Taxing questions

Most of us risk being taxed on our income, our capital gains and the value of our estate when we die. It is worth getting a clear grasp of how these taxes work and then discussing with your financial adviser the most tax efficient financial planning for you.

Income tax

The single person's income tax allowance for the year to 5th April 2010/2011 is £6,475 (2009/2010 - £6,475). If your total income is less than this during the tax year then there's no tax to pay. This allowance is reduced by £1 for every £2 income above £100,000, resulting in an effective tax rate of 60%. With careful planning you may be able to reduce this penal tax rate.

Variations of this apply to the age bands 65-74, £9,490, and age 75 and over, £9,640 for 2010/2011. Married couples also have allowances, these are again age related, but can be reduced by £1 for every £2 of income above the overall limit of £22,900.

You may also be able to reduce tax on any interest you've earned on your savings by possibly switching savings onto the life of a spouse, if he or she has no income or a low income. So if you or your spouse is on a low income then your bank or building society can provide you with Inland Revenue form R85 to apply for your interest to be paid gross.

Income tax bands 2009-2011

	2009-2010	2010-2011
Rate	Band (£)	Band (£)
10%*	Up to 2,440	Up to 2,440
20%	2,441 to 37,400	2,441 to 37,400
40%	Over 37,400	37,401 to 150,000
50%	n/a	Over 150,001

*applies only to savings income.

The self-employed can claim business expenses against their income. So make sure you include all possible justifiable business expenses on your self-assessment form. This also applies to capital allowances for expenditure on plant and equipment, including computers and tools, for example, used for your business.

If you employ an accountant, they should be able to confirm your correct allowances for you.

Don't forget pension payments either. You may be able to pay further contributions to your pension, which can soak up some unused tax relief.

One other point to remember, if one spouse is a tax payer and the other is not or pays tax at a lower rate it is worth considering switching some investments to take advantage of their unused tax allowances.

Capital gains tax

In the tax year to 5th April 2010/2011 the CGT allowance is £10,100 (2009/2010 £10,100).

This means that you do not have to pay tax on gains from buying and selling shares or other investments during the tax year up to that amount. Remember also that you do not normally have to pay tax on any gain you make when you sell your main residence.

If you have used your CGT allowance, don't forget your ISA allowance. A "stocks and shares ISA" can shelter capital gains and dividends on investments, for example shares, worth up to £10,200 per year in the tax year 2010/2011.

For further information about ISA`s please click here.

Inheritance tax

Inheritance tax is hanging over more and more of us each year. This is largely due to the rise in residential property values. The current IHT allowance is £325,000 (2009/2010 £325,000). Depending on the value of your house and other assets this may not be that big an allowance. If you die leaving an estate worth more than £325,000 (2009/2010 £325,000) and you have no spouse your estate will come in for IHT at 40% on the balance.

Even if you do have a spouse to inherit then this only puts off the time when tax will be payable because he or she will also pass away one day. It is worth doing some forward planning with us to decide whether it would be appropriate to gift some of your estate, perhaps to children or other relatives, during your lifetime; or possibly redirect assets up to the value of the nil rate band into a trust on death.

The nil rate band is effectively transferable between husband and wife such that where one spouse has died with a chargeable estate for IHT of less than the nil rate band at the time, the unused proportion will be added to the nil rate band of the surviving spouse on the second death.

One thing is for sure with all forms of tax; if you do nothing the government will use its considerable powers to make sure a share of your hard earned wealth ends up in their coffers.

For further information about Inheritance Tax and its full effects and its possible mitigation please click here.

Levels, and bases of, and reliefs from taxation are subject to change.

The FSA do not regulate Tax Planning and Inheritance Tax Planning