solution is to make a will. You can do this yourself or take professional advice. We can provide recommendations if needed. With death comes a funeral. You can make it clear in your will how you want your funeral to be. Viking funerals with a burning boat could prove rather costly. However, even a simple funeral can involve considerable expense. If you are not otherwise setting aside money in some way for this, there are pre-paid funeral plans available which, once paid for, guarantee to cover the costs of a traditional cremation without any further costs – regardless of how much prices rise in the future. (Note: Viking burials on burning ships come at a somewhat higher costs!). We can help advise on the pre-paid funeral plans. Going into care is not the sure bet that death is, but it is pretty likely that if you or one of your family beat the grim reaper past the three score and 10 on the score card, that you will have to deal with the problems of care and even mental difficulties. If you or your parents or other relatives are not able to look after their affairs for one reason or another, they will need someone to do it for them. As soon as this begins to become a possibility, we recommend that you find out about and arrange a Lasting Power of Attorney. “Attorney” simply refers to someone with the power to act on the behalf of another. Such an arrangement can either be just for financial matters or for health care decisions, or both. And as the final point of this rather unpleasant section, there is the option of a Living Will. This is simply an advance decision which you document about what medical treatments you do not wish to have in the future, if you are not in a condition to make an informed decision at the time.