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April is the cruellest month

The pre-Budget report tax changes hit home this month and here are some strategies to ease the pain.

Much of the post-Budget noise has been about income tax and, in most cases, it has been about changes we already knew were coming.

When the changes were first announced, their implementation was a long way off, but now they are here. Here and now. And people are interested – especially those affected. The April pay packet will show the impact, especially for those who have suffered a full or substantial removal of the basic personal allowance.

These people will probably have had their revised coding notices and that represents a pretty personal communication of how tax change is going to affect you. But there is nothing quite so powerful as seeing a smaller net pay bottom line. Action stations advisers! Your time is here, your time is now. Informed advice just went up in value. First the facts.

Let us look at the personal allowances first. As announced in the December pre-Budget report, allowances and
thresholds for 2010/11 have been held at their level in 2009/10. And the basic personal allowance will be gradually cut back once the taxpayer’s adjusted net income exceeds £100,000. This means:

  • The personal allowance remains at £6,475.

From 6 April 2010, where an individual’s adjusted net income exceeds £100,000, the level of the basic personal allowance will be reduced by
£1 for each £2 over £100,000 until it reaches zero.

Adjusted net income is calculated in a series of steps. The starting point is net income which is the total of the individual’s income subject to income tax less specified deductions, the most important of which are trading losses and payments made gross to pension schemes.

This net income is then reduced by the grossed-up amount of the individual’s Gift Aid contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source.

The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income.

  • The limit for the 10 per cent starting rate for savings income will remain at £2,440.
  • The age allowance is £9,490 (for those aged 65 – 74) and £9,640 (for those aged 75 and over).
  • The level of income that a person can enjoy before age allowance is cut back is £22,900.
  • The married couple’s allowance (MCA) for those aged 75 and over remains at £6,965. In calculating the reduction in age allowance when income exceeds £22,900, the increased MCA is cut back to not less than £2,670 (the “minimum amount”).

There is nothing quite so powerful as seeing a smaller net pay bottom line. Action stations advisers! Your time is here, your time is now. Informed advice just went up in value

  • Tax relief for maintenance payments will be available only where at least one party was 65 or over at April 5, 2000. The relief remains at £2,670.
  • Relief in respect of the MCA and maintenance payments continues to be given as a tax credit at the rate of 10 per cent.

What does all of this mean to affected taxpayers and what opportunities are opened up for financial planning?

Make no mistake, there is a wide spectrum of individuals affected by these seemingly relatively simple changes. Here are a few TC thoughts on what the changes mean and how they can be legitimately planned for.

The fact that each person has their own personal allowance and their own starting and basic-rate tax bands means that worthwhile overall income tax-saving opportunities exist for 2010/11. This is especially so in regard to income that falls between £100,000-£112,950 – causing the removal of the basic personal allowance and an effective tax rate of 60 per cent.

For all couples, as a bare minimum, both personal allowances and starting/basicrate tax bands should be used to the full.

This is particularly beneficial where income can be legitimately shifted from a higher or additional-ratepaying spouse to a non, starting or basic-rate taxpaying spouse.

For those with cash and investments, this will usually be facilitated by a transfer of income-producing investments from the higher- taxpaying spouse.

Any such transfers would be capital gains tax-neutral and inheritance tax-neutral. Transfers between spouses living together are treated astransfers on a no-gain/no-loss basis for CGT. Transfers between UK-domiciled spouses (living together or not) are exempt from IHT.

I will look at more planning possibilities next week.

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