New Tax Year Resolutions to keep you Financially Fit John Ward Personal & Corporate Wealth Management offers all clients regular face to face personalised advice on all aspects of their financial situation. Here are some thoughts for the new tax year for you to consider. If you would like to discuss any aspect of the information below and how i can help you achieve your financial aims in the most tax efficient manner, please contact John Ward on 07801839885 or visit www.sjpp.co.uk/johnward enquiry • Check your tax code to ensure it is correct. Probably the single most common reason that people pay too much tax is that their tax code is incorrect. • Review your income and planning opportunities. If your anticipated income is in the region of £42,475, £100,000 or £150,000. • Review Your Options to Obtain Income Tax Relief, For example, if you earn £100,000 and receive a bonus of £10,000, then if this sum is invested in a pension you do not lose any of your personal allowance and your marginal rate. Tax relief is available on VCTs and EISs at a rate of 30%. By investing in either a VCT or EIS early in the tax year, you can obtain the income tax relief via your tax code, ensuring that you will pay less tax each month which provides an immediate cash flow benefit. • Consider investing in assets which produce capital gains rather than income. In addition to the income tax personal allowance, you are also entitled to an annual Capital Gains Tax ('CGT') exemption. This means that the first £10,600 of capital gains are tax free and, even where this amount is exceeded, you will typically pay tax at either 18% or 28%. This is lower than the equivalent rate of income tax. • Do you have to own the asset? Do you have a spouse or civil partner with little or no income? Married couples and civil partners have the option of restructuring the ownership of assets so that any resulting income or capital gain will be taxed at the new owner's marginal rate of tax. So, for example, a spouse with little or no income can receive up to £7,475 before they pay tax at a rate of 20% (10% for savings income). This can be a significant saving if the spouse with the higher income is paying tax at the higher rates identified earlier in this briefing. • Reduce your level of taxable income without affecting the amount you have available to spend. Do investigate how you can use different investment products to minimise the amount of tax you pay. By investing in a single premium investment bond, you are able to receive 5% of your original investment without an immediate tax charge for a period of 20 years. As these payments are regarded as return of capital, they don't even need to be reported on your tax return. In addition, any income or capital gains from money invested in Individual Savings Accounts ('ISAs'), up to the current annual limit of £10,680, are tax-free. That includes income from savings, dividend income or profits from the sale of stocks and shares. Just about anyone can pay into an ISA, as long as they are a UK resident and aged 18 (or 16 for a cash ISA) and whilst the dividend tax credit cannot be reclaimed for basic rate tax payers higher rate taxpayers have no further liability to income tax. • Make Your Money Work Harder If you are considering investing into an ISA; why not invest the money at the beginning of the tax year rather than at the end? Investment is a long-term game, the longer we leave our money invested, the greater the chance of achieving better returns. For example, if you had taken advantage of your full PEP and ISA allowances since their introduction you could have invested as much as £172,600. If you had invested this amount at the beginning of the tax year it would have grown to £437,743, whilst the same amount invested at the end of the tax year would 'only' have grown to £418,505. So as you can see, it pays to invest early. • If you are self-employed, consider how your business is structured and how you draw your income. With National Insurance rates set to increase by 1% on 6 April 2011, combined with the different tax rates that apply to salary and dividends, you may want to consider paying yourself a higher dividend at the end of the tax year rather than taking the income attributable to you as an annual salary. For example, higher rate taxpayers will pay tax at a rate of 40% on their salary plus 2% National Insurance Contributions (NICS') whilst dividend income will be taxed at a rate of 32.5%. Similarly additional rate taxpayers pay tax at a rate of 50% plus 2% NICS, but only 42.5% on their dividend income. • Make sure your trusts don't pay 55% on the income they receive. Trusts are widely used as a means of transferring wealth between the generations. They can also provide a number of tax advantages, together with offering the opportunity to ensure that only your loved ones benefit from your estate. It is however imperative to ensure that the assets of the trust are invested tax efficiently as failure to do so could result in certain types of income suffering tax at 55%. • Don't Forget Inheritance Tax While inheritance tax is not paid annually, plan to mitigate your potential liability. By planning sooner, rather than later, it is possible to significantly reduce, and often eliminate an inheritance liability without affecting your long-term financial security. It is therefore a rather sobering thought that HMRC continue to collect £2.4 billion each year (2009/10).