Tax tips for the 'Comfortable poor'

The brilliant author and publisher, Felix Dennis, who sadly died this year, created various categories to compare relative wealth of individuals. These range from the 'Comfortable poor' who have quickly realisable assets of £50,000 to £200,000 to the 'Filthy Rich' with quickly realisable assets of over £100m. Mr Dennis himself was amongst the select group of 'Filthy rich', his fortune built on his entrepreneurial endeavours.

We don't have any clients in the 'Filthy rich' category but we do have some who are 'Comfortable poor' or aspiring to be so. These will often be higher rate or additional rate taxpayers, still working hard in employment or in their own business, often with young children still living at home. These tax tips are aimed at this group and could help them to keep more of their hard earned income.

1 Use your annual ISA allowance

Anyone over 18 can now invest up to £15,000 in a tax year and receive all their interest or returns tax free. The investment can be split between cash and stocks and shares.

2 Make pension contributions to keep child benefits

Over 1m people have been adversely affected by the child benefit changes which were introduced in 2013. The benefit starts to withdrawn when one earner in the family has income of more than £50,000 and is taken away completely if earnings are £60,000.

If you are earning a little over £50,000 you could invest some of your income into an Additional Voluntary Contribution into your corporate pension scheme or into a personal pension scheme. As well as being a tax effective method of saving for retirement this could enable you to retain your entitlement to child benefit by reducing your qualifying earnings to below the £50,000 threshold. An extremely attractive double benefit.

3 Keep your personal allowance and save 60% tax with pension contributions

Following a similar approach to that described above can enable you to retain your personal allowance and save 60% tax.

For earnings between £100,000 and £120,000 the £10,000 personal allowance is gradually withdrawn. The effect is that the rate of tax on these extra earning is a painful 60%!

Making pension contributions to reduce your earnings below £100,000 can avoid this punitive tax rate.

4 Share your personal allowance

From April next year basic rate taxpayers will be able to transfer up to £1,000 of their personal allowance to their spouse or civil partner. 

So just a few tips here to help the 'Comfortable poor' keep a little more of their income. These are all reasonable planning steps introduced by the government to encourage saving, investment in pensions and recognise the value of marriage and civil partnership. If these leave you feeling slightly guilty for keeping this money out of the chancellor's coffers you could always donate more to charity. That could potentially save you more tax but I will save that for another blog.

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