In the UK, we are now living longer and having fewer children. As a result, workplace pension schemes have come under increasing pressure as they have to cover the income of retirees for longer with less investment. At the same time, people are not saving enough for their retirement off their own back. The government is therefore becoming concerned about its ability to cope with the future demands for state payouts. Consequently, the Government has decided it is time to try and persuade more individuals to start saving towards a private pension. Their latest measure is the National Employment Savings Trust (NEST) and is set for implementation from 2012.
NEST is designed to encourage both a greater level of saving for old age and open up access to saving for individuals who do not currently have a decent workplace pension scheme. Therefore, from 2012, all eligible employees will start to be automatically enrolled into NEST unless a suitable workplace scheme exists to take its place.
For employers, this creates a lot of issues. First, and perhaps most importantly, NEST or its workplace alternative MUST be part funded by the employer – with a contribution of 3% of eligible earnings. This will be added to a 4% contribution from the employee and another 1% from the Government (via tax relief), making a total of 8%*. The aim, primarily, is to promote a savings culture, particularly amongst low-to-moderate income earners, and will affect those from age from just 22 right up to state-pensionable age. These are earners who in the past have either not had easy access to independent savings or have simply opted not to take part. Consequently, the cost of having to fund such workers is likely to increase costs for virtually all businesses. There is also the question of whether to continue with – or set up – a workplace pension scheme instead. For employers whose workforce is made up of the higher paid, or who consider the incentive of an in-house arrangement key to their benefits package, the rigidity of NEST may not provide the flexibility they are looking for. Some may therefore consider that either opening, extending or simply increasing the funding for an existing workplace scheme is something they should sort out in advance. There may even be contractual issues to sort out with existing staff. Whatever your current situation, it is a good idea to start considering how you can meet the needs of your own workforce. Whether you employ 2, 200 or even 2,000 employees, the earlier you beginning to consider your options, the better prepared for the changes your business will be.
* Eligible earnings are those between £5,035 and £33,540, indexed with average earnings from 2007
Friday, 18 March 2011
Rising limits for ISAs
ISA allowances are set to rise in the new tax year, providing an additional incentive for savers. During the current tax year (2010-2011), investors can save up to £10,200 in an ISA. However, from 6 April 2011, ISAs will be linked to inflation. Increases will be based on the Retail Prices Index (RPI) for the September preceding the beginning of each tax year on 6 April. The index-linking plan was originally announced in the Labour government’s March 2010 Budget, and was later confirmed in June by the incoming coalition government. Subsequent speculation over the coalition’s plans to cut public spending had led to fears the annual amount available to save in ISAs would be frozen. However, despite taking the decision to cut tax relief on pension contributions, the government still appears keen to encourage individuals to save. The calculation for ISA limits is therefore now linked to inflation, specifically the Retail Price Index (RPI) as measured in September each year. For September 2010, the Office for National Statistics confirmed that RPI was 4.6%, so, once applied to the current limit and rounded up to the nearest £120, this equates to a rise of £480. The maximum annual contribution into an ISA in the new tax year will therefore be £10,680.
This can be invested in a stocks-and-shares ISA, or up to half the amount – £5,340 – can be saved in a cash-only ISA, with any remaining allowance available for investment in a stock-and-shares ISA. According to the Investment Management Association (IMA), net ISA inflows have averaged more than £400 million since October 2009 and 47% of investors would invest more if the allowance was increased further. Meanwhile, according to HM Revenue & Customs, more than 14.9 million individuals subscribed to ISAs in the last tax year, although this was slightly lower than the previous year, when almost 15.2 million individuals subscribed. ISAs are tax-efficient vehicles that allow individuals to save and invest without having to pay income tax or capital gains tax. ISAs can be a good way for people to start saving, or to add to their existing savings and investments. If you cannot afford to take advantage of the full annual allowance, it is still worth putting away what you can via a monthly savings plan, which can start from £50 a month. Looking ahead at the annual allowance, it is worth remembering one of the golden rules of ISA investing - use it or lose it.
This can be invested in a stocks-and-shares ISA, or up to half the amount – £5,340 – can be saved in a cash-only ISA, with any remaining allowance available for investment in a stock-and-shares ISA. According to the Investment Management Association (IMA), net ISA inflows have averaged more than £400 million since October 2009 and 47% of investors would invest more if the allowance was increased further. Meanwhile, according to HM Revenue & Customs, more than 14.9 million individuals subscribed to ISAs in the last tax year, although this was slightly lower than the previous year, when almost 15.2 million individuals subscribed. ISAs are tax-efficient vehicles that allow individuals to save and invest without having to pay income tax or capital gains tax. ISAs can be a good way for people to start saving, or to add to their existing savings and investments. If you cannot afford to take advantage of the full annual allowance, it is still worth putting away what you can via a monthly savings plan, which can start from £50 a month. Looking ahead at the annual allowance, it is worth remembering one of the golden rules of ISA investing - use it or lose it.
Tuesday, 1 March 2011
INHERITANCE TAX
If you are single, if you had an accident and died, any value of your home and possessions over £325,000 would be taxed at 40%. For a married couple they each receive this £325,000 so there is a total of £650,000 protected from the 40% Inheritance Tax. If you have a lot more than you need, you may wish to look at gifting some of your money away year by year in order to reduce the eventual Inheritance Tax. If you are in that category, we would be happy to discuss the various strategies that are open to you.
PENSIONS
For many people even the mention of the word “pension” starts them yawning or moving on to some other subject. Part of the problem is that the laws on pensions have been continually changing over the years. We are here to assist you to know what you have and what that will provide you. With the experts forecasting that we will all start living to our 90s or even longer, the importance of have a worthwhile source of income in retirement is obviously vital.
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.
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.
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.
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.
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