Tax facts

12 March 2010 8:00 am

It is a brand new decade and, as my previous column predicted, it is a much better start to the year than we could have hoped for 12 months ago.

This time of year is always tax planning time and never more so this year with a 50 per cent tax rate looming. Indeed, to get there, you will have gone through a 60 per cent tax bracket before dropping back to 50 per cent. Never has tax held such a high place in my clients’ minds as now.

Even the lowly Isa has come into play with clients who previously dismissed it as too trivial to consider. Now Isas have never been more attractive, particularly with the allowance being raised.

A couple over the age of 50 can now put a combined sum of £20,400 into their Isa which is a significant amount for most investors. This looks even more attractive when considering the higher rates of tax on income outside tax shelters.

However, the increased allowance pales into insignificance for those who are staring down the barrel of 50 per cent tax.

The removal of the personal allowance on incomes above £100,000, which triggers the 60 per cent rate, combined with the massive complications on pension payments, has concentrated advisers’ minds as never before. As always, simplicity is a blessing and a virtue and as Isas are simple and straightforward to understand, they are a good place to start.

An old friend that we have not seen for quite some time and I think most of us thought we had seen the back of, namely the maximum investment plan, has reappeared.

These are now looking quite enticing for 50 per cent taxpayers no longer able to make their pension payments. The regular nature of the payments for 10 years mirrors the savings into a pension. There is, however, no tax relief on the investments and the fund is taxed internally but
at relatively benign rates.

The benefit comes in that after seven-and-a-half years withdrawals can be taken from the fund with no further tax liability. At a time when this income could be taxed at 50 per cent, such a scheme looks very interesting.

Couple this with the life insurance benefits and the ability to provide money outside your estate for IHT means these plans will make a well earned comeback.

But for those not being taxed at 50 per cent, I still think that pensions should be the first port of call for tax-efficiency.

The ability to save 40 per cent tax should not be wasted. Who knows if in time this benefit too will no longer be available. I recommend that clients take advantage of it while they can. Bruce Wilson is managing director of Helm Godfrey

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