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Welcome to the latest edition of Adcock Financial’s regular newsletter, in which we bring you the latest news from the financial world.
Capital Allowances
A quick reminder for small- and medium-sized business owners: this is the last year of First Year Allowances (FYAs) on plant and machinery, with new rules coming into force on 1 April 2008. The current FYA allowance of 50% will then reduce on most items, and an upper limit of £50,000 will be imposed.
Make sure you order equipment (except for cars) before your company year-end, with payment not later than four-months later, to ensure you take advantage of this allowance. Income Splitting
In a development that may affect family companies and partnerships, details of the Chancellor’s proposals on legislation to crack down on what HMRC describe as ‘income-splitting’ have begun to emerge. It seems that the new legislation will give HMRC the authority to demand information about the amount of money that company bosses take out of their businesses by way of dividends. We will of course keep our clients ‘up to speed’ on the new legislation and how this may affect you. Protected Rights now ‘SIPPable’
It seems that we could soon be seeing the end of the conventional personal pension, if a consultation paper released by the government in December is anything to go by.
Currently, ‘protected rights’ funds – that is, personal pensions accumulated using National Insurance rebates paid when an individual contracts out of the State Second Pension – must be invested in insured funds, managed funds or bank deposits, and must be used to purchase an annuity with certain stipulations. However, if the proposed changes come into effect as planned in October, then it will be possible to self-invest these accumulated protected-rights funds. Investors will be permitted to transfer them into new or existing SIPPs, with all the freedom of investment that brings, so that eventually they could have complete control over their pension pot.
This is sure to be a popular move, but combined with the introduction of ‘personal accounts’, planned for 2012, it is difficult to see where any future demand for personal pensions will come from; perhaps ‘pension simplification’ may not be a misnomer after all.
Please remember thought that with SIPPS extra charges may be payable over and above those applying to personal pensions. They will certainly not therefore be the right choice for everyone. Professional advice should be sought by anyone considering moving their benefits to such schemes.
Pensions and Tax Credits
Finally for this month we consider a useful way of maximising your tax relief and credits. Tax credits are allowances paid to those who are working and/or responsible children. In general, entitlement to tax credits reduces as your income increases. However, by making pension contributions your income is reduced, and so your entitlement to tax credits increases. The benefits can in fact be enjoyed for two years, as the following example illustrates:
- Income above £5,220 reduces entitlement to working/child tax credits by 37p per extra £1 income;
- So, a pension contribution of £7,800 net (£10,000 gross) will increase tax credits paid by £3,700 (37%) in the tax year it is made (2007/08);
- As your tax credits for the next tax year (2008/09) are calculated based on income for the previous tax year, your £10,000 contribution the year before will increase tax credits for 2008/09 by up to £3,700.
For those receiving only the family tax credit element (£545 p.a.), it is important to note that this allowance does not vary between £26,638 and £50,000. So, for a basic rate taxpayer, it may be worth considering contributing a sufficient amount to a pension to reduce your income below £26,638; and, for a higher rate taxpayer, below £50,000.
HMRC make it clear that depriving yourself of income in order to increase the amount of tax credits available is not an acceptable practice. However, making a pension contribution has yet to come under this heading and so, for now at least, this is a legitimate and useful tool.
As always, if you need to discuss anything within this newsletter or any aspect of your personal finances then please do call us on 01623 490120.
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