Overcoming the 60% tax trap

The new headline 50% tax rate has been well publicised - From 2010/2011, a 50% rate of tax will apply to individuals with taxable income in excess of a higher rate limit of £150,000 per annum.

However, not quite such a headline grabber is the fact that in addition to increased rates of income tax for high earners, those with an adjusted net income in excess of a £100,000 high income limit will see their basic personal allowance reduced or removed entirely from April 2010.

There will be a loss of £1 in personal allowance for every £2 of income earned over £100,000. The personal allowance will be lost when earnings equal £112,950 (the personal allowance for 2010/2011 will be £6,4750)giving an effective 60% tax rate.

Adjusted net income can essentially be defined as taxable income reduced by specified deductions e.g. such as trading losses and payments made gross to pension schemes, as well as grossed-up gift aid and pension contributions which have received tax relief at source.

This means that provided an individuals adjusted net income is below or equal to the £100,000 limit, they will continue to be entitled to the full amount of the basic personal allowance.


Example

The following example considers the tax relief available if the pension contribution is paid in 2010/2011.

The personal allowance in 2010/2011 will be £6,475 and the basic rate tax band £37,400.

Mr X is earning £112,950, and he makes a pension contribution of £12,950.

If Mr X has earnings of £112,950 - and no other income - in 2010/2011 he would not only be liable to 40% tax on the top £12,950 slice of his salary, but would also lose all £6,475 of his personal allowance (£1 for every £2 above £100,000).

This amount of £6,475 would be liable to 40% tax, meaning the overall tax liability on his top £12,950 slice of salary is effectively £7,770, or 60%.

If Mr X made a personal pension contribution of £12,950 gross, his adjusted net income would be reduced to £100,000.

Not only would this reduce his higher rate tax liability, but it also means that he would retain his full personal allowance.

Mr Xs effective tax relief on the £12,950 pension contribution is £7,700 which equates to 60%.

Investment Fund Selection - Getting It Right

When we conduct our fund research we'll typically ignore the latest trends, new funds and star managers, and concentrate on analysing the actual performance achieved.

Trustnet - a website devoted exclusively to investment reseacrh - recently published their list of 112 Alpha managers, these being fund managers who add real value to the investment process. Over 1100 managers have been analysed for this rating. After the exclusions, this falls to below 1000. The top scoring managers that still meet the calculation criteria are deemed Alpha Managers - The full list is here

Having reviewed the top managers on their list against our recommended funds it is pleasing and reassuring to know that our clients money has 12 of the top 15 managers looking after it !

Advice from someone you can trust

It is getting easier to find an independent financial adviser (IFA) you should be able to trust.

Advisory firms who adopt what has been termed the New Model approach tend to portray similar characteristics - running good businesses that put the interests of their clients first.

The result is that locating an adviser who works for you, and not a life insurance or a pension provider, is easier than it used to be.

Some of the key determinants that separate a New Model Adviser from the traditional and outdated methods are:

Planning

A new model adviser will generally be looking to help you attain your life goals and ambitions with financial advice tailored to help you attain the future desired lifestyle you seek.

You will buying from them advice and not being sold a product.

Genuinely Fee Based

All IFAs must offer clients the option of paying a fee rather than agreeing to the adviser being paid commission by a financial services product provider. Paying a fee means you are much more likely to get unbiased advice.

New Model Advisers will have clear charging structures for their different levels of service.

Highly Qualified

New model advisory firms will contain planners who have qualified as either certified financial planners (CFP) and/or chartered financial planners. These are the two highest qualifications IFAs can attain. Do not confuse the CFP with the certificate in financial planning, which is the most basic qualification all IFAs must have.

By the end of 2012, the bar will be raised and all advisers will need to have a certain minimum qualification to be able to continue to advise.

Satisfied Clients

Asking for feedback from clients on services offered is a sign of a well run business. This allows the firm and its advisers to learn what is and what is not working and helps in strengthening ongoing client relationships.

Technologically Advanced

Forward thinking firms will make good use of information technology, not something that can be said of the ordinary IFA, with websites that enable clients to track their investment portfolio online.

Additionally, the use of blogs and social media are becoming an increasingly valuable tool to aid effective and efficient communication with clients.