Year End planning: Income Tax

There are numerous matters for taxpayers to consider when reviewing their income tax position, several of which are set out below.

Age related allowances

The higher personal allowances for 65 and 75-year-olds are subject to an income limit of £24,000 for 2011-12. It may be possible to replace taxable income with tax-exempt income through, for example, ISAs or national savings certificates and bring income below the limit.

Timing of income

Marginal tax rates jump from 20% to either 32.5%, 40% or 42.5% once the basic rate band threshold is exceeded and so bonuses and dividends should be timed, whenever possible, to fall in the most beneficial tax year. This should be subject to the tax position and other considerations of the company, however.

Personal allowance restriction

Entitlement to the personal allowance is reduced where income reaches £100,000 and is removed completely once income reaches £114,950. The effect is a marginal tax rate of 60% on income falling between £100,000 and £114,950 and those affected should consider making pension contributions, gift aid donations and other means of reducing their income to less than £100,000.

ISAs

The income and gains generated on ISA investments are tax-free and should be made by 5 April in any tax year to have effect for that year. The limits for ISA investments for 2011-12 are £10,680 in total (with up to £5,340 in cash).

The long term residents charge

Non-UK domiciled individuals should review the number of years they have been resident in the UK to see whether they come within the scope of the long-term resident’s charge. Those aged 18 or over who have been resident in the UK for 7 out of the past 9 tax years will have to pay the £30,000 charge if claiming the remittance basis of taxation. It has been proposed that the charge for individuals resident in more than 12 out of the last 14 tax years will increase to £50,000 from April 2012.

Non-UK domiciled individuals facing the increased £50,000 charge should consider maximising the income and gains realised in 2011-12, covered by the lower £30,000 charge, and re-investing in non-income producing assets and choosing the worldwide basis of taxation for 2012-13.

Contact us for further details:

Phone: 020 7354 3914