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Colin Jelley: Making the most of tax allowances

In a Budget he described as being for an “aspiration nation”, the Chancellor announced the delivery of a £10,000 personal allowance from 2014/15.

This gives effect to his commitment made at the beginning of the Parliament. At the same time, and for the first time in this Parliament, the higher rate threshold will rise instead of fall, if only by 1 per cent.

These are progressive measures which will take more of the low paid out of the tax net altogether and will be universally welcomed.

The most significant impact of this Budget on the wealth planning of clients and their advisers will be the confirmation of the changes to the annual and lifetime allowances that apply to contributions made to registered pension schemes during pension input periods ending after 6 April 2014.

In this market, which is the sweet spot for financial advisers, these reductions to £40,000 and £1.25m respectively will drive significant changes to wealth structuring behaviour. They will encourage not only increased contributions to registered pensions in the short term but also the use of other tax favoured investment structures in the short to medium term.

The next few days are a key chance for clients to make the most of carrying forward unused contributions from 2009/10 before they are lost forever.

It is also essential within the same timeframe that clients maximise the opportunity for 50 per cent income tax relief on pension contributions before the rate falls to 45 per cent on 6 April.

The ability to get 60 per cent income tax relief where taxable income in 2012/13 is between £100,000 and £116,210 should not be overlooked either.

In the retail affluent market segment, we should expect to see the use of Isas as retirement planning vehicles increase still further.

In the high-net-worth segment of clients, advisers will undoubtedly also see increasing use of offshore insurance wrappers, as a means to generate a gross rollup of investment return.

These vehicles also provide an ability, which is similar to registered pensions, to manage the income tax profile of the client when benefits begin to be drawn in retirement.

Blending a mix of unwrapped investments together with investments held in a range of tax wrappers, optimised to the needs of each individual client will increasingly become the norm for wealth planners.

The Government has also published the largest ever package of measures against tax evasion and avoidance. All law abiding taxpayers will be pleased to see this focus on catching criminals who illegally do not pay the taxes that are due on their monies.

It is also reassuring that the Government is limiting its stated focus on avoidance to those “who use contrived avoidance schemes to gain an unfair advantage”. This suggests that the previously announced general anti-abuse rule will be used sparingly and not to combat the use of arrangements deliberately legislated for by Parliament and accepted by HM Revenue & Customs for many years.

This is a Budget with much opportunity for advisers to continue to engage proactively with their clients.

Colin Jelley is head of wealth planning at Skandia


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