Key Opportunities for High Earners
Last year’s Finance Act brought in the anti-forestalling tax net and has left a number of people bemused about paying further amounts into pensions.
With our taxes say VAT likely to go up and personal allowances due to be frozen we should maximise what relief we can secure.
There are key advice opportunities to consider:
• Making sure you use your pension contribution allowance this tax year and next.
• Can you manipulate your income to get out of the special annual allowance tax net altogether.
• Exploring whether investing in bonds can help.
• Planning ahead for the forthcoming tax and NI changes.
Using the allowance this tax year and next
You can still benefit from the usual tax breaks on pension provision within your special annual allowance. So it makes sense to make the most of this before April, and in the 2010/11 tax year, before even stricter rules come into play in April 2011.
• Remember everyone with relevant income of £130,000 or above has a basic allowance of £20,000 a year - and it can be as high as £30,000.
• Anyone with regular pension savings in place before the anti-forestalling measures were announced can be continued with all the usual tax breaks, even if they are more than the standard allowance.
Manipulating income
The special annual allowance rules only apply to those with relevant income of £130,000 or more in either the tax year their pension provision is made or the previous two tax years.
There are a number of ways if you have gross income above £130,000 can reduce relevant income below this crucial threshold:
• pay pension contributions (the first £20,000 can be deducted to calculate relevant income),
• for those already drawing pension income, use the flexibility of income drawdown and phasing to control taxable income,
• choose non-income producing investments such as investment bonds(be careful about surrendering bonds, as the chargeable gain (without top-slicing) is added back in) or tax free investments such as ISAs,
• make gift aid donations.
Also bear in mind that relief for trading losses (amongst others) are deducted. And
Another major point to remember, is if you are out of the special annual allowance tax net, it’s business as usual for pension funding.
So, for example, a client with total income of £145,000 in this tax year who was below the £130,000 threshold in the last two tax years can pay a £145,000 pension contribution and get the usual tax breaks without worrying about the special annual allowance rules. This is because the first £20,000 of the pension contribution is taken off their total income figure, giving relevant income of £125,000.
Changes from 6 April 2010
Anyone with income over £100,000 from April this year, they will have their personal allowance reduced by £1 for every £2 of adjusted net income above £100,000. This means that anyone with adjusted net income of £112,950 or more will have no personal allowance at all!
• Relievable pension contributions reduce adjusted net income. So by making pension contributions to reduce their adjusted net income below £100,000, clients can get their personal allowance back - and potentially achieve an effective rate of tax relief of 60% on some of those contributions.
• There is also the option of using salary sacrifice, which can boost the effective rate to over 65% in some circumstances. From April 2011, when National Insurance contribution rates increase by 1%, salary sacrifice should be even more attractive.
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