This CGA information sheet explains Tax Allowances and Exemptions as at the end of the 2008/9 Tax Year:
ISA
The annual investment allowance expires at the end of each tax year. If you don’t use it, you lose it. The maximum allowable investment is generally £7,200 for each individual to an investment ISA i.e. £14,400 per couple. There is no reason why the maximum should not be paid at the end of this tax year and the start of the next making a total outlay of £28,800 per couple. The big tax advantages of an ISA are that there is no tax on income and capital gains within the investment (although dividend tax cannot be reclaimed) and the proceeds when taken as a lump sum or income are tax-free. ISAs are generally near the top of the investors shopping list because they are very flexible and very tax-efficient.
The annual investment allowance expires at the end of each tax year. If you don’t use it, you lose it. The maximum allowable investment is generally £7,200 for each individual to an investment ISA i.e. £14,400 per couple. There is no reason why the maximum should not be paid at the end of this tax year and the start of the next making a total outlay of £28,800 per couple. The big tax advantages of an ISA are that there is no tax on income and capital gains within the investment (although dividend tax cannot be reclaimed) and the proceeds when taken as a lump sum or income are tax-free. ISAs are generally near the top of the investors shopping list because they are very flexible and very tax-efficient.
Pension contributions
Personal pension contributions are relieved against your highest rates of income tax in the tax year of payment. You no longer have a facility ‘carry back’ a contribution to a previous tax year. If you are a higher-rate taxpayer and you don’t meet the 5 April deadline, you lose the chance to reduce your tax bill in 2008/09 forever.
Personal pension contributions are relieved against your highest rates of income tax in the tax year of payment. You no longer have a facility ‘carry back’ a contribution to a previous tax year. If you are a higher-rate taxpayer and you don’t meet the 5 April deadline, you lose the chance to reduce your tax bill in 2008/09 forever.
Remember that pension plans are unusually tax-efficient. They offer tax relief at the ‘front end’ (contributions) and allow significant tax-free lump sums on retirement or death. Investment returns are also tax-privileged.
The tax uplift
For every £1,000 you pay to a registered pension scheme, £1,250 is invested at current tax rates (and your tax bill is reduced by a further £250 if you are a higher rate taxpayer).
For every £1,000 you pay to a registered pension scheme, £1,250 is invested at current tax rates (and your tax bill is reduced by a further £250 if you are a higher rate taxpayer).
Children’s Pensions.
You can make contributions for children and grandchildren (and any other children for that matter) even though they may be too young to have any earnings. You can pay up to £2,880 for each child this year and £3,600 will be invested.
Employer pension contributions
Employer contributions are generally allowable business expenses, but unlike pay, they are not taxed as an employee/director benefit. The new pension rules allow very large employer contributions to be paid for employees and directors, regardless of their level of earnings. Contributions paid before 7 April 2009 could be as much as £735,000 without the member being taxed. The rules are even more generous if the contribution is a payment on redundancy or retirement.
Employer contributions are generally allowable business expenses, but unlike pay, they are not taxed as an employee/director benefit. The new pension rules allow very large employer contributions to be paid for employees and directors, regardless of their level of earnings. Contributions paid before 7 April 2009 could be as much as £735,000 without the member being taxed. The rules are even more generous if the contribution is a payment on redundancy or retirement.
Protection from the lifetime allowance charge
The lifetime allowance charge is an unpleasant tax (55%) on personal aggregate pension funds that exceed a lifetime allowance when benefits are taken. The lifetime allowance is £1.65m this year and will rise to £1.8m in 2010. However, even though pension funds will probably increase, the allowance will be frozen for 5 years from 2011.
The lifetime allowance charge is an unpleasant tax (55%) on personal aggregate pension funds that exceed a lifetime allowance when benefits are taken. The lifetime allowance is £1.65m this year and will rise to £1.8m in 2010. However, even though pension funds will probably increase, the allowance will be frozen for 5 years from 2011.
If you had already built up substantial pension funds at 5 April 2006 (after which the lifetime allowance charge was introduced), you may be able to claim some protection from the charge. You only have until 5 April 2009 to make a claim to HM Revenue & Customs: there are unlikely to be concessions.
Employer pension contributions – losses
Employer pension contributions are generally allowable business expenses in the trading year in which they are paid. The impact of the contribution is not felt until corporation tax is paid, perhaps 9 months later: good for the tax bill, less good for cash flow.
Employer pension contributions are generally allowable business expenses in the trading year in which they are paid. The impact of the contribution is not felt until corporation tax is paid, perhaps 9 months later: good for the tax bill, less good for cash flow.
If the contribution is paid before the trading year-end and creates or increases a loss, the loss can be carried back and ‘relief’ is more instant.
Employer pension contributions – marginal rate relief
Although it affects few employers, those who have been trapped by the marginal rate of corporation tax may wish to reduce that disproportionate liability by payment of a deductible pension contribution. The rate is 32.5% on profits between £300,000 and £1.5million. The smaller companies rate is currently 21%.
Although it affects few employers, those who have been trapped by the marginal rate of corporation tax may wish to reduce that disproportionate liability by payment of a deductible pension contribution. The rate is 32.5% on profits between £300,000 and £1.5million. The smaller companies rate is currently 21%.
Sharing Tax Reliefs.
Husbands and wives each have their own tax allowances, but they are worth little unless they are used. Sharing income from a business allows personal allowances to be maximised and if income is equalised you can reduce exposure to the higher rate tax band (make sure you check how you do this with your accountant). Similarly, if you share assets, you become entitled to two annual exemptions against capital gains tax. You can give your wife, husband or civil partner an asset without incurring a liability to capital gains tax.
