Morgan Harris

Tax Year End Retirement Planning

Higher rate tax relief under attack

The recent Pre-Budget Report changed the restriction on higher rate pension relief by cutting the income threshold from £150,000 to £130,000. It means many more high earners will now be caught by the HMRC restriction at which the Special Annual Allowance charge will apply and this change sends a powerful message to all higher rate taxpayers to beware the creeping tide of tax relief withdrawal.
With Gordon Brown indicating that there is likely to be another Budget before the General Election people need to consider making their contributions sooner rather than later to secure 40% tax relief while they still can.

Company Year End

According to Companies House data, around 40% of limited companies have their company Year End on 31 March so there is an excellent opportunity NOW to reduce their liability to Corporation Tax by making a significant pension contribution in the next twelve weeks. A number of businesses are coming out of the recession and their profits are starting to rise.
Remember the guidance in paragraph BIM47106 of HMRC’s Business Income Manual which means that employer contributions made on behalf of owner directors are not limited by their salary.

60% tax relief

From 6 April 2010, the personal allowance will be reduced by £1 for every £2 of income over £100,000. This could result in an effective rate of tax of 60% for individuals earning between £100,000 - £112,950 in the 2010/11 tax year. 

For example, someone with an income of £110,000 would not only be liable to 40% tax on the top £10,000 ‘slice’ of their income, but would also lose £5,000 of their personal allowance (£1 for every £2 above £100,000). The ‘lost’ £5,000 personal allowance will now be liable to 40% tax (ie an additional £2,000) meaning the overall tax liability on the individual’s top £10,000 slice of salary is £6,000 or 60%.
By agreeing to sacrifice £10,000 of their salary in exchange for a non-cash benefit such as a pension contribution, the individual would not only reduce their higher rate tax liability, but also retain their full personal allowance. In this example, the individual would reduce their tax bill by £6,000 or, putting it another way, save an effective rate of 60% tax on the amount sacrificed.

Time is running out to take benefits at 50

There is an important imminent change in the law which will impact on the option for early retirement for many individuals.
Currently, individuals can take their benefits from age 50 (they must attain age 50 prior to 6th April 2010 to exercise this right).
From 6th April 2010 this changes to the age of 55.

A ‘free’ pension for the working spouse

Is your spouse employed in your business?
Remember, even if your spouse/partner’s UK Relevant Earnings are below the tax and NI thresholds, they (or their employer) can still pay a maximum of £3,600 gross pa into an SJP Retirement Plan.
Assuming that the spouse/partner is not presently working, it is also possible that part of your remuneration could be re-directed to pay a salary to your spouse/partner of just below the Income Tax and NI threshold (currently £6,475). Naturally, it will be necessary for the individual to justify the level of remuneration being paid to their spouse/partner.

Eg A higher rate tax payer then they would need to earn £10,791.66 as remuneration to take home £6,475 net (£10,791.66 - 40% tax = £6,475). If instead their spouse/partner is paid £6,475, then the balance of £4,316.66 (£10,791.66 - £6,475) can be used as a Retirement Plan contribution on behalf of the spouse/partner and in effect provide them with a ‘free’ pension. The net household income remains unchanged.

Using the Annual Allowance

The Annual Allowance is the maximum aggregate contribution that can be made by or on behalf of an individual to a pension scheme in a year that will attract tax relief. For 2009/10, the Annual Allowance is £245,000.
The maximum personal contribution is 100% of earnings.
The easiest way to maximise contributions is to pay from cash flow by means of regular monthly contributions.
Regular monthly contributions will smooth out the volatility of investment markets over a year.
Remember that clients whose total income exceeds £130,000 will have tax relief restricted by the Special Annual Allowance.

Using the Lifetime Allowance

The Lifetime Allowance for pension investments is £1.75m for 2009/10 providing ample scope for most people to invest more within their own pension tax shelter. The fact that the Lifetime Allowance will be frozen at £1.8m between 2010-16 will help provide certainty for people who wish to target the maximum permissible. It also means some you will need to review their arrangements if you are likely to hit the Lifetime Allowance

Conclusion

Retirement planning is more important now than it has ever been. The recent confidence seen in investment markets - the FTSE is 1,000 points higher than this time last year - means now is the right time to consider making the most of the current retirement planning opportunities and identify if you:

• Are affected by the £130,000 threshold and will have tax relief limited to basic rate from 2011
• Have a Company Year End of 31 March
• Are likely to be paying 60% tax from April
• Will be receiving a bonus this tax year
• Will be over 50 before 6 April 2010 but want to take benefits before they reach age 55
• Are not using their £3,000 annual IHT Allowance
• Could employ their spouse/partner but are not already doing so
• Aren’t contributing sufficient to pensions to maximise the available tax relief
• Might have their benefits limited by the Lifetime Allowance in the future
• Operate occupational pension schemes and would benefit from a quarterly update of relevant issues.

Don’t delay - you will receive a smaller retirement fund if you don’t act very soon!

If you would like to discuss any of the above, in further detail then please contact Alan Morgan on 01993 700010.

Morgan Harris