A NEW TAX YEAR FULL OF CHANGES

The Tax Year 2010/2011 is bringing many more changes to our finances than is immediately obvious. The changes, and promised changes, leave one feeling like the Matrix has shifted or that one has walked through Alice’s Looking Glass (depending on your preference of books and films). There are substantial changes in pension legislation yet again and talk of major changes to the State Pension. There are some boosts in personal tax allowances, but higher VAT and rising costs of petrol and basics leave many living a bit on the knife edge and dreading the moment when the Bank of England finally increases the Bank Base Rate.

So what has changed and how do we need to respond? Pensions deserve the closest look because they are likely to impinge on our lives most in the long term. In the previous decades those working many years for major companies could rely on a worthwhile pension when they reached State Retirement Age - which for many, many years had been age 65 for men and age 60 for women. The quality pension schemes have been subjected to harsher and harsher regulations over recent years, and the great majority of companies can no longer afford to keep them going. Even the Blue Ribbon public service schemes, such as the Civil Servant Pension Scheme, can no longer be afforded by the Government and will have to change. The Government’s talk of a higher State Pension to help handle this problem is so far in the future that it really is little more than an effort to raise hopes and avoid a backlash from the other changes. The Government cannot even afford the current level of State Pension, which is why they are having to extend the State Retirement Age.

Junior ISAs - New kid on the block

The Coalition Government has now confirmed details of the long awaited savings plan analysts had been expecting since the withdrawal of Child Trust Funds (CTF) last year. The Junior ISA will be launched in November and will extend to under 18s the same tax benefits which parents (and all adults) already enjoy. Their exact structure is subject to final legislation which may change, but this is the plan so far. The Junior ISA will allow parents to open up a specific account in their child’s name, into which they, their family and friends can contribute a total of up to £3,000 a year. These contributions will then be invested in a chosen mixture of cash and/or stocks and shares and the benefits locked up until that child reaches 18. Anyone under 18 born before September 02 or after January 11 (i.e.: those who do not have a CTF) will be eligible for a Junior ISA (and for those with CTFs, the annual limits are expected to be brought in line). The Junior ISA could provide a significant step up for children whose family and friends get together for their benefit. Final values are subject to growth rates but just to give you an idea, assuming an average of 5% pa (net of charges), that £3,000 pa could leave the lucky beneficiaries with a contribution of over £80,000 towards their world trip, first house or those hotly debated university tuition fees.

Budget 2011 - Tax

Chancellor George Osborne had already decided to raise the personal allowance to £7,475 from 6 April this year. He used this latest Budget to extend that allowance by another £630 to £8,105 from April 2012. He has also brought down the rate at which people start to pay higher rate tax from £43,875 to £42,475. As a legacy from the last Labour budget, the personal allowance will still be withdrawn completely at an income of £115,000. The Chancellor has also announced that, in future, tax allowances will be increased in line with the Consumer Prices Index rather than the Retail Price Index. Historically, the Retail Price Index has been higher, so this could have a long-term impact on the value of such increases for all taxpayers. The rules on inheritance tax and capital gains tax (CGT) remained largely unchanged. However, anyone leaving more than 10% of their estate to charity will see their inheritance tax bill fall by 10% while the amount qualifying for Entrepreneur’s Relief on CGT - where tax is charged at 10% rather than 18% or 28% - has doubled from £5m to £10m. There were some changes at the top end of the investment scale. Upfront tax relief on Enterprise Investment Schemes will rise from 20% to 30% while the amount that can be invested annually will rise from £500,000 to £1m. The Chancellor is also relaxing some of the rules around eligible companies for these and venture capital trusts to expand the potential for attracting this type of investment.

Tax year start - Get in early

You only receive one ISA allowance every tax year. Since you cannot carry your allowance over to next year, if you do not use it, come the end of the tax year, you will lose it. The annual allowance has been raised for everyone this tax year, to £10,680 (2011/12), up to £5,340 can be placed in cash - and this is available to be used any time up until 5 April 2012. However, you don't have to wait. You can invest any time from now and, particularly with cash ISAs, you might benefit more from doing so. The earlier you get your money into a deposit account, the more interest you will earn. For stocks and shares ISAs, there are those who try to 'time' their investment - that is, buy when prices appear cheaper (and thereby benefit more as they recover). However, even experts seldom manage to time the market on a consistent basis, and individuals can find it even more difficult. If you are concerned about market volatility, a better idea than 'timing' might be to drip feed your money in on perhaps a monthly basis - in other words, invest smaller regular amounts - to smooth out the risk of a price fall by buying your investment at a range of different price levels. This system is called 'pound cost averaging' and can offer long-term benefits, particularly for nervous, first-time investors. Regardless of how you invest your money, however, remember you only receive one allowance a year. It is therefore best to start your research early and speak to your adviser about all the options. This will help ensure you make the right decision.