WIth very few options open to the chancellor in the recent budget the following changes were made to income tax:
- For 2014/15 the personal allowance for those born after 5 April 1948 will be increased to £10,000.
- As a consequence of the above increase, the basic rate limit for 2014/15 will be reduced to £31,865 and from 2015/16 the allowance will be increased by the CPI.
- The additional rate of tax reduces to 45%, and to 371Ž2% for dividends.
- The personal allowance for those born after 5 April 1948 increases to £9,440.
- The age-related higher personal allowances are unchanged as follows:-
- £10,500 for those born after 5 April 1938 but before 6 April 1948
- £10,660 for those born before 6 April 1938
- The total income limit for the purposes of the higher personal allowances increases to £26,100.
Tax Planning opportunities
The fact that each individual has their own personal allowance and their own starting and basic rate tax bands means that worthwhile overall income tax saving opportunities are available for 2013/14.
This is especially so in regard to income that falls between £100,000 – £118,880 which causes the removal of the personal allowance and an effective tax rate of 60% for non-dividend income.
For all couples, as a bare minimum, both personal allowances and starting/basic rate tax bands should be used to the full. This is particularly beneficial where income can be legitimately shifted from a higher or additional rate taxpaying spouse to a non, starting or basic rate taxpaying spouse.
For those with cash and investments this will usually be facilitated by a transfer of income-producing investments from the higher tax paying spouse to the other.
Any such transfers would usually be CGT and IHT neutral as transfers between spouses living together are treated as transfers on a no gain/ no loss basis for CGT purposes and transfers between UK domiciled spouses (living together or not) are exempt from IHT without limit.
Age Allowance Trap
Age allowance applies separately to a husband and wife as does the total income limit of £26,100 above which the allowance reduces. By careful planning both spouses can possibly each qualify for a full age allowance.
When investment income falls within the “age allowance trap” it can suffer an effective rate of tax of 30% so reinvestment in non-income producing assets should be considered.
Capital investment bonds, capital growth oriented collectives and ISAs may be attractive as, “income” can be taken without loss of age allowance. With the Insurance based investment bond (“Investment bond”), this will commonly be by use of the 5% annual withdrawal facility. In some cases, more than 5% can be taken (without an addition to total income which may impact on the age allowance) provided the first withdrawal is made in the second policy year.
Income over £100,000
Where an individual has adjusted net income in the band between £100,000 and £118,880 (or just above £118,880) a part of any non-dividend income in that band will effectively be taxed at 60% because of the cut back in the personal allowance.
A contribution to a registered pension plan could, in effect, provide tax relief at the same 60% rate. As part of their planning, such people may also wish to consider independent taxation strategies and reinvestment into tax-efficient investments such as ISAs or capital investment bonds. However, it needs to be borne in mind that no top-slicing relief applies for the purposes of adjusted net income when a capital investment bond is encashed.
If you would like any help with tax planning, contact us for a free, no obligation chat.