We are at the end of another year already. Shocking I know. This year seems to have passed through almost as quickly as the national debt has risen. It has been a year of political limbo, with so many decisions being made in view of next year’s election.
Will the election be March to save going through another nonsense budget, or will the idea of door knocking in the dark and snow ensure a May election. Either way, the Pre Budget Report certainly was done with this in mind. A banker’s bonus tax put in to drum up more votes than tax, and both stealth and blatant increases on anyone earning more than £150,000. As for the bonus tax, it probably won’t generate enough to offset the cost of the department created to implement it, as it will be the easiest tax planning the banks have done in ages.
Anyone earning over £180,000 will not only be hit with 50% tax, but 30% benefit in kind taxation on the employers pension contributions (they managed to keep that quiet for a few days), only 20% tax relief on the employees contributions (so pension contributions taxed at 30%), plus have taxation of 40 or 50% when you come to take the money out. And of course taxing someone’s income twice is never enough, so Inheritance Tax thresholds will also be frozen to really annoy the Tories.
We are in recession with a massive public debt though, so you might argue it makes sense to tax the higher earners so that increasing employment and company growth can be the top priority. An increase of 1% in National Insurance (tax on employing people) doesn’t therefore seem like joined up thinking, but when has that been necessary in politics? And what did we find out about how we half the national debt as promised? Well nothing really. That would involve a politician planning for the country’s future, something that is of little interest when the next 6 months is all that matters!
What is the moral of this story? I suppose financial planning becomes even more vital. Where in the past pensions were usually the main port of call, other options start to become much more attractive. Ensuring that trusts are used to protect your wealth being taxed time and time again is vital. Making sure you use the few tax breaks the government gives you (e.g. ISAs, Venture Capital Trusts, Capital Gains Tax allowance & Annual Inheritance Tax Gift Allowance) is key, as they are “use them or lose them” allowances. And once you are at retirement age, drawing money out of pensions in the correct manner to allow you to manage your taxation has never been so important. With the regularity of tax and pension changes at the moment, flexibility is key, and utilising different strategies essential.
Let’s hope that the new year brings lots of prosperity, a little more continuity and some simplification through red tape removal, although I am not sure the Tories are really geared up for the changes that are needed. They definitely need to have a bold 18 months if they get in; it is time for change! The pension area, for example is a complete mess. If the old age pension was put back to say age 70, possibly even later, a decent meaningful level of income could be provided. People could save for a set period of time if they wanted to retire earlier, and layers of complexity removed. With an increased basic pension, earnings related pensions could be scrapped, which would solve the deterrent of saving for lower earners, and remove around 48,000 pages of legislation, not to mention those employed to administer it. This is the perfect example of layer upon layer of bad legislation, rather than fixing the problem properly.
That’s it, the rant is over! Planning is the key, and if you would like us to help you build that plan, we’d be delighted. Remember; 'we don’t plan to fail, we fail to plan!’ Make sure you don’t.
From all of us at Efficient Portfolio, we would like to wish you a very happy Christmas, and a prosperous new year.
Merry Christmas.
Written by,
Charlie Reading Dip PFS
http://www.e-fficientportfolio.co.uk/
Tel; 01536 772077
Disclaimer
This document is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. It does not constitute financial advice under the terms of the Financial Services and Markets Act 2000. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. Past performance is not an indication of future performance. Interested parties are advised to contact the entity with which they deal, or the entity that provided this document to them, if they desire further information. The information in this document has been obtained or derived from sources believed by E-fficient Portfolio Ltd to be reliable, but it does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgement of E-fficient Portfolio Ltd at this time, and are subject to change without notice. © 2009 E-fficient Portfolio Ltd (which is not regulated or authorised by the Financial Services Authority).
Monday 21 December 2009
Thursday 10 December 2009
How to profit from this week’s Pre Budget Report
There have been a number of proposals made by Alistair Darling this week, and most lead to paying more tax one way or another. So what can the different groups of people that are all affected in different ways, do to minimise these effects, and even profit long term.
Partnerships and Sole Traders
The increase in National Insurance is likely to mean that more people will benefit from having a Limited Company rather than trading as self employed, so speak to your accountant about this. This will also allow you to share your income through dividends with a spouse, if appropriate, to provide greater tax savings.
