Tax planning in general terms applicable to 2011

  • Employers should utilise salary sacrifice for their employees making pension contributions to an employer's pension scheme to contra rises in both the rate of Primary and Secondary Class 1 National Insurance.
  • Third party pension contributions - this offers a donor an opportunity of making an exempt or potentially exempt gift for inheritance tax purposes (e.g. a grandparent can make gifts on behalf of a grandchild). Assuming the grandchild has no net relevant earnings, £3,600 gross may be paid each tax year. The donor pays £2,880 net and the chosen life company reclaims £720 tax relief on the contribution from HMRC, making £3,600 gross.
  • The current lifetime allowance for pension funds stands at £1.8m. For 6 April 2012, this is going to be reduced to £1.5m. Those who did not register for enhanced protection as at 6 April 2006, and who now have pension funds in excess of £1.5m, will need advice on a) not to make more pension contributions & b) to register for protection (the format is yet to be announced but a significant tax charge could be levied on retirement on any funds in excess of the reduced lifetime allowance).
  • Do not forget Capital Gains Tax - this is something that is quite often overlooked from a financial planning perspective. Attractions are i) an annual exemption of £10,100 of accumulated gains are free of tax, (ii) tax is levied at either 18% or 28% (depending on whether you are a basic or higher rate income tax payer) and (iii) losses can be carried forward and used to mitigate gains in future years. The point here is that many people invest in income producing assets. Outside an Individual Savings Account, for those earning in excess of £43,875 in 2010/2011 (£42,475 in 2011/2012), the tax rate applied will be a minimum of 40% (32.5% on dividends). For taxable incomes in excess of £150,000, the rate of income tax is 50%/ 42.50% dividends. It is prudent to take advantage of the tax free Capital Gains Tax exemption allowance and lower rate of Capital Gains Tax wherever possible.
  • To check deposit rates of interest earned on savings to make sure these remain competitive.
  • Married couples to take advantage of any available unused personal allowances and to split wealth accordingly.

Action before tax year end 5 April 2011