24th June 2014
Hargreaves Lansdown has put together three tax planning strategies which can be optimised using the NISA or upgraded Isa. The limit for the Isa is to increase to £15,000 from the start of next month and those who have already taken out an Isa from the start of the tax year can upgrade to this figure.
The three strategies are below.
1. NISA income can protect your age related allowance
Investors born before 6th April 1948 with income of £27,000 or more, for every £2 of taxable income above this level they lose £1 of age related allowance.
NISA income is not only free from further income tax but also does not count towards the age related allowance “means” test. For those born 6th April 1938 – 5th April 1948, the personal allowance increases from £10,000 to £10,500 (£10,660 if born before 6th April 1938). However, for every £2 of taxable income over £27,000, the additional age related allowance reduces by £1. This creates an effective tax rate of 30% and for those with pension income of £27,000 and interest income of £1,000 will cost an additional £100 plus the standard £200 in income tax.
However, shelter this interest income in NISA and it does not count towards this age allowance test saving, in this example, a total of £300 income tax.
2. NISA income can protect High Income Child Benefit Tax Charge
The High Income Child Benefit Charge (HICBC) is 1% of the child benefit received for every £100 of income over £50,000. For example, a parent with 2 children, earning £50,000 a year and having investment income of £3,000 gross, would pay £675 income tax on the investment income plus a further £525 HICBC tax – 30% of the £1,752 annual child benefit – a total of £1,200 in tax.
However, if the investment income was sheltered within a NISA none of this tax would be paid, saving £1,200.
3. For those earning £100,000 and over, save as much as £4,000 on loss of personal allowance
This is similar to the age related allowance trap. NISA income is not only free from further income tax but also does not count towards the new personal allowance “means” test. For those with taxable income of £100,000 or more, the personal allowance is eroded. For every £2 of income over £100,000 the personal allowance reduces by £1, completely extinguished by the time that income reaches £120,000.
For example, an investor with earnings of £100,000 and £20,000 of fixed interest income would pay £8,000 income tax on the interest plus a further £4,000 tax due to loss of personal allowance– a total of £12,000 in tax.
However, NISA income does not count towards this personal allowance means test, saving up to £12,000 a year.
More information is available on the following link.