The first practical tip for any taxpayer is to prepare the Tax Return early this year. For those with income over £100,000 there is a loss of £1 personal allowance (£7,475 for 2011/2012) for every £2 of income plus 40% income tax results in a marginal rate of tax of 60%.
The twist in the tail for those with earned income is that there is an extra 2% of employees’ National Insurance (NIC) and/or Class 4 NIC. It has been said that ’coming to a wage packet near you‘ is 62% marginal tax!
’Notice of Coding‘ Errors
At a practical level there seem to have been a large number of notices of coding where this loss of personal allowances is not allocated correctly or is not provided for, especially where there are multiple sources of income, e.g. current earnings and pension received.
Tax Planning Points
A practical point is to again produce the draft Tax Return moving forward to assess the historic damage and the potential liabilities. It is important to carry out tax planning projections and to look at problems around the marginal rates above the £100,000 earnings limit.
Other sources of income, for example ‘buy to let’ rental income, will need particular review. For example, the claiming of capital allowances and interest paid will be very poignant moving towards 5 April 2012.
Areas to look at are gift aid donations and pension contributions that extend the basic rate band thus reducing the exposure to the higher rate band. The extra National Insurance is forcing the focus on the limited company and the efficient extraction of funds via dividends which do not carry an NIC burden.
Also the timing of when the dividend can be drawn around 5 April can provide further income tax planning around the date of withdrawal. There will also be great emphasis on the use of spouse’s allowances and lower rate bands of income tax through inter-spouse transfers etc.
With the higher rate band impacting on CGT there are large advantages to be gained with proper planning.
Practical tax and NIC planning points include:
• Prepare the 2011 Tax Return as soon as possible and assess the damage…
• Look at tax planning points prior to 5 April 2012 for the marginal income levels.
• Consider the critical advantages of tax planning opportunities, e.g. pension payments, loan management, incorporation, timing of dividends, inter-spouse transfers and review, gift aid, etc.
• National Insurance planning – consider the use of a limited company.
By Julie Butler