Limited Company Owners
Business owners will be hit with a further 1% Employers National Insurance in the PBR’s proposals. Hardly much of an incentive for employing more people, but let’s leave the political rant for another day. One way of minimising the effect of this is to restructure the company pension to accommodate salary sacrifice. Rather than making an employer contribution and an employee contribution to the pension scheme, the whole amount can be made an as employer contribution, and the employee’s salary reduced to accommodate this increase. You will save Employer National Insurance on the amount the employees are contributing, which may have the effect of saving the company tax, even though rates have gone up. Finally, for companies looking to extract profits, Employee Benefit Trusts were expected to be attacked yesterday, but seem to have been left untouched. If you want to take more than £100,000 out of the business, this certainly needs to be considered.
Employees earning under £130,000
For the business owners I have just described how restructuring the pension scheme to accommodate salary sacrifice can save the company tax. This also has the effect of saving the Employee National Insurance as well. This is a relatively easy thing for an employee to ask their company to do, and as it saves the company money, either the company will be keen to comply to get the saving, or a very generous employer may even pass on this saving to you. This will enhance your pension fund even further, whilst also reducing the tax you pay.
Employees earning more than £130,000
The increase in higher rate tax to 50% for people earning over £150,000 from April 2011 initially looked like it would lead to a flood of money heading into pensions to reduce the liability. Obviously the idea of people saving for their retirement is seen as such a bad thing by the government, that they felt it necessary to create some anti-forestalling rules, making it more difficult for these people to get full tax relief on their contributions. The government amended those again yesterday to stop people making large contributions from their company, and to include those that earn over £130,000. As such, pension contributions will effectively be capped to a total contribution of £20,000 per annum, otherwise you’ll start to only get 20% tax relief, rather than the 40% (or 50%) you have paid. This is something to generally avoid, as you obviously run the risk of paying 40% tax when you come to take the funds out of the pension. After £20,000 has been funded, you should start to consider using Venture Capital Trusts which give 30% income tax relief, and the ability to reinvest after 5 years for more relief.
Anyone earning between £100,000 and £112,000
Anyone earning between these figures is going to be paying a marginal rate of 60% tax from April. That is because for each £2 they earn over £100,000, they will lose £1 of the personal allowance, adding an extra 20% taxation to the 40% they are already paying. As this group fall into the category of earning under £130,000, extra pension contributions will therefore see a theoretical tax saving of 60%, so make sure you use it.
Go Green
There are a number of proposals, if you want to spend a little to save over future years. A Boiler Scrappage Scheme providing a £400 incentive to households to replace ‘old boilers’ (no, not the wife) will be introduced, plus extra incentives to install solar panels and wind turbines. Finally, electric cars are to be exempted from company car tax for five years, with a 100% first year capital allowance for electric vans.
Benefit allowances
Benefit allowances like Child Benefit Allowance, and Disability Allowances will be increased this year, but provision has already been put in place for a ‘real’ reduction in these later next year. Anyone would think there was an election looming!
The conclusion
Although there seem to be a few areas where the Chancellor has gone for it, it actually turned out to be a Pre Budget Report of little note. Increasing the complexity of pensions with the 6 monthly tinkering has become the norm, although it still amazes me that they are so keen to stop people saving for their retirement. One suspects that the worst is yet to come, however one also suspects that it’s Alistair Darling’s last PBR anyway.
Written by,
Charlie Reading Dip PFS
http://www.e-fficientportfolio.co.uk/
Tel; 01536 772077
Disclaimer
This document is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. It does not constitute financial advice under the terms of the Financial Services and Markets Act 2000. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. Past performance is not an indication of future performance. Interested parties are advised to contact the entity with which they deal, or the entity that provided this document to them, if they desire further information. The information in this document has been obtained or derived from sources believed by E-fficient Portfolio Ltd to be reliable, but it does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgement of E-fficient Portfolio Ltd at this time, and are subject to change without notice. © 2009 E-fficient Portfolio Ltd (which is not regulated or authorised by the Financial Services Authority).
