Money Matters

No Give-aways this Time

One of the joys of being an Independent Financial Adviser, (and writing a column, such as this) is having to foretell the future. Luckily, having a vaguely psychic ancestor, I am well equipped to deal with such matters. I should say that I am referring to the 2011 Budget day, which, by the time you read this, will be history. My problem is trying to consider the “known knowns” and the “unknown unknowns” (thanks to Donald Rumsfeld), these being the aspects that have been announced already and will come into effect in the new tax year, and the measures announced on the 23 March 2011, unknown to me at the time of writing. The first Budget following an election, furthest from the next trip to the polls, is generally when most of the unpleasant work is done, as Mr Osborne aptly demonstrated.

However, there are more changes on the way at the start of the financial year. Firstly, the maximum pension contribution, subject to tax relief, has been reduced to £50,000 with effect from 6 April 2011. The way in which restrictions on tax relief interact is complex, not least because the new allowance works on a tax year basis, whereas the annual allowance revolves around what are called ‘pension input periods’, which usually do not coincide with tax years. This will probably not trouble many of us though!

ISA contribution limits will be index-linked from 2011/12, so the current limit of £10,200 (£5,100 in cash) will rise to £10,680 (£5,340 in cash) from 6 April. Maximising your contributions is generally the best practice. With pension tax benefits being cut and the top rate of CGT now 28%, the tax shelter offered by ISAs has become relatively more important. As a reminder, the four main ISA tax benefits are: 1. Interest is received free of UK tax in an ISA, other than from cash held in a stocks and shares ISA (when a flat 20% rate applies). 2. There is no UK tax on dividends in a stocks and shares ISA, although tax credits cannot be reclaimed. 3. There is no capital gains tax on profits. 4. ISA income and gains do not have to be reported on your tax return. With short-term interest rates still at historically low levels, the tax benefits of a cash ISA are relatively modest. Variable rates of around 3% are on offer for new savings, but these rates almost invariably contain a large bonus element which falls away after a fixed period, typically 12 months. If you arranged a cash ISA a year or more ago, it is worth checking what interest rate it is now earning – it could be 0.5% or even less. If you live on the interest, you might want to consider a transfer to a stocks and shares ISA invested in income-producing funds. You would lose the security of a capital deposit, but your income potential could increase significantly.

Child tax credits: at the moment, income increases of up to £25,000 don’t normally affect your tax credits for the current tax year. This limit is changing to £10,000 from 6 April 2011. This means if your income goes up by more than £10,000 from the last tax year, the amount of tax credits you get for the current tax year will be reduced. The income limit for Child Tax Credit is going down from £50,000 to £40,000 from 6 April 2011. This change means if your income will be over the new limit, your basic Child Tax Credit payment of £545 will be reduced. The extra amount of Child Tax Credit for having a baby under the age of one is being stopped from 6 April 2011. This change means if you were getting this payment for the last tax year, you won’t get it for the new tax year – even if your child is still under the age of one.

My guess is that the spirit of austerity that came in the June 2010 Budget, will continue this year, though maybe in slightly smaller measures. Call me a cynic, but I can’t see any give-aways until there is another election on the horizon!

David Foot

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