By ADRIAN LOWCOCK 31/12/2010
It is nearly too late to avoid one of the tax increases imposed by the coalition government – the increase in VAT from 17.5% to 20% takes effect on 4 January – but there are plenty of other tax changes and planning measures that investors should be aware of.
The two most important are the rules covering ISAs and pensions. The ISA allowance for the current year is £10,200 per person, which means couples can shelter £20,400 from income and capital gains tax. From 6 April 2011, the allowance will increase in line with the inflation rate for the previous September, which means the allowance for 2011/12 is going to be £10,680. The allowance cannot be carried forward so it is important to use it before the 5 April deadline.
Unlike ISAs, the changes to the pension rules are not all to investors’ advantage. From 6 April, the maximum amount which can be put into a pension, and qualify for tax relief, each year will be cut from £255,000 to £50,000 while the lifetime allowance, covering the amount which pensioners can draw benefit from, also falls from £1.8 million to £1.5 million. Anyone considering topping up their pension by a significant amount should, therefore, consider doing so before the end of the tax year – particularly given that contributions still qualify for relief at the highest rate of tax incurred, which could be 50% for the top earners. From April, unused allowances can be carried forward for up to three years giving the potential to pay up to £200,000 into a pension for those who do not make the full permitted contribution each year.
More positively for pensions, from April 2011, investors will no longer be compelled to buy an annuity, giving greater flexibility on how the funds in a pension can be used. Options could include continuing to invest or take income drawdown. The over-riding requirement is that investors will not be allowed to use up all their fund then fall back on the State, so the limit on the amount which can be withdrawn will be equal to the amount a single person annuity purchased with the fund would provide.
Investors should also be aware of the annual capital gains tax (CGT) limits, currently £10,100. It is worth considering whether there are impending disposals which could be made in this tax year to make full use of the allowance – which is available to both husband and wife – particularly now that the rate has been increased from 18% to 28%.
Anyone with a large income tax bill should also consider whether they should be investing in a Venture Capital Trust or Enterprise Investment Scheme, both of which give significant tax breaks although they are both relatively high risk.
For more information please call one of our Investment professionals on 020 7189 9999.