The new tax year is approaching, and with it comes a new top rate income tax, meaning that those fortunate enough to be earning over £150,000 will be required to pay 50% income tax on anything above this amount.

In addition, higher rate on dividends will move from 32.5% to 42.5% of the grossed up income (equivalent to 36.11% of the net dividend) for taxable income above £150,000.

As a result of the changes to become effective from 6 April, private banks and wealth managers have been advising those who will be affected to act now in order to protect their income. Many are taking steps to bring forward earnings to this tax year, or plan their finances in an attempt to lower the impact.

Below are some tips outlined by Which4U that higher earners should consider:

1. Make full use of all your tax allowances Many of us complain about how much tax we pay, but forget to take advantage of tax free breaks. The truth is, many of us could be missing a trick when it comes to tax relief.Always ensure you have used up your allowances by the end of every tax year. A popular tax free savings incentive is your first port of call, in the form of individual savings accounts (Isas), with an annual allowance of £10,200 (or £7,200 for those under 50 until April 6th), as well as tax-free National Savings & Investments products.No income tax is required to be paid for any interest or capital gains earned using Isas, so make sure you shop around to find the best Isa rates, or alternatively if you wish to invest in a stocks and shares Isa, do some research into the market.

   Transfer investments that provide an income to your spouse, if he or she does not work or has earnings that fall in a lower tax band. This now not only applies to spouses on the basic rate tax but also those paying 40%, if the other spouse currently earns above £150,000 per year.

2. Close your bank account According to advisers at Deloitte, those that have a savings account paying interest on an annual basis that is due to be paid after April, should consider closing the account before the new tax rules kick-in in, allowing the interest payment to be subject to a lower rate of income tax. After, you can simply open a new bank account.
3. Donate to charity in the new tax year After 6 April, high earners making donations using the Gift Aid scheme will qualify for higher tax relief, which means that more money will be given to the charity. However, you should think about the potential impact delaying your regular donations could have on the charity, especially in the current financial climate.
4. Accelerate your income Some employers have chosen to pay employees their salaries early to avoid the higher tax. Consider asking your employer if this is a possibility. This may be easier for those in entrepreneurial or family businesses.You can also make use of any share options you currently hold, as these attract income tax so you will pay the lower rate. Those already getting pension income are able to opt to receive annual payouts as a lump sum before the changeover date in April.
5. Add more to your pension fund in the new tax yearIt has become apparent that pensions are looking more of an unattractive option to higher earners, with tax relief cut to 20% on some contributions.However, if you do fall into this category, you may want to act fast. In the 2010/2011 tax year, those earning more than £150,000 will be eligible to put in at least £20,000 and up to £30,000 with 50% tax relief, before the new restrictions come into play in 2011.Advisers at Deloitte have suggested that people earning between £100,000 and £113,000 – who will effectively be paying 60% tax from April as a result of their personal allowance also being eroded – should also add to their pensions.
6. Consider venture capital trusts (VCTs) Although these start-up investment schemes can be quite risky, they are being labelled as an alternative to a pension fund for higher earners because contributions attract 30% tax on the way in.
7. Move your assets into an offshore bondOffshore bonds are investment bonds that are operated by life insurance companies and also have some life insurance attached to them. This enables you to avoid paying any tax until you encash the bond. The idea is that by the time you come to encash the bond, you may be subject to a lower rate of income tax, for example when you’re retired – or if you have become an expat or a non-dom, you may not have to pay any UK tax whatsoever. Many well known financial advisers are using this approach for clients.
8. Change from income investments to Capital Gains Tax In 2008, capital gains tax was lowered to 18%, and investors have since been looking to acquire returns that are taxed as capital gains rather than income. According to advisers, the 50% income tax band has sped-up this switch. Over the past year, demand for products such as zero dividend preference shares has significantly risen, as well as funds that work on a total return basis instead of generating income, such as absolute return funds.
9. Consider leaving the countryThis may seem like a rather extreme measure – but advisers at Cazenove and Schroders Private Bank have said that many of their clients are considering this option in response to the substantial tax demands.

Savers seeking the most effective way to save should not only build up a tax free savings pot using ISAs, but also be aware of the rates paid on balances to ensure they are earning the best ISA rates. bmi credit cards

This usually means transferring cash ISAs to get a better deal, but what are the rules around moving your cash between ISAs?

Which4U is aware that many savers are either baffled by the rules around ISAs, or not given useful information from providers. (more…)

How to save your money

By the time you hit 30, there are a number of steps you should have or are planning to take to build on your financial knowledge to secure your future finances.

Life has a way of passing you buy, and before you know it you’ve lived out your 20s and suddenly you’re a fully fledged adult.

Welcome to the 30s club! Up to now, you have probably learned enough about yourself and your finances to know at least the basics for managing your money. Now it’s time to build up the foundations of this knowledge and experience to set yourself up for the future.

