With the tax year end fast approaching on April 5, The Financial Planning Group thought we would highlight certain changes for the forthcoming tax year – timing is often the key ingredient in tax planning, so now is the perfect opportunity to take stock of your finances and tax position.
Firstly, 2017/18 has been a relatively steady year for tax and pension planning. With no real surprises in the Budget last Autumn, it meant our clients continued to benefit from the existing range of tax reliefs and allowances to help them save for the future. This was largely good news, however, reviewing the year to date, then identifying where there is still scope to save by maximising unused reliefs and allowances is prudent house-keeping . Here are several key areas where opportunities may still exist, and as always, we are happy to advise on an appropriate course of action.
Maximise ISA subscription limits
ISAs offer savers valuable protection from income tax and Capital Gains Tax. The current £20,000 annual allowance is given on a ‘use it or lose it’ basis, and the period leading to the tax year end, often referred to as ‘ISA season’, is the last chance to top up. Savings delayed until after April 6 2018 will count against next year’s allowance.
Pension saving at highest rate of relief
Successive Chancellors have decided against cutting the rate of tax relief on pension savings for individuals. But with the spotlight constantly falling on pension saving incentives at each Budget, relief at the highest rates may not be around forever. Additional and higher rate taxpayers may also wish to contribute an amount to maximise tax relief at 45%, 40% or even 60% (where personal allowance is reinstated) while they have the opportunity. Carry forward can allow contributions in excess of the current annual allowance. For couples, consider maximising tax relief at higher rates for both, before paying in an amount that will only secure basic rate relief.
Keeping pensions annual allowance for high earners
Some high income individuals will face a cut in the amount of tax-efficient pension saving they can enjoy this tax year. The standard £40,000 Annual Allowance will be reduced by £1 for every £2 of ‘income’ over £150,000 in a tax year, until their allowance drops to £10,000. However, it’s possible that some people may be able to reinstate their full £40,000 allowance by making use of carry forward. The tapering of the annual allowance won’t normally apply if income less personal contributions is £110,000 or less. A large personal contribution using unused allowance from the previous 3 tax years can bring income below £110,000 and restore the full £40,000 allowance for 2017/18. And some of it may attract 60% tax relief too. High earners may also have a reduced annual allowance from 2016/17.
Boost SIPP funds now before accessing flexibility
Anyone looking to take advantage of income flexibility for the first time may want to consider boosting their fund before April, potentially sweeping up the full £40,000 from this year, plus any unused allowance carried forward from the last three years.The Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is now £4,000 a year since April 2017. If you are subject to the MPAA, you cannot use carry forward. Those requiring money from their pension can avoid the MPAA and retain the full £40,000 allowance if they only take their tax free cash.
Sacrifice bonus for an employer pension contribution
March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes. The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay.
Dividend changes and business owners
Many directors of small and medium sized companies may be facing an increased tax bill following changes to the taxation of dividends. This could be amplified next year when the tax free dividend allowance drops from £5,000 to just £2,000. A pension contribution could be the best way of paying yourselves and cutting your overall tax bill. And, of course, if a director is over 55, they now have full unrestricted access to their pension savings.There’s no NI payable on either dividends or pension contributions. Dividends are paid from profits after corporation tax and will also be taxable in the director’s hands. By making an employer pension contribution, tax and NI savings can boost a director’s pension fund. Employer contributions made in the current financial year will get relief at 19% (this is also the planned rate for the next two years) but the rate is set to drop to 17% in 2020. So those business owners who cannot fund a pension every year, may wish to pay sooner than later if they have the profits and the cash available.
Recover personal allowances and child benefit
Pension contributions reduce an individual’s taxable income. In turn, this can have a positive effect on both the personal allowance and child benefit for higher earners resulting in a lower tax bill. An individual pension contribution that reduces income to below £100,000 will mean the tax payer will be entitled to the full tax free personal allowance. The effective rate of tax relief on the contribution could be as much as 60%. Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once their income exceeds £60,000. A pension contribution will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
Take investment profit using CGT annual allowance
Individuals looking to supplement their income tax efficiently could withdraw funds from an investment portfolio and keep the gains within their annual exemption. Even if an income isn’t needed, taking profits annually within the CGT allowance, then re-investing the proceeds, means that there will be less tax to pay when you ultimately need to access these funds for you actual spending needs. Proceeds cannot be re-invested in the same mutual funds for at least 30 days otherwise the expected ‘gain’ will not materialise. But you could be re-invested in a similar fund or through your pension or ISA . Alternatively the proceeds could be immediately re-invested in the same investments but in the name of the your partner.
Cash in bonds to use up PA/starting rate band/ PSA and basic rate band
If you have any unused allowances that can be used against savings income, such as Personal Allowance, Starting Rate Band or the Personal Savings Allowance, now could be an ideal opportunity to cash in offshore bonds, as gains can be offset against all of these. For those that have no other income at all in a tax year, gains of up to £17,500 can be taken tax free. If not needed, proceeds can be re-invested into another investment, effectively re-basing the ‘cost’ and reducing future taxable gains. If you do not have any of these allowances available, but your partner (or even an adult child) does, then bonds or bond segments can be assigned to them so that they can benefit from tax free gains. Remember, the assignment of a bond in this way is not a taxable event.
Recycle savings into a more efficient tax wrapper
As mentioned above, allowances are a great way to harvest profits tax free. By re-investing this ‘tax free’ growth, there will be less tax to pay on final encashment than might otherwise have been the case. That is to say, when snd individual actually needs to spend their savings, tax will be less of burden. But there may be a better option to re-investing these interim capital withdrawals in the same tax wrapper. For example, they could be used to fund your pension where further tax relief can be claimed, investments can continue to grow tax free and funds can be protected from IHT. Similarly, capital taken could be used as part of this year’s ISA subscription. Although there’s no tax relief or IHT advantage as with a pension, fund growth will still be protected from tax. Which leads nicely on to one final consideration; should ISA savings be recycled in to a your pension in order to benefit from tax relief and IHT protection?
Remember, it is only at the end of the tax year that you have all the pieces of the jigsaw, and what is outlined above are only a handful of the considerations that financially savvy individuals should be contemplating at this time of year. With 25 years’ experience helping individuals, families and businesses to place their financial affairs in context with their future goals and aspirations, The Financial Planning Group are here to provide a simple, structured, disciplined and reviewable planning service. We will change the fundamental relationship people have with their money to give them confidence and clarity in their own future.
If you would like to like to arrange a consultation at our offices in the heart of Teddington, please call Tim Norris or Alan Clifton on 0800 731 7614.