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Personal Finance It’s that time of year……again

Joe Coten’s looks at ways of mitigating new losses of tax allowances for the over 65s and plus £100,000 earners


irstly, many thanks go to everyone who called to convey appreciation for my article in the Christmas edition of Barbican Life. I received no calls taking issue with my comments, so I’m left to assume that there was general agreement with my thoughts on the economy and the role of the banks and bankers in the catastrophic financial situation in which we find ourselves. On a lighter note, thanks also go out for all the Christmas good wishes. I say this publicly as several cards arrived with the names illegible, so if we didn’t reciprocate your good wishes many apologies and belated greetings. The festive season is now a hazy memory for all sorts of reasons. In France the vines are now almost budding and the sun warming up a bit. Shirtsleeve weather in the garden on a good day, despite misty, murky early mornings as the dampness rises from the Garonne nearby. Doing our bit for diplomacy we’d made an appointment to introduce ourselves to Monsieur le Maire when we flew over to take possession of our house keys in September. Perhaps because I explained what I did for a living, he kindly spent the best part of an hour going into some detail on the finances of the commune. He was at pains to let us know that he manages a budget of 1.2m Euros, which for albeit a sizeable village (Pop:1,100) is a fair amount of money. Nina was less than thrilled with his exposition, as her French vocabulary centres mostly on food and wine but she managed to nod in the right places most of the time. Just a matter of weeks ago I nipped next door to the boulangeriein the grey gloominess of early January and caught sight of our new friend

across the street. I waved my baguette at him by way of salutation and I’m hopeful he didn’t misinterpret the gesture.

Now we’re coming up to the end of the tax year there are a number of planning themes that I could discuss but I’ll just stick to the one: namely, the progressive loss of the personal allowance on income in excess of £100,000. This is particularly unpleasant, as it means you’ll be losing £1 of allowance for every £2 of excess income. So, once your income exceeds £112,950 (£6,475 allowance x 2) all of your income is taxable and your tax rate is effectively 20% up to £37,400 then 40% on income above this threshold. Nasty! And this is without the further whammy of the 50% rate for those earning more than £150,000!

So what remedy? If you’re income is say £110,000 and you have available annual pension allowance you could make a net pension contribution of £8,000 (£10,000 gross) and gain tax relief on it. This is because you are reducing your income to below the £100,000 threshold and restoring your personal allowance, hence avoiding having to pay 20% tax on the first £6,475 of your income. Added to this your pension contribution will be attracting 40% tax relief.

A more radical alternative would be to make a net contribution to charity of £8,000 (£10,000 grossed up via Gift Aid) in the above example and achieve the same effect. This may be a bridge to far for some of my neighbours and fellow residents however.

It goes without saying that full use should be made of ISA allowances, which provide non-taxable income, and investments can be repositioned

to gear for growth rather than income as a means of keeping income below the threshold. Single premium insurance bonds have their uses in this situation also, with the ability to take 5% withdrawals not being added into the taxable income calculation. Those who are married or in civil partnerships have further options; investments can be transferred to a spouse or a partner with a lower income. The income is then taxable in relation to the lower income. The only caveat is that you need to be confident that he or she won’t head straight to New Change with the new found large change and invest the newly acquired wealth in irresistible goodies!

This type of planning is not only for high earners. The loss of age allowance for those over age 65 and then again over 75 can also be addressed using the same techniques. Once your income exceeds £22,900 you will similarly start losing the age allowance supplement to your personal allowance. The planning strategies outlined above for high earners also work for the over 65s, although no tax relief is available on pension contributions beyond age 75.

Whatever your circumstances now is the best time of year to review your planning. It goes without saying however that if you are going to invest in pensions or ISAs, it’s advisable to check the selected investment matches your risk profile. Just because an investment is tax efficient clearly doesn’t mean it can’t lose money. The net effect could be that you’re worse off if the investment bombs and we’ve all seen how unexpected changes in market conditions can dramatically affect investment returns.


Barbican resident Joe Coten

is a member of the Personal Finance Society.

He may be reached on 0207 588 9626.

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