As we near the end of the tax year, it is relevant to remind you of the changes which will occur in the new tax year.
The first change is in fact a “no change” because the personal allowances and tax bands are being frozen for the tax year 2010/11. This means that most people whether in employment or in retirement will pay more tax because some of their income will have undoubtedly gone up with inflation (if not more) but the personal allowance will have remained static.
Phasing out of Personal Allowances
The personal allowance will be phased out for anyone with income in excess of £100,000. The allowance will be reduced by £2 for each £1 of income over the threshold. This has the effect of a 60% tax rate on income between £100,000 and £112,950.
The definition of income is gross taxable income less trading losses, pension contributions and Gift Aid payments.
50% tax band
Although tax bands will not change, the Chancellor has introduced the 50% tax band which will affect those with incomes in excess of £150,000. The corresponding tax rate for dividends for those caught in this bracket will rise to 42.5%.
Taxation on Trusts
The tax on income generated from trusts will rise to 50% on interest and 42.5% on dividend income.
Change to pension contributions
As from 6 April the maximum you can contribute to a pension scheme and obtain tax relief will fall from £255,000 to £50,000. So, if you want to make a large contribution to your pension,now may be the last chance. However, check with us because transitional arrangements apply for high earners.
Changes to Lifetime Allowance for Pension purposes
The Lifetime allowance will fall in 2012 from £1.8m to £1.5m. What does this mean? It means that when you draw your pension benefits (other than State benefits) the values are tested against an overall Lifetime Allowance. This will now fall. Any fund in excess of the Lifetime Allowance is subject to a tax charge.
Some clients have already protected the situation with Enhanced or Primary Protection and a new Protection is now available for anyone who thinks that their fund in the future may exceed £1.5m. There is a sting in the tail, if you want this protection you may o longer make pension contributions to any scheme.