April 2013 Newsletter

We are now in '2013-14'. That is, a new tax year has started and we all have a healthy increase in our personal allowance, courtesy of the Coalition.
Unless you are in the fortunate position of earning more than £100,000 each year, as the government take it away from you, if you do!
In order that you can check your tax details, we have included a list of the major changes in this newsletter.
We would urge you to consider making your ISA contributions now and not at the last minute. Many people do their ISA just before the end of the tax year, when doing it at the start in April instead would give them virtually an extra year's tax-free interest and other income.
And this time, at the start of a tax year, is the time when you should be reviewing your tax position, to make sure that you pay as little as possible.
Even a quick review could be a good idea, as that could save you lots of tax.

In this edition:

1. Happy new tax year
2. Tax planning checklist for 2013/14
3. Follow the manager, not the funds?

BUSINESS SECTION

4. Business tax planning checklist for 2013/14
5. Opt out rate for auto enrolment

Happy new tax year
The bad news is that you are now effectively working for the government until 'tax freedom day' – 30 May 2013.
Each year, the Adam Smith Institute calculates how many days of tax a year is paid by the average UK resident, before they start earning for themselves, and tax freedom day is when your tax burden has been dealt with for that financial year.
If you want to bring your personal tax freedom day forwards, these tips should help.
Income Tax
There are several important changes to income tax from 6 April 2013 that could affect your planning:

• The personal allowance has increased by £1,335 to £9,440. If you are married, or in a registered civil partnership, where one of a couple has low earnings or pension income much or all of the allowance may be wasted. If you or your partner is in this situation, there are several strategies which could be used to generate what is effectively tax-free income in 2013/14.
• While the personal allowance has risen sharply, the starting point for higher rate tax has fallen by £2,360. This will drag many of you into the higher rate tax band. It might pay you to make pension contributions, use gift aid or convert interest-paying investments into capital growth if you are in this situation.
• As mentioned in the introduction, and especially if you are investing in cash ISAs, subscribing now (up to £5,760 for a cash ISA) rather than later can increase your tax-free interest and reduce your income tax.

Pension contributions
These are eligible for full tax relief. You make them net of 20% tax relief (so a £1,000 cheque equals a £1,250 investment) and can then claim higher or additional rate tax relief if applicable to you.
You should make sure that this would fit in with your overall financial plans and I can help you with this if required.
Capital Gains Tax (CGT)
If you have gains that you can realise on your investments, you ought to think about using your annual exemption to lock-in some profits, and reinvest, at some time before 6 April next year.
Systematically using your annual CGT exemption can help you to avoid the situation where accumulated gains make it expensive to manage your portfolio. Because otherwise, there could be a conflict between making the correct investment decision and not wanting to pay CGT.
This year's annual exemption could save you over £3,000 in tax if you are a higher or additional rate taxpayer, over £2,000 if you are a basic rate taxpayer.
But there are 'bed & breakfasting' rules that you have to take care of – let me know and I can explain these to you.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)
The tax relief available for VCT and EIS investments is very attractive and a good way of saving tax.
But VCTs and EIS are high risk investments in small unlisted companies and should only form a small part of a well diversified investment portfolio. The investment risks involved are the main reason why the government is prepared to offer generous tax reliefs.
So you would have to balance the tax incentives with the investment risk and make a decision if it is for you.

Tax planning checklist for 2013/14
It is difficult keeping track of al the tax changes every year – especially as many of them get announced more than a year in advance nowadays.
Here is a checklist of what changed on 6 April 2013. If you need any more information about any of them just let us know.
Income Tax

• The basic personal allowance for those born after 5 April 1948 is £9,440.
• The personal allowance for people born between 6 April 1938 and 5 April 1948 is £10,500.
• The personal allowance for people born before 6 April 1938 is £10,660.
• The age related threshold has increased to £26,100 for people born before 6 April 1948 (above this age related reliefs are reduced by 50% of income over this level).
• Personal allowance is reduced by 50% of income over £100,000.
• The basic rate threshold has fallen to £32,010.
• The higher rate tax of 40% is payable on income between £32,011 and £150,000 and the additional rate of 45% applies over £150,000.

