I ended last week’s article on the rather depressing note that because those on the lowest incomes (below £25,000) will benefit from a £1,000 increase in the personal allowance and they have been protected from the 1 per cent National Insurance increase also applying from 2011/12, the Treasury has had to look at a wider cohort than those earning more than £150,000 to recoup this “giveaway”.
The Treasury’s answer is to ensure that, for the 2011/12 tax year, instead of moving into higher-rate tax at an income of £43,875, you will do so at £42,475, £1,400 less.
This is estimated to bring an extra 750,000 taxpayers into the higher-rate tax bracket, making a total of 3.8 million higher and additional-rate taxpayers. This is almost twice the 2.1 million higher-rate taxpayers when Labour came to power in 1997 and only just shy of the 3.87 million in 2007/08 before the recession hit.
In the Telegraph recently, it was postulated by Mike Warburton of Grant Thornton that “If the Government adopts the same approach in future years (restricting the benefit of the increased personal allowance to those on lower incomes), you could hit higher-rate tax at below £40,000 a year, although the Treasury disputes this.
The papers that came out with the autumn statement suggested that only an extra 400,000 taxpayers would be drawn into higher-rate tax but we now have the Institute of Fiscal Studies saying the real figure will be about 750,000, nearer my estimate.’
As indicated above , not only will we see the lowering of the higher-rate tax threshold from April 6 but we will also see the main rate of NI for employees increase by 1 per cent from 11 per cent to 12 per cent and the increase of the extra NI charge on earnings above £42,475 double to 2 per cent.
Higher-rate taxpaying families will also have to cope with the widely publicised removal of child benefit from 2013.
It may well be possible to dispute the exact number of additional people that will be dragged (maybe not kicking and screaming but possibly only because they do not fully appreciate it) into higher rates of tax but no one can dispute there will be considerably more higher and additional- rate taxpayers in 2011/12 than there are in 2010/11.
Not all these will be up for financial advice but the numbers who are (and could benefit from it – good, client-centred financial advice that is) will definitely be more likely to be maximised if advisers set out to specifically communicate with this expanded group.
An approach with a clear identity – especially if that identity has a specific and professional look and feel – has a great chance of engaging the want to do something about it instincts of the taxpayer. Tax has a great anxiety-generating capacity, don’t you know?
But most affected people will not necessarily wake up with a tax problem as top of their immediate to do list – in other words, it is likely to be in the important but not urgent box. Ahead of it is likely to be many other more pressing issues in the pecking order of must do stuff.
That this may be so does not make it right but it does remind us that adviser proactivity targeting the problem and indicating solutions could be fabulously effective.
There is no shortage of solutions to higher tax, including
- Isas (for each of a married couple)
- Pensions (at least up to the £50,000 annual allowance in 2011/12, plus carry forward and possibly up to £255,000 for those not affected in this tax year by the special annual allowance and whose pension input period ends in the current tax year – or can be amended to do so)
- Collectives (UK and offshore for low/no-income/high- capital growth portfolios)
- Insurance bonds, UK and offshore, for tax deferment and control -especially in relation to higher-income- producing portfolios
- Qualifying savings plans for unlimited regular savings. Such plans, with a minimum 10 year term, can produce tax- free capital or income. With the right trust, they could deliver accessible, IHT-free benefits. This resurgence of interest is reassuring but it is essential that any new Mip must have been subjected to a rigorous treating customers fairly audit in relation to underlying funds and charges before being passed fit for adviser sales. New Mips have real legs, I believe – they just have not reached tipping point yet.
For most financial product-based strategies, maximum benefit will be secured if the plan is or plans are in force so now’s the time to lay plans for the brave (but not so fiscally friendly) world that many of your clients will be enterin in 2011/12.
How about other strategies? Well, salary sacrifice (or salary exchange) has been well publicised of late as a highly effective means of minimising tax and NI. The two most popular destinations for the sacrificed salary appear to be pensions and child- care vouchers.
There has been much written about the current and future limitations on pension tax relief for high-earners (currently) and contributions and accruals in excess of £50,000 plus carry forward (from 6 April 2011) but it is perhaps less well known that, from the next tax year, tax relief on childcare vouchers will be limited to the basic rate for new claimants.
In some cases, for those who expect to be paying a higher rate of tax next year than they do currently, it may be worth bringing income forward, for example, by closing a deposit account, so that the interest is taxed in this tax year or receiving a bonus this year rather than next.
In practice, though, the scope for this type of saving may be limited as the very bringing forward may take you into the higher rate of tax that you are seeking to avoid.
As well as salary sacrifice/exchange all couples should give careful thought to the savings that can be secured by ensuring that income and gains flow to the person who pays the lower rate of tax. Holding investments in the right hands to give rise to the desired outcome makes obvious sense.
This type of strategy is helped by the fact that most gratuitous assignments between spouses for capital gains tax purposes (provided they are living together) and under the chargeable events’ regime in relation to investment bonds will not run the risk of triggering a tax charge.