Personal Allowances
Personal allowances below age 65 increases to £7,475 for 2011-12; ages 65-74 increases to £9,940, and age 75 and over rises to £10,090. These reduce tax payable. However, the basic rate threshold decreases from £37,400 to £35,000, bringing more people into the higher rate band at 40%. At £150,000 taxable income, the rate of tax is 50%.
Where the level of adjusted net income is above £100,000, all personal allowances reduce on a £1 for £2 basis until they become nil at around £115,000 (where the effective rate of tax is 60%). Capital gains tax (CGT) remains at 18% for basic rate taxpayers (after the CGT personal allowance of £10,600) and 28% for higher rate taxpayers.
The level of income where age related personal allowances reduce from is now £24,000, up from £22,900. Inheritance tax (IHT) is reduced to 36% (from the normal ‘death rate’ of 40%) on net assets where 10% of your estate is given to charity.
Tip:
Use capital growth for income as capital gains on investments are taxed at a maximum of 28%, whereas the highest rate of income tax is 50%, plus you use the CGT allowance of £10,600. Use tax-reducing strategies, including investments and pension contributions to preserve personal allowances and reduce tax to lower rate bands.
ISA Allowances
These increase to £10,680, of which £5,340 can be in a cash ISA. ISAs grow tax free and are accessible. A new junior ISA of up to £3,000 has been introduced for children but must be held to age 18, where it replaces the CTF (Child Trust Fund).
EIS Investments
The investment limit remains at £500,000 per person for this tax year, but doubles to £1 million from 2012/13. The income tax relief has increased from 20% to 30% from 6 April 2011 (subject to State aid approval), and investments must be held for 3 years to retain the relief. There is no CGT on EIS share gains, and gains on other assets can be deferred at 18% or 28% until you die, when the gain dies with you. After 2 years the investment generally falls out of your estate for IHT. Total tax reliefs could therefore be 98% (30% income tax, 28% CGT, and 40% IHT).
VCT Investments & EZ Investments
There is no change to VCT investments with tax relief at 30%. EZ Investments came to an end on 5 April 2011. The Government is seeking to create new Enterprise Zones and to encourage investment in the future, so they may be revived.
Pension Contributions
The maximum contribution level is 100% of relevant earnings capped at £50,000; with no earnings the maximum is £3,600 gross. Contributions are relievable at your highest marginal rate, of up to 50%. Personal (not employer) contributions are uplifted at 20% by HMRC, and in addition you can claim tax relief if a higher rate taxpayer (at 20%) or additional rate taxpayer (at 30%). The maximum £50,000 contribution includes employer contributions. Unused annual allowances can be carried forward from 2008/09, so greater contributions can potentially be made.
Practical Tip
Use tax-reducing investments to preserve your personal allowances. Pension strategies can increase your basic rate band and therefore possibly reduce any CGT payable at 28% to 18%. Reclaimed tax can be recycled into other tax-reducing investments.
By Tony Granger
