Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals.
It’s not long before the end of the tax year – around five weeks to be exact - and so now is the time for individuals to focus on maximising their tax reliefs and allowances. This year is unique in that for the first time in many years, from April 6 there will be a reduction in the top rate of tax; those with income of more than £150,000 will see their top rate reducing from 50% to 45%. It is also worth remembering that there is a 60% tax rate for those with income between around £100,000 to £116,000, because of the withdrawal of personal allowances.
Taxpayers paying tax at either 50% or 60% would be wise to maximise tax reliefs which are given in full against income. This could include pension contributions (up to £200,000 including any unused relief brought forward), Gift Aid contributions, and loss reliefs (including losses incurred on shares in some private companies).
It also makes sense to delay income payments such as bonus payments and dividends from companies where possible, especially for those paying a higher rate of tax this year compared to next year.
Other planning opportunities include looking at tax efficient investments other than pensions, and whether there is the opportunity to make use of reliefs which would otherwise be lost as the annual limits are refreshed into the new tax year. These investments include:
• Enterprise Investment Scheme relief where up to £1m can be invested into qualifying companies with income tax relief given at 30% and other capital gains deferred at 28%.
• Seed EIS investment which allows up to £100,000 to be invested in very small companies for 50% tax relief as well as capital gains tax exemption. Additionally, gains in recent years rolled into these investments will be exempt from capital gains, but only for investments made before April 6, 2013.
• Venture Capital Trusts where up to £200,000 can be invested for 30% income tax relief
• Individual Savings Account (ISA) where up to £11,280 can be saved in 2012/13 which can then be invested for growth in a tax-free environment.
These reliefs have great value. Taking one example, if a top rate taxpayer invests £100,000 into a pensions and VCT, and invests the tax relief generated into an EIS arrangement and ISA, the tax relief given could amount to 54%. In other words, without any investment growth, the £100,000 invested alone would be worth £154,000. That’s simple tax planning using tax reliefs and allowances available to all taxpayers.
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