Personal allowances below age 65 increases to £7,475 for 2011-12; ages 65-74 increases to £9,940, and age 75 and over rises to £10,090. These reduce tax payable. However, the basic rate threshold decreases from £37,400 to £35,000, bringing more people into the higher rate band at 40%. At £150,000 taxable income, the rate of tax is 50%.
Where the level of adjusted net income is above £100,000, all personal allowances reduce on a £1 for £2 basis until they become nil at around £115,000 (where the effective rate of tax is 60%). Capital gains tax (CGT) remains at 18% for basic rate taxpayers (after the CGT personal allowance of £10,600) and 28% for higher rate taxpayers.
The level of income where age related personal allowances reduce from is now £24,000, up from £22,900. Inheritance tax (IHT) is reduced to 36% (from the normal ‘death rate’ of 40%) on net assets where 10% of your estate is given to charity.
Use capital growth for income as capital gains on investments are taxed at a maximum of 28%, whereas the highest rate of income tax is 50%, plus you use the CGT allowance of £10,600. Use tax-reducing strategies, including investments and pension contributions to preserve personal allowances and reduce tax to lower rate bands.
These increase to £10,680, of which £5,340 can be in a cash ISA. ISAs grow tax free and are accessible. A new junior ISA of up to £3,000 has been introduced for children but must be held to age 18, where it replaces the CTF (Child Trust Fund).
The investment limit remains at £500,000 per person for this tax year, but doubles to £1 million from 2012/13. The income tax relief has increased from 20% to 30% from 6 April 2011 (subject to State aid approval), and investments must be held for 3 years to retain the relief. There is no CGT on EIS share gains, and gains on other assets can be deferred at 18% or 28% until you die, when the gain dies with you. After 2 years the investment generally falls out of your estate for IHT. Total tax reliefs could therefore be 98% (30% income tax, 28% CGT, and 40% IHT).
VCT Investments & EZ Investments
There is no change to VCT investments with tax relief at 30%. EZ Investments came to an end on 5 April 2011. The Government is seeking to create new Enterprise Zones and to encourage investment in the future, so they may be revived.
The maximum contribution level is 100% of relevant earnings capped at £50,000; with no earnings the maximum is £3,600 gross. Contributions are relievable at your highest marginal rate, of up to 50%. Personal (not employer) contributions are uplifted at 20% by HMRC, and in addition you can claim tax relief if a higher rate taxpayer (at 20%) or additional rate taxpayer (at 30%). The maximum £50,000 contribution includes employer contributions. Unused annual allowances can be carried forward from 2008/09, so greater contributions can potentially be made.
Use tax-reducing investments to preserve your personal allowances. Pension strategies can increase your basic rate band and therefore possibly reduce any CGT payable at 28% to 18%. Reclaimed tax can be recycled into other tax-reducing investments.
By Tony Granger