Start As You Mean to Go On
A new tax year is here once more, and with the recent budget has shown no major changes to any of the main taxes, there is no reason why you should not get your house in order from a tax planning perspective.
Of course, we will wait to see what the forthcoming election on the 6 May holds and whether any incoming government would decide to do a second budget, and we will keep our readers abreast of the situation if and when it arrives.
In the meantime, if you are likely to have income above £150,000 this tax year, you will need to either be setting aside 50% of any income over and above this or think about using some tax planning strategies to avoid this liability. This article looks at just a few of the issues available.
Personal Pension Contributions
If you are looking to set aside some of your income for retirement, you will need to be aware of the pension tax relief restrictions. The restriction will prevent those individuals who put more than £20,000 (£30,000 in some limited circumstances) into a personal pension between 6 April 2010 and 5 April 2011 and will apply to individuals who have had taxable income of over £130,000 in any of the last 3 tax years (including the current year). These restrictions do not apply to regular monthly or quarterly contributions into a personal pension provided that these have been made consistently in the past.
If you are caught by the restriction, you will find that higher rate tax relief is restricted to only the first £20,000 of the personal contributions made, which will obviously decrease any tax refund that you could have expected prior to the restrictions, effectively meaning that you pay 20%-30% tax on your pension contributions.
If your employer (including your own limited company) makes the contribution on your behalf, any Corporation Tax relief will be unaffected, but total contributions exceeding £20,000 will generate a personal tax bill on the excess!
Final detailed legislation is expected shortly, although it is clear that anyone who has income of more than £130,000 a year may like to look for other alternatives from traditional pension strategies.
One alternative to the approved pension route is that of using an EFRBS (Employer Financed Retirement Benefit Scheme).
An EFRBS is an 'unapproved' (but still completely legal!) pension scheme which can be set up for an individual or a group of individuals whether related or not, and has been around for several years now.
Previous guidelines potentially allowed employers to claim a Corporation Tax deduction upon the contribution to EFRBS, although recent HMRC guidance has confirmed that Corporation Tax relief will only be allowed when taxable payments have been made to the pension beneficiaries.
Whilst EFRBS do not appear to be as tax efficient as they possibly once were, they remain a viable option for individuals to receive monies from their employer (including their own limited company) without being stung for tax at the higher rates of tax.
Other additional benefits of EFRBS are that it is not caught by the 'approved' pension rules which restrict the types of investments that can be made, there are no restrictions on maximum contributions or benefits, any monies held are outside of the Inheritance Tax estate, and if the EFRBS is located offshore, then any income and capital growth could be tax free.
Therefore EFRBS are able to invest in residential property or even such things as antiques, wine collections and vintage cars. If these happen to be purchased from the ultimate beneficiary, then the individual then has the cash in his pocket once more without the tax liability (although a Capital Gains Tax charge may be payable)!
In addition, should you wish to obtain this money prior to retirement, then a proportion of it can be drawn (dependent upon the trustees agreement) as a commercial loan, which of course means that any interest paid you are effectively paying to yourself!
Due to the fact that no income tax is payable on contributions made into an EFRBS by the employer, the effective tax rates on any monies paid into an EFRBS are between 21% and 28% (being Corporation Tax).
Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT)
Both of these similar options are investments that are made into smaller, more 'risky' businesses than many investors will not necessarily otherwise consider, and hence offer some reasonable tax breaks if you are willing to take the risk.
Enterprise Investment Schemes offer income tax relief at 20% on the gross investment up to maximum of £500,000 per tax year, together with the ability to defer a capital gain incurred up to 3 years before or 1 year after the EIS investment. However, the investment must be held for a minimum of three years in order to obtain full tax relief including a tax-free gain on any gain made on the disposal of the EIS shares, also offering additional tax relief in the event of the investee company going bust.
On the other hand, Venture Capital Trusts may seem much more attractive when viewing the tax relief available on its own as 30% Income Tax relief is available provided that the Venture Capital Trust investment is held for at least five years. In addition, any growth in the value of the investment and any dividends received from the investee company are tax free, although there is no availability of other capital gains to be deferred by using this scheme.
This article only covers a small selection of the planning options available to those individuals likely to fall into the higher rate band of Income Tax in very brief detail.
Some of the options available may not be suitable for all individuals, and advice should be sought from an appropriately qualified accountant or Independent Financial Adviser before embarking on any planning strategies.
If you wish to discuss your affairs with an adviser in either field, please contact us.
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