Tax Planning Year End
Chris Broome – Chartered Financial Planner
1. Income Tax Allowance
Every person has a ‘Personal Allowance’ of £12,500. Any income received within this allowance will be tax-free. ‘Income’ isn’t just what you get from work, it includes pension income, rental income and income from offshore bonds.
If you haven’t already used your personal allowance, look to see if there are assets you can withdraw an income from tax-free.
2. Marriage Tax Allowance
If you’re married or in a civil partnership, you can transfer up to 10% of your personal allowance to your spouse or civil partner. This is just one of the four main ways that married couples can reduce their tax bill.
To benefit as a couple, you (as the lower earner) must normally have an income below your personal allowance (£12,500) and your spouse/civil partner must have an income below the higher rate tax threshold (£50,000)
Transferring the personal allowance can save you up to £250 per in tax.
Pro tip – you can backdate your application up to 3 years (additional £750 tax saving).
3. Personal Savings Allowance
Most people are allowed to receive some savings interest tax-free:
For non or basic rate taxpayers, you’re allowed up to £1,000 per year.
For higher rate taxpayers, it’s £500 per year.
For additional rate taxpayers, nothing (sorry!).
Although this might not sound like a lot, in today’s low-interest environment it takes a lot of savings to produce £500 or £1,000 of interest.
For example, you would need to have £50,000 of savings, providing an interest rate of 1.00% to get £500 of savings interest.
And remember, each person gets this allowance. So if you hold savings jointly with your spouse or partner, you can both use your allowances.
4. Savings Rate Band
On top of this, you may be eligible for the ‘starting rate for savings’ (otherwise known as the ‘savings rate band’. This allows you to receive savings interest of up to £5,000 per year tax-free.
To be eligible for the savings rate band, you need to have ‘income’ (see above) of less than £17,500 per year.
5. ISA Allowance
Everybody has an ISA allowance of £20,000 per year. An ISA is basically just a ‘wrapper’ that can hold an asset, normally cash or stocks and shares.
Most people stick cash in their ISA. In prior years, this made sense, as any interest on savings was taxed. But with the introduction of the personal savings allowance, tax isn’t really an issue for cash savings (unless you have a significant amount).
A potentially better option is to use your ISA allowance to invest in stocks and shares. That way you are protected against dividend tax and capital gains tax (more on that later).
Don’t worry if you’ve already got a cash ISA, you can always transfer it to a Stocks and Shares ISA and keep the ISA allowance from previous years.
6. Dividend Allowance
Everybody is entitled to receive up to £2,000 per year of dividends tax-free. This is particularly useful for if you own shares (outside of an ISA) or are a director of a company.
Pro tip – if you own a company, consider appointing your spouse as a director to make use of their dividend allowance.
7. Capital Gains Tax Allowance
If you make a gain/profit on an investment (or second property) you pay capital gain tax. Everybody has a capital gains tax allowance of £12,000 per year.
You can transfer your assets to your spouse or civil partner tax-free and they can sell the gain. This is particularly useful if one of you pays a higher rate of tax than the other.
You can also sell taxable investments and reinvest them tax efficiently. For example, you could sell an investment and reinvest the proceeds in a stocks and shares ISA. This uses your capital gains tax allowance and ensures that any gains in the future are tax-free.
8. Pension Annual Allowance
Up to the age of 75, you can contribute up to 100% of your earnings or £40,000 into a pension (whichever is less). There are some restrictions for high earners, in the form of the tapered pension annual allowance. You can find out more about this by clicking here.
Even if you have no income, you can contribute £2,880 per year into a pension.
The benefit to using your pension annual allowance is that funds contributed to a pension receive pension tax-relief (read more on this here).
In addition, funds held inside a pension grow free from income and capital gains taxes and on death are not included for inheritance tax.
If you’re a business owner, the company can make pension contributions on your behalf, which acts as a deductible business expense against corporation tax.