Capital gains tax
Allowances are there to be claimed. There is an annual exemption against capital gains tax this year and another next year. If you have assets that have made a gain then you may wish to sell just enough to ensure that your gain is within the annual exemption at the end of this year (annual exemption in 2008/09 is £9,600).
Allowances are there to be claimed. There is an annual exemption against capital gains tax this year and another next year. If you have assets that have made a gain then you may wish to sell just enough to ensure that your gain is within the annual exemption at the end of this year (annual exemption in 2008/09 is £9,600).
You may sell to realise cash, to change the balance of your portfolio, to reinvest in the tax-efficient environment of an ISA or to claim the tax-uplift of a pension contribution. You may even wish to transfer shares to a pension by way of a contribution: this may create a capital gain.
There are many other capital gains tax opportunities and these may involve carrying forward a loss realised in the current year or ‘rebasing’ a purchase price to defer a future gain.
You may simply wish to avoid the paperwork that goes with declaring a gain in excess of the annual exemption!
Inheritance tax
For those of us who are blessed with families and close friends, it makes little sense to hoard our wealth for the benefit of HM Revenue & Customs. The inheritance tax rules offer many opportunities to make gifts during our lifetime without incurring tax or heavy legal costs – and those gifts can bring so much comfort or pleasure to the recipients. Some gifts are limited to tax years:
For those of us who are blessed with families and close friends, it makes little sense to hoard our wealth for the benefit of HM Revenue & Customs. The inheritance tax rules offer many opportunities to make gifts during our lifetime without incurring tax or heavy legal costs – and those gifts can bring so much comfort or pleasure to the recipients. Some gifts are limited to tax years:
Annual exemption. You may gift up to £3,000 a year under this heading. If you didn’t use the full £3,000 last year, you can carry forward what you didn’t use to this year (only) in order to boost this year’s transfer.
Small gifts. You can make unlimited gifts that do not exceed £250 this tax year. (This is one for the grandchildren, but isn’t limited to them).
Normal expenditure. Gifts that are regular (e.g. each year) and do not significantly alter your standard of living may be exempt.
Taper relief. The longer you live after making a substantial transfer of assets, the less likelihood is that the gift will fall into your estate for inheritance tax purposes. Indeed, after seven years, you may have no liability on the gift at all.
Dividends
Take dividends from your family company for you and your wife of husband. Each of you is independently taxed and each has a personal allowance which is applicable for each year.
Take dividends from your family company for you and your wife of husband. Each of you is independently taxed and each has a personal allowance which is applicable for each year.
EIS
These investments enjoy a 20% tax subsidy and relief against income for losses. A profitable EIS will also allow you to defer the capital gains tax liability. EIS are designed to encourage investment in small, unlisted companies. They are subject to many qualifying rules and on the whole carry a level of risk which may concern investors in the current environment.
These investments enjoy a 20% tax subsidy and relief against income for losses. A profitable EIS will also allow you to defer the capital gains tax liability. EIS are designed to encourage investment in small, unlisted companies. They are subject to many qualifying rules and on the whole carry a level of risk which may concern investors in the current environment.
VCT
These are a means of investing via a managed vehicle in a range of smaller companies. There is a 30% tax subsidy initially and there is no tax on dividends or capital gains. There are many conditions, but they need not necessarily be as risky as an EIS (but still to be viewed with caution and a financial adviser).
These are a means of investing via a managed vehicle in a range of smaller companies. There is a 30% tax subsidy initially and there is no tax on dividends or capital gains. There are many conditions, but they need not necessarily be as risky as an EIS (but still to be viewed with caution and a financial adviser).
Investment allowance
From 2008/09, a new investment allowance is available for plant and machinery purchased by a business and put in the general capital allowance pool.
From 2008/09, a new investment allowance is available for plant and machinery purchased by a business and put in the general capital allowance pool.
Commercial buildings etc
There are a number of allowances, some of them at 100%, but others that are being reduced over the next two years. There is a new business premises renovation allowance (100%). Investment in enterprise zones may also attract relief at 100%.
There are a number of allowances, some of them at 100%, but others that are being reduced over the next two years. There is a new business premises renovation allowance (100%). Investment in enterprise zones may also attract relief at 100%.
Gift aid
Gift aid donations are uplifted for the charity by basic rate tax, but you can claim higher rate relief. The relief is claimed against tax years: this is the last opportunity to claim relief against 2008/09.
Gift aid donations are uplifted for the charity by basic rate tax, but you can claim higher rate relief. The relief is claimed against tax years: this is the last opportunity to claim relief against 2008/09.
NOTE:
These are summaries of what can be done with proper financial planning. The effectiveness will depend on individual circumstances.
The value of investments can go down as well as up.
You should not undertake any of the pension exercises without speaking to a CGA qualified adviser who will explain the suitability and risks to you after conducting a thorough confidential review.
Initially enquiries will be handled by CGA Services Ltd which is not a financial adviser and does not dispense financial advice. CGA Services will introduce you to an adviser from CGA Financial & Investment Services Ltd or CGA Insurance Services Ltd. CGA Financial & Investment Services Ltd is registered in England and Wales ( number 2666180) and represents St. James's Place Wealth Management plc which is authorised and regulated by the Financial Services Authority. CGA Insurance Services Ltd is authorised and regulated by the Financial Services Authority. Our FSA Register number is 307262. Our permitted business is advising on and arranging general insurance contracts.
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