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THE INVESTOR
S
tealth taxes mean many high-
earners, hard-working families
and serious savers su er higher
marginal rates of taxation than the
o cial top rate of 45% – making
e ective tax planning more important than
ever.With valuable tax shelters due to be
restricted inApril, now is a good time to
consider the best way to utilise the legitimate
allowances that remain available. E ective tax
planning can substantially boost the bene t
you and your family receive from your
earnings, savings and investments. Doing
nothing could prove an expensive mistake.
The way that personal allowances are
clawed back above certain income levels, and
other quirks in the scal system, means that
the marginal tax rates applicable to many
people are higher than headline tax rates.
For example, anyone earning above
£100,000 a year loses £1 of personal allowance
for every £2 they earn above that threshold,
creating a marginal rate of 62% by the time
National Insurance contributions are taken into
account. Similarly, with the changes to Child
Bene t lastApril, which restrict payment
where either parent earns more than £50,000
a year, accountants calculate that some families
nd that they are faced with marginal tax rates
of 52%, where there is just one child, and 73%
if the couple has four children.
Pension contributions are an e ective way
to keep your taxable earnings below the
thresholds where marginal tax rates apply, as
well as helping fund your retirement. But this
most useful of tax reliefs is to be further
restricted fromApril when the maximum
annual pension contribution that will attract
tax relief will be cut by 20% from £50,000 a
year to £40,000.The maximum fund you can
accumulate tax-free in a pension, the‘lifetime
allowance’, will also be reduced from £1.5
million to £1.25 million with e ect from 6
April 2014. Because many people leave it
quite late, especially in a low-interest rate
environment, to start saving the massive sums
needed to generate a decent income in
retirement, any reduction in tax relief can
have a signi cant e ect.
For example, performance-related bonuses
or redundancy payments are often used to
boost pension funds in the nal years before
retirement. Reducing the maximum tax-free
pension contribution could have a big impact
on the ability to shelter such payments from
tax. If the lifetime allowance is breached, the
income drawn from funds above that level may
be liable to a punitive 55% tax charge. It is
possible to elect to protect funds bigger than
the lifetime allowance by using a concession
fromHMRC known as‘ xed protection’,
which must be applied for by the end of the
current tax year.Assessing whether to opt for
the protection is not straightforward and
anyone contemplating it should seek advice
and be aware that it will probably rule out any
further payments into the pension.
Even with the lower tax-relief limits,
the availability of upfront tax relief, at the
highest rate paid, remains a valuable incentive
to save for a pension towards retirement.
To invest £1,000 in a pension, basic-rate
taxpayers only need to put in £800, the rest is
provided through tax relief; for those paying
tax at 40%, the investment required falls to
£600, while those on the top rate of 45%
need only subscribe £550 to get the £1,000
investment. However, only the basic rate of
tax relief is added at source; the di erence
for higher rates of tax must be reclaimed
through the individual’s tax return. Even
children get tax relief at the basic rate on
investments of up to £240 a month, net of
tax relief, equal to £300 gross.
The old compulsion to spend three-quarters
of the fund on an annuity from a life company
has been replaced with choices including
income drawdown, which allows you to
leave your fund invested, with the dividends
and other investment returns providing the
pension income.The resulting income is taxed
the same way as earnings.
Pensions are not the only way to pay for an
enjoyable life after work – ISAs are also an
attractive way to supplement your retirement
savings and have the bene t of being free of
OPINION
OPINION
ANALYSIS
It has never been more important to consider effective tax planning and utilise
the legitimate allowances available in our complex personal tax system
By Ian Cowie
