WITH tax year end just around the corner, it is time to check you are making the most of your tax reliefs and allowances, writes Richard Eastwood.
There is a lot to think about in our top ten:
1. Pension saving: maximise tax relief
• Higher rate taxpayers may contribute an amount to maximise tax relief at 40, 45 or even 60 per cent (where personal allowance is reinstated).
• Those with sufficient earnings can use carry forward to make contributions in excess of the current annual allowance. This is the last chance to benefit from the potential double annual allowance before it drops off the carry forward radar.
• Couples could maximise tax relief at higher rates for both before paying contributions that will only secure basic rate relief. You can top up pensions for partners up to the partner’s earnings, with tax relief on top.
2. High earners: making a pension contribution could increase annual allowance
• Some high income clients will face a cut in the amount of tax-efficient pension saving this tax year. The standard £40,000 AA is reduced by £1 for every £2 of income over £150,000, until their allowance drops to £10,000.
• But it is possible some clients 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 three tax years can bring income below £110,000 and restore the full £40,000 allowance.
• Remember that when working out how much carry forward is available, high earners may also have had a reduced annual allowance from 2016/17 or 2017/18.
3. Clients approaching retirement: boost pension saving now before triggering the MPAA
• Anyone looking to take advantage of income flexibility for the first time may want to consider boosting their pension pot before April, potentially sweeping up the full £40,000 AA from this year plus any unused allowance carried forward from the last three years.
• Triggering the Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding into DC pensions will be restricted to £4,000 a year, with no carry forward.
• Clients who need money from their pension can avoid the MPAA and retain the full £40,000 allowance if they only take their tax free cash.
4. Employees: sacrifice bonus for an employer pension contribution
• Exchanging a bonus for an employer pension contribution before the tax year end can bring several benefits.
• The employer and employee NI savings made could be used to boost pension funding, giving more in the pot for every £1 lost from take-home pay.
5. Business owners: take profits as pension contributions
• For many directors, taking profits as pension contributions could be the most efficient way of paying themselves and cutting their overall tax bill.
• If the director is over 55 they have full unrestricted access to their pension savings.
• There is 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.
• Employer contributions made in the current financial year will get relief at 19 per cent, but the rate is set to drop to 17 per cent in 2020. So business owners who cannot fund a pension every year may wish to pay sooner rather than later if possible.
6. Use ISA allowances
• ISAs offer savers valuable protection from income tax and CGT and, for those who hold all their savings in this wrapper, it is possible to avoid self-assessment returns.
7. Recover personal allowances and child benefit
• Pension contributions reduce an individual’s taxable income, which can have a positive effect on both the personal allowance and child benefit for higher earners.
• An individual pension contribution that reduces income to below £100,000 will restore your full tax free personal allowance.
• Child Benefit is clawed back by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once 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.
8. Investments: take profits using CGT annual allowances
• If you are looking to supplement income tax-efficiently you could withdraw funds from an investment portfolio and keep the gains within your annual exemption.
• Even if cash is not needed, taking profits in the £11,700 CGT allowance and re-investing the proceeds means there will be less tax to pay when you need to access funds.
• Proceeds cannot be re-invested in the same mutual funds for at least 30 days. But they could be re-invested in a similar fund or through their pension or ISA. Alternatively proceeds could be immediately re-invested in the client’s partner’s name.
• If there is tax to pay on gains at the higher 20 per cent rate, a pension contribution could be enough to reduce this rate to the basic rate of 10 per cent.
9. Bonds: cash in bonds to use up PA/starting rate band/PSA and basic rate band
• If you have 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 these.
• If not needed, proceeds can be re-invested into another investment, effectively re-basing the ‘cost’ and reducing future taxable gains.
• For those that have no other income at all in a tax year, gains of up to £17,850 can be taken tax free.
• If you do not have any of these allowances available, but a partner (or adult child) does, then bonds or bond segments can be assigned to them so they can benefit from tax free gains. Remember, the assignment of a bond in this way is not a taxable event.
10. No bonus? No problem: recycle savings into a more efficient tax wrapper
• Using tax allowances is 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.
• But there may be a better option to re-investing these interim capital withdrawals in the same tax wrapper. For example, to fund a 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 ISAs do not attract the tax relief or IHT advantage a pension does, fund growth will still be protected from tax.
• Which leads nicely on to one final consideration; if you’re over (or approaching) 55 – should ISA savings be recycled into a pension to benefit from tax relief and IHT protection?
Effective tax planning is a year round job. It is only at the end of the tax year that you have all the pieces to complete the planning jigsaw, but there are steps you can take now to give yourself time to put plans in place. Call Richard on 0161 785 3500 for advice.