There are a number of steps that should be employed by anyone in their 30s towards a better financial future. 10 principles have been outlined below that can help you in reaching your retirement goals:

1. Your first objective should be to clear all non mortgage debt. In Your 20s you are likely to have far less financial responsibility, but 30s tend to bring new financial obligations such as a family to support and a mortgage to repay. One of the most effective ways of freeing up your cash is by paying off your debts. It is assumed that you will have paid off any credit card debts over the last decade, but if this is not the case then this should be your priority.

The most effective way to pay off credit card debt is through transferring the debt to a credit card that has a 0% balance transfer period. This will allow you to set up a payment schedule to clear the debt over the 0% period, without incurring any more interest. Most credit card providers will charge a transfer fee of around 3%, but this is likely to be significantly lower that the high rates you’re currently paying.

After these high interest debts have been cleared, focus on clearing any student loans and other forms of debt.

2. Lose the debt habit. It’s no good clearing all of your debts if you go out and acquire new ones.
One way of avoiding debt is by saving up for costly purchases such as new car or kitchen appliances. Now you’re debt has been cleared, you could deposit the money you would have otherwise been paying in interest and repayments into a high interest savings account. For example, you have just made your final monthly repayment of £250 on a loan, rather than simply giving yourself more disposable income, continue to make the payments but into a bank account. After a year you will have saved £3,000 without even noticing any difference in your outgoings.

3. Start taking a serious view to retirement. Most people don’t plan for their retirement in their 20s. This wasn’t the time to start investing and you may not have been paying into a pension fund. Now it’s time to start planning for your future and looking at all of the possibilities in terms of retirement and a pension fund.

This is everything, from what age you wish to retire; how you would like to live – how much money you will require, all based on a realistic goal that you can reach through what can seem like a lifetime of investing. Time is still on your side, so use it before it passes you by and makes things difficult. The earlier you start the better, and the more chance you will have of enjoying a comfortable retirement without having to give up too much until then.

Before you begin to think about saving for your children’s futures, e.g. education expenses, ensure you have sorted yourself out. You can easily take a loan out to pay for college, but not for retirement.

4. Don’t put all of your eggs in one basket. You should diversify your investments to ensure your cash isn’t tied up in one sector, as markets have been known to crash and this could leave you with nothing.

It is generally recommended that you should try to invest around half of your portfolio to large companies, split evenly across growth and value.

You may want to look into putting some of your savings into fixed rate bonds. These accounts allow you to fix the interest rate paid on your balance for a specified period of time, allowing you to predict how much the investment will earn. This is also good as the base rate is on a downward path, as a variable rate savings account would reflect these changes by reducing the rates. By fixing the rate you can protect yourself from these reductions. There is an element of risk involved in fixed rate bonds, as rates could also rise through the life of your account, which would leave your savings subject to a lower rate than that offered to new and variable rate customers.

5. Every day’s a school day. Continue to learn and never stop investing in yourself. You will begin to widen your investment knowledge, and it is this that will help your earning power through informed decisions.

6. Protect your assets. There is only so much planning you can do to prepare yourself for the future and even what appears to be a full-proof financial plan can be derailed as a result of unexpected cost. It can pay off to cover yourself from every angle, allowing you to survive every “what if” scenario. This can be as simple as taking out adequate insurances to cover your possessions and even your life.

It is also a good idea to save for an emergency fund, covering yourself in the event of a job loss, medical emergency or anything else that life may throw at you. This should be enough to cover all of your outgoings for up to six months. This may all be too much to take on, so you may wish to start saving a small amount towards this fund so you can build up a more substantial amount over a time.

7. The simple life. Saving your gratification for a distant future might not be fun, but adopting a simple lifestyle is an effective way to reach the goals of today, while still achieving your long-term goals. Take a close look at all of your regular outgoings and spending to identify areas that could be trimmed for the cause. Small sacrifices can lead to big rewards.

8. Write a Will. This may seem like a hasty step to take, but if  the unthinkable happen, you would have no choice in where your possessions go. A will can ensure that your wishes are met, allowing you to specify who would be entitled to your assets.

If you’re a parent to children under the age of 18, think about who could take care of them should something happen to yourself and the other parent. This can also be specified in a will.

9. A price on your life. If you have somebody who depends on you financially, it is important that you consider taking out a life insurance policy. If you died, you would want to be sure that they were financially secure. At 30, there are some great life insurance deals available to you. The premium can be reduced based on certain elements, such as not smoking.

10. Tax free savings. An effective way of saving towards a better future and taking advantage of your tax free savings allowance is through cash and investment ISAs. Each year, all individuals are entitled to an ISA saving limit of £7,200, in which they can invest cash and investments. There is a £3,600 limit on cash ISAs within any one tax year, but you can invest the full £7,200 in a stocks and shares ISA, with a Capital Gains Tax (CGT) exemption of up to £9,600 per year.

Weighing up your choices

Fixed Rate Bonds VS ISA’s

Knowing where to put your savings is confusing these days, especially based on how much stress the economy has been under over the last few months, pushing the Bank of England to make a string of cuts to its Base rate which have in turn been passed on to savers rates.

With Thursdays cut taking the Base rate down further to a new record low, rates on normal savings accounts have recently been slashed, which has limited our saving options, with saving suddenly becoming less attractive.

