Tony Wickenden Tax Planning
The announcement of two tax changes in this year’s Budget have the potential to seriously change what people think and what people are prepared to do to reduce taxation. The two changes I refer to are:
- The introduction of a 50 per cent income tax rate from 2010 and
- The removal of higher-rate tax relief on pension contributions.
Financial advisers need to be aware of the potential desire on the part of their clients for explanation of and strategies to reduce the detrimental effects of these changes.
Advisers also need to be prepared for and able to use the opportunities available to maintain or improve the financial wellbeing of their clients (and themselves) in the light of these changes.
Which clients are we talking about? Most obviously, those who will be affected by the changes, so those with taxable income above £150,000.
But it goes further than this. Even those who are unlikely to be affected by the changes may be more open to consider tax planning to reduce tax.
In other words, tax planning has probably just moved up the list of financial priorities for a wide range of people.
Fifty per cent tax (and higher-rate tax relief removal for pensions) for those who will be affected by it is clearly sufficiently serious to cause those people to want to do something about it. But the very announcement of a 50 per cent tax has, I believe, also raised the interest in planning of all higher-rate taxpayers – even those with incomes below £150,000.
There could be a tipping point effect that may mean that while 40 per cent tax had become “acceptable”, the introduction of the 50 per cent additional rate is just going too far. And let’s not forget that, for those with income between £100,000-£113,000ish in 2010, the effective rate of income tax borne on the slice of income falling between £100,000 and £113,000ish is 60 per cent.
This results because each £1 over £100,000 and up to £113,000ish not only triggers tax at 40 per cent but also causes the loss of 50p of personal allowance which means that a further 20p of tax becomes payable – making a total of 60p of extra tax payable – for every £1 of income received between £100,000 and £113,000ish when the personal allowance is fully wiped out. More capacity for anger generation and more financial adviser scope for anger management or resolution. Come in Adam Sandler.
“Tax planning has probably just moved up the list of financial priorities for a wide range of people.”
The first and most important part of any effective client communication is in place – a current or imminent and important change that causes, or has the capacity to cause, anger and anxiety among an important client segment. With this in the bank, so to speak, we should have the makings of an effective business-generation campaign.
And the segment to be communicated with? All higher-rate taxpayers but especially those with taxable income that does or is likely to exceed
Now, all we need is a range of solutions that will deliver mutual client and adviser benefit – and we are away.
That part is not too difficult either.
For those who will suffer the special annual allowance charge (effectively limiting tax relief on a pension contribution to the basic rate) a discussion of pension alternatives may be rewarding.
Any unused Isa allowances for a couple should certainly be taken up. Remember the contribution limit increased to £10,200 a year from October for people aged over 50 in the 2009/10 tax year, and to that level for everyone from April 6, 2010.
A tax-free fund and tax-free benefits will be appealing, even if no direct IHT planning with the Isa is possible. Those with substantial (or potentially substantial) Isa portfolios may, however, be receptive to a discussion about the merits of appropriate life insurance in trust to meet the potential inheritance tax liability on the Isa portfolio.