A SERIES of initiatives announced in last month’s Budget came into effect on 6 April. Alongside attention grabbing measures on the North Sea and fuel prices, a number of personal tax changes also took place.
A 1% rise in National Insurance contributions for employers and employees, alongside the earlier VAT increase and the rising cost of living, has added to decisions on whether it is best to spend or save our remaining disposable income.
With the reduction in the 40% threshold for the higher rate of income tax to £35,000 this year, many more people may now find themselves in this tax bracket. However, the personal tax allowance has also risen for everyone, allowing earnings of £7,475 for individuals under 65 before basic rate income tax becomes payable.
The personal allowance for individuals under 65 will be increased to £8,105 for 2012-13, with the basic rate band being further reduced to £34,370. This reflects the government’s ongoing aim of benefiting individuals on lower incomes, whilst restricting the benefit that higher rate taxpayers might achieve with the increase in personal allowance.
Which might make saving options more attractive for some. In considering this changed environment, questions worth asking are: ‘could I be paying less in tax?’, ‘how can I reduce the amount of tax I pay’ and ‘how can I better put my savings to work for my family?’
For higher rate tax payers with savings in a bank or a building society account, if you are married or have a partner paying the basic rate of tax you may wish to transfer your savings into an account in your spouse or partners name. By doing so, it is possible to save an extra 20 or 30% as a tax charge on interest applied.
Opening an individual savings account (ISA) may also be a good option. An ISA can be invested in cash, stocks and shares or a split of £5,340 and £5,340 into both, with the maximum annual contribution increasing to £10,680 in 2011/12.
Other options to minimise your tax liabilities while saving include National Savings Premium Bonds, any winnings from which are tax-free with your capital remaining protected. Pension contributions also benefit from valuable tax relief. Depending on the rate of tax you pay, you could obtain up to 50% relief, or a contribution could be used to lower your overall tax liability.
Simon Kilkerr is an Independent Financial Adviser with ‘Positive Solutions’.