But there are still some good savings accounts out there, carrying slightly more risk to your returns than instant access accounts, but offering the best rates at present. The two types of savings accounts that stand out from the rest, are fixed term bonds and Individual Savings Accounts (ISA’s).

Although these savings accounts are similar in some respects, there are pros and cons to each that need to be evaluated before making a choice between the two.

Lets start with Fixed Rate Bonds.

The way that fixed rate bonds work is by providing a rate that is fixed throughout the duration of the agreed term, giving you a predictable source of income with no surprises.

Rates on these accounts can differ, with the higher rates generally paid on short-term bonds, and lower rates on longer-terms. This is because the shorter terms carry less risk to the banks, as significant rate changes would not have a lasting effect.

Fixed Term Bonds allow savers to make significant deposits, usually ranging between £500,000 and £2 million, but some, such as ICICI, come with no maximum limits, allowing savers to deposit as much as they like. Something that you must remember is that you can only make an initial deposit when opening the account, and no more throughout the duration of the bond.

There are no limits as to how many of these accounts you can open within any one year, so there is nothing stopping you from opening five separate accounts across different banks.

Some people will tell you that the success of your fixed term bonds involves luck, as the rate you sign in for will not be affected by the Bank of England Base rate, so if you choose to open your bond at the right time, you might find that your savings are earning far more interest that they would in a standard account. Knowing which direction the base rate is headed isn’t all about luck, you can often get an insight into predictions, and make an educated guess. But with all luck comes the flip-side – bad luck, so remember to do your homework as you could find that rates begin to rise and suddenly the rate on your bond is a lot less attractive.

If you think back to October last year, when the Base rate stood at 5%, you would be very chuffed with yourself if you had fixed in a rate as it peaked!

Many economists believe that rates will continue to fall during 2009, going as low as 0%.

You must remember that these accounts do exactly what they say on the tin, they fix the rate. Always make sure you are being realistic with your money, choose a term that is right for you and only go for this option if you can actually afford to lock your money away. In most cases, withdrawing early will close the bond and you will lose any interest you accumulated to date.

As with any normal savings account, the interest you earn counts as income, so is subject to tax deductions. For anyone on the lower tax band (under 34,800) the tax rate is 20%. For those earning above this rate must pay 40%. There are other circumstances in which non-earners may be given a tax free allowance, so check out the HM Revenue website for more information.

Next lets look at Individual Savings Accounts

Individual Savings Accounts (often abbreviated to ISA) offer a tax free option to saving. The difference with ISA’s and your average savings account is that you don’t have to pay any tax on the interest you earn.

Each year you’re given a £3,600 allowance that you can put into your ISA, and the interest accumulated from your total balance is tax free for life. You can still deposit up to £3,600 between now and April 2009, which is when your allowance is renewed, so if you decide an ISA sounds right for you, make sure you use up your allowance, as you cannot carry it over.

ISA’s offer a range of options to suit your needs, such as fixed rate, base rate guarantees and instant access.

Unlike fixed term bonds, most ISA’s will allow you to make as many deposits as you like, providing you keep to the £3,600 annual limit. To get the best returns on your ISA, you would be better to put the full £3,600 into your account as soon as your allowance renews, as this would allow you to earn the highest possible amount of interest. This will not suit everybodys savings plans, so you may be better to save as you earn, making monthly deposits from your salary.

As returns will often be high compared to some savings accounts due to tax redemption, interest rates offered on ISA’s tend to be lower than fixed term bonds.

Most ISA’s are affected when rate cuts are passed onto proviers, so you cannot guarantee your returns over time. If you were to open an ISA when rates were high, there would be no guarantee that they would stay high, and visa versa. Fixing your rate on an ISA would allow you to lock yourself in at a rate for a specified term. This does come with a certain amount of risk, as rates change, especially over a long period of time.

Both fixed term bonds and ISA’s are both great tools for saving as they encourage you to leave your money to grow. With an ISA, rather than capping interest earned to date and closing the account due to withdrawals, ISA’s simply give savers an annual deposit limit of £3,600, and once this has been reached, no more can be added, regardless of any withdrawals. This may not apply to all ISA’s so that’s something to check before applying.

Always make sure you’re aware of the compensation scheme used by your proposed provider. With the recent financial crisis, many financial institutions have been feeling the pinch, so although it may be unlikely that your bank would collapse, it should definitely be something that you look into. For more information which banks carry which schemes, and which banks fall under the same financial umbrella, see Which4U’s Top Ten Savings Tips.

The bottom line with any savings account is to always make sure you’re gaining the highest possible returns. Although ISA’s provide tax free interest, you could find that the difference in rates offered when comparing to fixed term bonds, will in fact leave you worse off. Before deciding, compare the savings market to give you an idea what’s available

One last thing to remember is to make sure your account is paying a higher interest rate that the rate of inflation, as anything below would cause your money to erode. This is because Inflation measures the rate at which prices will increase, so if this rate is higher than the interest rate you are earning, your money will be slowly eroding.