June 11, 2009
Income Tax Rises 2010 – Will You Be Affected?
Large rises in income tax are due to take effect from next April for people earning over £100,000.
New rates of tax were announced by the Government in the recent budget and they are going to hit many of our clients hard! This is because our clients tend to be higher earners, with many in the £150,000 to £350,000 pa bracket.
So, how are you going to be affected?
Well, let’s look at different incomes and how they are taxed now, and compare the same incomes and how they will be taxed next year #. National Insurance contributions (more tax) are also included.
2009/10 Tax Paid 2010/11
£100k £34,700 £34,700
£113k £40,000 £42,600
£125k £45,000 £47,520
£150k £55,200 £57,780
£200k £75,700 £83,270
£300k £116,700 £134,280
£400k £157,700 £185,280
What we can see here is that those earning more than £100k are hit by the gradual removal of their personal allowance up to £112,950 pa when it completely disappears.
In fact, for those who earn £112,950 pa next year, the equivalent rate of tax they will be paying on income between £100,000 and £112,950 will be 60%!
Those then earning more than £150k are not only affected by this, but also by the 50% tax rate that then comes into play. So for someone who is earning say £300k pa, they will find that their take home pay is down by nearly £1,500 per month!
These are truly hard hitting figures, which will no doubt affect many. Let’s face it; this will affect many aspects of planning, since it will mean either spending or saving less, or paying off less debt.
So is there anything that can be done about it?
Well, we can just picture the scene whereby you will start to see advertisements of lots of weird and wonderful schemes to 'save you tax'. There has never been a shortage of these in the past, and we often ignore them for three simple reasons – they are usually overly complicated, quite often simply don’t work and are open to attack by HMRC.
However, what about putting more into your pension? After all, if you are paying 50% tax, wouldn’t it be fantastic to get this rate of tax relief as well as boosting your retirement income?
Well, possibly. It could mean that you get 50% now, and are able to grab a quarter of the fund at retirement in tax free cash. This sounds good, but of course it is probable that you will pay 40% or even 50% on your pension income.
(One thing you should definitely cover if you are a dentist or have private earnings as a doctor is whether Incorporation is a good idea for you.)
Also, with the Lifetime Allowance rules, there are strict limits on how big your pension pot is allowed to get. Fall foul of these rules and you will be hit hard with tax penalties.
So how much do you really require in retirement, and how will these tax rises affect your financial plan? Do you have a financial plan? What we find with the majority of clients is that they find they will need around £3,500-£5,500 per month after tax in retirement. Then other savings augment this for extra spending, say, on a special holiday.
Quite simply, many of our clients find that their NHS Pension and lump sum will give these amounts or close to it.
Now, more than ever, it makes sense to look at your planning for the future. If you do not have a detailed expenditure overview to see what you spend now and need in retirement – get one!
If you adviser does not build you your own financial forecast to see if you are on track or not – ask why! What is more important than ensuring you are not going to run out of money before you die? If you do not have an NHS Pension forecast – why not?
Quite simply, will these tax hikes cause you problems – or not?
Get organised, and then plan ahead. Our clients tell us it's the best thing they have done with their finances, as they can see where they are and where they are going. Living the life you want now and having peace of mind for the future.
Not a bad plan!
# approximate figures.
Key Considerations
Don’t be persuaded to take action on tax reduction measures unless you have really done your homework. If in doubt, take a second opinion.
Action Point
Write down what you spend now and what you will need when you retire. What total amount will you need? How do the tax rises affect your ability to create the wealth you require?
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Filed under Tax by Graeme Urwin