National Insurance Contributions (NICs)

• The rate for employees is 12% (plus 2% on the excess above the new upper limit of £797 each week) and 13.8% for employers (no upper limit).

ISAs

• The annual limit for a stocks and shares ISA is £11,520.
• The annual limit for a cash ISA is £5,760 and the balance can be invested
  in a separate stocks and shares ISA.

Pension contributions

• The annual allowance stays at £50,000 and there is also the ability to carry forward any unused allowance from the previous three years. This reduces to £40,000 from 6 April 2014.
• Lifetime allowance has reduced to £1.5 million. This reduces to £1.25m from 6 April 2014. You should act now if this will affect you.

Capital Gains Tax (CGT)

• The individual annual exemption on CGT is increased to £10,900. After this, gains up to the basic rate limit are taxed at 18% and 28% above the basic rate limit.

Inheritance Tax (IHT)

• The nil rate band remains static at £325,000 until April 2018 and the tax rate on the excess is 40% on death.
• Anyone who leaves at least 10% of their net estate to charity will pay a reduced IHT rate of 36% on their residual estate.
• The exemption for transfers to a non-domiciled spouse rises from £55,000 to £325,000.

Venture Capital Trust (VCT)

• Tax relief remains at 30%, up to maximum investment of £200,000.

Enterprise Investment Scheme (EIS)

• Tax relief remains at 30% up to a maximum of £1,000,000
• For a Seed Enterprise Investment Scheme (SEIS), tax relief of 50% up to a maximum of £100,000 is available.

Follow the manager, not the funds?
If you are an investor in units trusts and OEICS or investment bonds, you may well have looked at the statistics showing past performance of funds.
Of course, we must remember that past performance is not a guide for the future but it is a useful summary of a fund's success – or otherwise. It may also help when contemplating a new investment or switch to compare the fund against its peer group (of equivalent funds) or sector.
But the period under review may have seen a change of fund manager and on some occasions, more than one.
The fund manager may also look after more than one fund and get it right with one fund but not with another.
Citywire say the most important consideration when selecting an actively managed fund is the track record of the manager running the money. And that is a long-term track record of course.
This can be illustrated by the following charts. You may have heard of, or even be invested in, Invesco Perpetual Income – but its manager (Neil Woodford) manages several other funds. How can you be sure that an investment recommendation of one of his funds is overall a good idea?
The chart below shows that over a long-term he has a superior track record to his peer group.

And of course, some other managers are not so good! But assessing a fund manager's past competence is one of the factors that we look at before making a fund recommendation.
But only one of them; because as we said earlier past performance is not a guide for the future and having an actively managed portfolio ensures you have the best opportunities in all circumstances.

BUSINESS SECTION
Business tax planning checklist for 2013/14
Here is a checklist of what changed on 1 April 2013. If you need any more information about any of them just let me know.

• Entrepreneurs' relief stays at the current level, which means that qualifying gains are taxed at 10% up to the lifetime limit of £10m
• Corporation tax rate for profits over £1,500,000 reduced to 23%.
• The small profits corporation tax rate remains at 20%
• Effective marginal profits rate has now reduced to 23.75%
• The small profits rate and the main rate of corporation tax will be unified from 1st April 2015 at 20%

• 100% first-year allowances will be available in respect of qualifying expenditure incurred from 1 April 2013 in the purchase of railway assets and ships.
• New anti-avoidance legislation will be introduced to attack companies who engage in arrangements which seek to exploit loopholes in legislation to access relief for losses
• New rules are to be introduced to prevent "loss buying" where companies pass the potential to gain access to corporation tax loss relief to unconnected third parties.
• Legislation will be introduced in Finance Bill 2013 to increase the annual investment allowance from £25,000 to £250,000 from 1 January 2013 for all businesses, for a temporary period of two years.
• The availability of first-year tax credits, for companies surrendering losses attributable to their expenditure on designated energy-saving or environmentally beneficial plant or machinery, will be extended for a further five years from 1 April 2013.
• The annual pension contribution allowance remains at £50,000 and there is also the ability to carry forward any unused allowance from the previous three years. The allowance reduces to £40,000 from 6 April 2014.
• The lifetime allowance remains at £1.5 million. This reduces to £1.25 million from 6 April 2014.