In the words of a frequently quoted commercial by Her Majesty’s Revenue and Customs (HMRC) for their on-line services, “tax need not be taxing”. It would all be rather less taxing if the rules remained the same for any length of time.
Over the past eighteen months we’ve seen a number of significant changes to the tax system for pensions, ISAs, Capital Gains Tax and personal income tax.
This summary is intended to serve as a brief guide to the main amendments introduced by the budget of 22nd June 2010 which are most likely to affect our clients.
Assets held within an ISA are exempt from tax on some income; however dividends are still taxed at 10% even within an ISA. There is no capital gains tax due on investments held in an ISA.
The ISA limit is now £10,200 per annum and is set to rise each year in line with the Retail Prices Index from the 2011/12 tax year onwards.
The opportunity to make tax savings using an ISA is considerable with a husband and wife able to make tax free investments worth £20,200 per annum.
The previous government had already moved to restrict higher rate tax relief on payments made to a pension scheme for high earners.These rules apply to individuals earning in excess of £130,000 and are quite complex. It is, therefore, important for high earners to seek advice regarding the tax treatment of ongoing payments to pensions.
The Coalition Government, in the recent budget, announced its plans to reduce the annual maximum contribution to personal pension schemes. We expect this to fall to approximately £35,000. This change will come into effect next tax year, 6th April 2011.
With immediate effect, the requirement to take an annuity from pensions by age 75 was removed with the trigger point moving to age 77. This signals the Government’s intention to remove this requirement altogether in due course.
From 6th April 2011, the Basic State Pension will be increased by the higher of RPI, National Average Earnings or 2.5% per annum.
The nil-rate band for inheritance tax remains at £325,000.
Good planning can utilise the opportunities, which are very significant, to reduce or even eliminate the threat of a 40% tax on death, using strategies such as lifetime gifts, business property relief and gifts into trust.
Capital gains tax
It was widely believed that The Chancellor would increase the rate of capital gains tax, paid when assets are sold for a profit, from 18% to perhaps 40%.
The changes made in the Budget were less dramatic, with the rate of capital gains tax for basic rate or non taxpayers remaining at 18% and for higher rate taxpayers being increased to 28%.
The annual exemption for capital gains tax, currently £10,100, continues at the same level.
The personal allowance, which is the income a person can receive before becoming subject to income tax, will increase from £6,475 to £7,475 from 6th April 2011.
A briefing note giving details of planning opportunities is available upon request from our head office.