Partnerships and Sole Traders
The increase in National Insurance is likely to mean that more people will benefit from having a Limited Company rather than trading as self employed, so speak to your accountant about this. This will also allow you to share your income through dividends with a spouse, if appropriate, to provide greater tax savings.
Limited Company Owners
Business owners will be hit with a further 1% Employers National Insurance in the PBR’s proposals. Hardly much of an incentive for employing more people, but let’s leave the political rant for another day. One way of minimising the effect of this is to restructure the company pension to accommodate salary sacrifice. Rather than making an employer contribution and an employee contribution to the pension scheme, the whole amount can be made an as employer contribution, and the employee’s salary reduced to accommodate this increase. You will save Employer National Insurance on the amount the employees are contributing, which may have the effect of saving the company tax, even though rates have gone up. Finally, for companies looking to extract profits, Employee Benefit Trusts were expected to be attacked yesterday, but seem to have been left untouched. If you want to take more than £100,000 out of the business, this certainly needs to be considered.
Employees earning under £130,000
For the business owners I have just described how restructuring the pension scheme to accommodate salary sacrifice can save the company tax. This also has the effect of saving the Employee National Insurance as well. This is a relatively easy thing for an employee to ask their company to do, and as it saves the company money, either the company will be keen to comply to get the saving, or a very generous employer may even pass on this saving to you. This will enhance your pension fund even further, whilst also reducing the tax you pay.
Employees earning more than £130,000
The increase in higher rate tax to 50% for people earning over £150,000 from April 2011 initially looked like it would lead to a flood of money heading into pensions to reduce the liability. Obviously the idea of people saving for their retirement is seen as such a bad thing by the government, that they felt it necessary to create some anti-forestalling rules, making it more difficult for these people to get full tax relief on their contributions. The government amended those again yesterday to stop people making large contributions from their company, and to include those that earn over £130,000. As such, pension contributions will effectively be capped to a total contribution of £20,000 per annum, otherwise you’ll start to only get 20% tax relief, rather than the 40% (or 50%) you have paid. This is something to generally avoid, as you obviously run the risk of paying 40% tax when you come to take the funds out of the pension. After £20,000 has been funded, you should start to consider using Venture Capital Trusts which give 30% income tax relief, and the ability to reinvest after 5 years for more relief.
Anyone earning between £100,000 and £112,000
Anyone earning between these figures is going to be paying a marginal rate of 60% tax from April. That is because for each £2 they earn over £100,000, they will lose £1 of the personal allowance, adding an extra 20% taxation to the 40% they are already paying. As this group fall into the category of earning under £130,000, extra pension contributions will therefore see a theoretical tax saving of 60%, so make sure you use it.
Go Green
There are a number of proposals, if you want to spend a little to save over future years. A Boiler Scrappage Scheme providing a £400 incentive to households to replace ‘old boilers’ (no, not the wife) will be introduced, plus extra incentives to install solar panels and wind turbines. Finally, electric cars are to be exempted from company car tax for five years, with a 100% first year capital allowance for electric vans.
Benefit allowances
Benefit allowances like Child Benefit Allowance, and Disability Allowances will be increased this year, but provision has already been put in place for a ‘real’ reduction in these later next year. Anyone would think there was an election looming!
The conclusion
Although there seem to be a few areas where the Chancellor has gone for it, it actually turned out to be a Pre Budget Report of little note. Increasing the complexity of pensions with the 6 monthly tinkering has become the norm, although it still amazes me that they are so keen to stop people saving for their retirement. One suspects that the worst is yet to come, however one also suspects that it’s Alistair Darling’s last PBR anyway.
Written by,
Charlie Reading Dip PFS
http://www.e-fficientportfolio.co.uk/
Tel; 01536 772077
Disclaimer
This document is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. It does not constitute financial advice under the terms of the Financial Services and Markets Act 2000. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. Past performance is not an indication of future performance. Interested parties are advised to contact the entity with which they deal, or the entity that provided this document to them, if they desire further information. The information in this document has been obtained or derived from sources believed by E-fficient Portfolio Ltd to be reliable, but it does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgement of E-fficient Portfolio Ltd at this time, and are subject to change without notice. © 2009 E-fficient Portfolio Ltd (which is not regulated or authorised by the Financial Services Authority).
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