Spear’s is talking to wealth managment experts to find out how the Budget is going to affect you: the headline is the 50% tax rate but we’re also uncovering what’s hidden in the rest of the Budget.
Tim Gregory, private client partner, Saffery Champness
There’s a useful aspect to financial planning regarding pensions: if you are approaching retirement and have not earned more than £150,000 in the last couple of years, make sure you do not earn more than £150,000 this year. Make sure you get just a little bit less. This should preserve your 40% tax relief for the current year.
In such a situation, you may be planning to put as much as £100,000 into your pension fund so, by forgoing a couple of thousand pounds of income, you should be able to escape the new charge and either you or your pension fund can benefit to the tune of £20,000.
One issue is the availability of Agricultural Property Relief and Woodland Relief. They have been extended to any property in the EEA. That’s significant for someone who wants to buy a hunting estate in Ireland (because they can’t hunt over here any more). They can now get inheritance tax relief as well.
If you have got shares in a non-UK company and you’re receiving dividends, you are not currently receiving a UK tax credit if you have more than ten per cent of the shares. From today, you can.
Phil Smith, head of Financial Planning at Barclays Wealth
The budget has introduced anti avoidance legislation limiting higher rate tax relief on pension contributions, with immediate effect. Anyone earning over £150,000 is now limited to 40% tax relief on just the first £20K of pension contribution, unless they were making regular (at least quarterly) contributions in which case the limit will not apply. The devil as ever was in the detail.
This has been introduced to ensure people do not make very large contributions, attracting potentially 40 or 50% tax relief, in the run up to the pension tax reliefs being reduced in 2011. Individuals affected by this change should ensure that they seek financial planning advice immediately as there are still opportunities to make large lump sum investments which offer both income tax and capital gains tax breaks, which can be used to supplement their income in retirement in a tax efficient manner.
Chris Groves, tax partner, Withers
The big headline is the increase of the income tax rate. It’s penalising a very limited number of high earners and will drive away mobile earners who contribute to the economy. These are the very people we’re looking to to put the UK back into growth.
I can’t see how this will stimulate the wider economy the overall economic position and contradicts the other measures in the Budget that seek to attract international companies to the UK.
The other point to note is that now we have a differential between income tax and capital gains tax of 32% for higher rate tax payers. It’s going to put a lot of pressure on people to invest in assets which produce in capital gains rather than income.
There was the usual round of tax avoidance rules. The most interesting thing that we’ve noticed concerns offshore funds, principally offshore liquidity funds. These funds essentially pay an interest rate and maintain a constant net asset value, but because they’re structured as companies they pay dividends which are taxed at an effective rate of 25%. This is going to be changed so that these dividends will now be taxable as normal income at 40% (or 50% for the highest rate payers from next year).
These funds have sprung up a lot lately and have become very popular. They’ve had a competitive advantage of paying tax a lower rate. Quite the effect in the longer term it is unclear at this stage.