12 October 2009

Limited Offer by HM Government? – Buy Now!!

There’s no doubt that UK finances are under pressure. With all the support given for banks, and with falling tax revenues due to the recession, public finances will be in a right state for years to come.

Politicians will continue to debate cuts without doing what’s needed soon enough (as usual). But undoubtedly the pressure is to increase taxes.

While it is always possible that legislation will apply retrospectively, it is certainly best to take full advantage of any tax breaks which are available here and now. So here’s a few which you should be considering before they (maybe) disappear:

  • Use your ISA allowance – while you pay into an ISA out of taxed income, income is free of income tax, and growth is free of capital gains tax (but watch out for Inheritance Tax). I haven’t heard any hint that this tax break is going to be removed, but it is wise to use it up to your annual allowance anyway. The only exception might be for older people (life expectancy less than, perhaps, five years); since ISAs have to be sold on your demise (they cannot be transferred to anyone else) and the markets might be down when your executors are forced to sell, alternatives may be better.

  • No more Tax Free Cash? – when you start taking a pension income, you are typically entitled to a tax free sum (25% of your pension pot in a money purchase scheme, different for final salary). This is now called a “Pension Commencement Lump Sum”, and while it is still tax free at present, does that change of name herald the removal of its tax free status?

  • Pension contributions – these currently qualify for basic rate tax relief, with HMRC “returning” the basic rate tax you have paid to the pension provider to add to your investment. Even if you are not an earner or are already receiving a pension but are under 75 you can make a contribution and take advantage of this. Higher rate relief is also currently available, making pension contributions particularly tax-effective for higher rate taxpayers. There are, though, limitations on relief from April 2011; is that the start of withdrawing this tax break? It has been suggested that it is: Telegraph. Within the limitations, it is best to make pension contributions sooner rather than later, particularly for higher rate taxpayers.

  • Gift Aid donations – these work similarly to pension contributions (believe it or not). The charity reclaims the basic rate tax, the giver can reclaim any higher rate tax. Use it while it’s still there!

  • Capital gains tax increases? – CGT was reduced in 2006 to a flat 18% (in most circumstances). This means that investments (including property) that are subject to CGT can be better than those subject to income tax. That looks to me like an opportunity for a cash-strapped Chancellor to claw back a bit of tax. Realising capital gains sooner rather than later looks like a good plan – and preferably within the annual CGT allowance.
Of course, there are always ways of being tax-efficient in your affairs, but these are some of the ones which may be particularly vulnerable to taxation changes in future.

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