All in all, pensions are pretty damn good from a tax perspective.
9. Pension Carry Forward Allowance
On top of your normal pension annual allowance, you can carry forward your pension allowance from the previous three tax years (one of the rare allowances that aren’t lost each tax year).
This means that you can potentially make a contribution of up to £160,000 into your pension (£40,000 from the current year and £40,000 from each of the previous three tax years).
The rules around this can be complicated. If you want to know more, just drop me a line.
10. Venture Capital Trusts (VCTs)
You can contribute up to £200,000 per year into Venture Capital Trusts (should you have a spare £200,000 sitting around!).
The benefit of investing in a Venture Capital Trust is that you get tax relief of 30% on the money you invest. This means that if you put in £70, the Government will put in another £30 on your behalf.
Any dividends received will be free of tax and there is no capital gains tax to pay on any profits, as long as you hold the investment for five years.
Venture Capital Trusts are high-risk investments and unlikely to be suitable for most.
The lack of people seeking advice, and their confidence in making the best decisions without the help of an adviser, comes at a time when more than half of savers have doubts about their ability to retire on their timetable.
55% of savers fear they won’t be able to retire on time, and 77% admitted they haven’t set a target for their retirement savings. A timetable for retirement and knowing your number (how much you need to save to live the life in retirement you want), are two important duties fulfilled by financial planners.
The research found it was members of the older generations who were least likely to have spoken with a financial planner. 51% of over 65s have never taken financial advice, and 57% of people in this age group said it was because they could do it on their own.
One in five of those responding to the survey who had more than £100,000 in savings said they had never spoken to a professional financial adviser at any time in their lives.
The majority of those said they trusted their instincts to make the right decisions.
Unsurprisingly, the Internet seems to be a popular source of information in helping DIY investors make their financial decisions. It came in second place after speaking to family members.
But the research did show that those who seek advice are far more confident about their decisions. Advised clients were twice as confident as non-advised clients about being able to retire how and when they wish.
Advised clients were also far more likely to have set an income target for retirement, and to have allocated or passed on money to the next generation while they are still alive.
Going it alone is a bad idea for your retirement planning. Working instead with a professional adviser means getting answers to the right questions, carefully considering all of the options, and mapping out a retirement plan on your terms.
When we meet a brand new prospective client, who to date has been a DIY investor and a future DIY retiree, we always suggest they ask themselves the following questions:
- Have you built your own financial plan? One that displays your short/medium/long term goals, including costs of each and expected life events?
- Have you held yourself accountable to the more challenging questions? Do you even know what those questions are?
- Do you truly understand the world of investment management? Understand how investment returns are derived? Factors to consider? How to deal with future changes? And which investment companies to actually use?
- Have you disaster planned? And we mean true disasters? On you. Your family. Children. Perhaps your business?
- Do you know the perfect balance of asset class and financial vehicles you need to ensure you first achieve, then maintain, financial independence?
- Are you relying on attempting to ‘time the market‘ or ‘stock pick‘? Or worse, are you relying on a friend or family member to do this guess work for you?
- Do you understand what the risk actually is? Is it the capital markets temporarily declining? Or it is running out of money? How does inflation impact this? And your asset class choices?
- Have you checked in (to your emotions) to understand how your behaviour (during both moments of market euphoria and Armageddon) poses the biggest threat to you personally derailing your future wealth?
- Do you hold any financial planning or investment management qualifications? Spent years, or decades, becoming a knowledgeable and successful investor?
- Do you first understand, and then keep abreast with, all changes to tax legislation and financial rules, such that you know for certain your private wealth is not going to be negatively impacted?
- What are you like at identifying investment scams and fraud?
- How often are you checking and maintaining your plan (point 1 above)?
In most instances, the outcome of the meeting is an admittance that perhaps they do need the services of a caring and empathetic financial planner.
And in those instances, we are there to help.
For more information on this article, or any other, please get in contact.