Options to maximise pension tax allowances – please contact us for advice
Key areas for consideration:
• Make full use of the pension contribution allowance of normally up to £40,000.
• Make use of any unused annual pension allowance available to carry forward from the previous three tax years.
• Make sure you’re getting tax relief at the appropriate rate if you’re a higher or additional rate taxpayer.
• Consider how to efficiently pass death benefits to your beneficiaries.
For example, pension holders can nominate who they wish to receive the benefits in the event of their death by completing an ‘expression of wish’ form. Pension trustees will usually, but aren’t obliged to, take this into account.
Pension tax advantages
The most that can be paid into a pension and receive tax relief is the greater of £3,600 or 100% of your earnings, up to a maximum allowance of normally £40,000. So any contributions over that amount will not attract income tax relief, unless you have any unused annual allowance to carry forward from the previous 3 tax years.
The tax relief means that as a higher rate tax payer looking to invest £8,000 in your personal pension, you would only effectively invest £4,800 of your own money as £3,200 would be added by HMRC as tax relief. Your initial payment would be £6,400, with 20% added by pension tax relief and the other 20% claimed back through the HMRC self-assessment process.
Options to maximise your ISA allowance – please contact us for advice
Key areas for consideration:
• Use your full annual ISA allowance if you can – you can’t carry it into the next tax year.
• Where possible, transfer existing investments which are subject to tax on any growth into a tax-free ISA.
• Use your annual ISA limit to accumulate a tax-protected investment portfolio.
• Your combined ISA investment for 2016/17 and then 2017/18 could be a maximum of £35,240. (NB the 2017/18 ISA allowance is £20,000)
• Having used your ISA allowance for the year, you might want to make sure that any spouse/civil partner uses their allowance too.
Information about ISAs you might find helpful
ISAs and tax
Why invest in a product that has no tax benefits when you can invest in another that offers tax efficient returns? That’s the beauty of ISAs. Each year you can save money without any tax being charged on any interest or dividends earned. If you don’t use your tax-free allowance within a tax year, that’s it. It’s a case of ‘use it or lose it’.
You can take your money out of an Individual Savings Account (ISA) at any time, without losing any tax benefits. If you have already invested your ISA through Investing Ethically it is ‘flexible’, you can take out cash then put it back in during the same tax year without reducing your current year’s allowance.
For example: Next tax year, Your ISA allowance is £20,000 and you put £10,000 into an ISA in May 2017. You then take out £5,000.
The amount you can now put in during the same tax year 2017/2018 is £15,000 as your ISA is flexible (the remaining allowance of £10,000 plus the £5,000 you took out)
Options to reduce income tax – please contact us for advice
Income tax can be applied widely – not just to your salary. However, there are ways
to reduce your annual income tax bill. Here are some of the options you might consider:
• Make a pension contribution to reduce your taxable income.
• Escape the child benefit tax charge by making a pension contribution to reduce your income below the £50,000 th reshold.
• Move taxable investments to your spouse/civil partner.
• Review strategies to invest for capital growth instead of income.
Your personal allowance
You can use your personal allowance (up to £11,000) to earn interest tax-free if you haven’t used it up on your wages, pension or other income.
Starting rate for savings
You may also get up to £5,000 of interest tax-free. This is your starting rate for savings. The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
If your other income is £16,000 or more
You’re not eligible for the starting rate for savings if your other income is £16,000 or more.
If your other income is less than £16,000
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
Example You earn £14,000 of wages and get £200 interest on your savings.
Your Personal Allowance is £11,000. It’s used up by the first £11,000 of your wages.
The remaining £3,000 of your wages (£14,000 minus £11,000) reduces your starting rate for savings by £3,000.
Your remaining starting rate for savings is £2,000 (£5,000 minus £3,000). You don’t pay tax on your savings interest.
Personal Savings Allowance
You may also get up to £1,000 of interest tax-free depending on which Income Tax band you’re in.
Capital Gains Tax (CGT)
CGT is a tax charge when you dispose of an asset that has increased in value.
You don’t necessarily have to sell the asset, because CGT can also apply to gifts.
The tax is on the profit you make – the gain – and not on the total amount you receive for the asset. Some assets don’t attract the tax and you don’t pay it if all the gains are within your annual CGT allowance of £11,100.
Options to reduce CGT – please contact us for advice
There are ways to reduce a Capital Gains Tax liability. –
• Make the most of your £11,100 annual CGT exemption.
• A reported loss on a chargeable asset can be deducted from the capital gains you made in the same tax year.
• Pay less tax by using losses from previous years to reduce this year’s gains.
• Consider making a pension contribution to bring your CGT liability down from 20% to the 10% applied to basic rate tax payers.
• Use the ‘Bed and ISA’ or ‘Bed and SIPP (Self-invested Personal Pension)’ planning to realise gains up to the annual exemption by selling assets and then immediately buying them back within an ISA or SIPP (subject to contribution limits).
Inheritance tax (IHT)
The IHT threshold
An IHT charge only applies if the value of the estate is above the IHT threshold – which is currently £325,000. This is often referred to as the ‘nil rate band’. You will not pay any IHT if you leave everything to your spouse or civil partner, a charity or sports club. These are just some examples of exemptions.
If you’re married or in a civil partnership and your estate is worth less than £325,000, the unused percentage can be added to your partner’s threshold on their death. This means the threshold can be as much as £650,000.
IHT and the next generation
When the inheritors are the children rather than the spouse, on the death of both parents a potential IHT charge may apply. The inheritors will pay IHT of 40% of anything over the threshold. However, as we previously established in relation to unused thresholds, the potential maximum nil rate band available to offset against their combined assets will be £650,000.
Gifts and IHT
You can give away £3,000 each tax year without it being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year. You can also give as many gifts of up to £250 per person as you want during the tax year so long as you haven’t used another exemption on the same person.
IHT changes from the next tax year
From 6 April 2017, you’ll get a larger IHT threshold if you give away your home to your children or grandchildren. A new residence allowance (the residence nil rate band or ‘RNRB’) was announced in the 2016 Budget. The allowance is set to increase by £25,000 each year, from £100,000 in April 2017 to £175,000 per person by 2020/21. This is in addition to the main nil-rate band.
Options to reduce IHT – please contact us for advice
• Make lifetime gifts to reduce your taxable estate
• Use the annual exemption, small gifts and regular gifts from income
• Take out life cover payable to your beneficiaries so they receive the full value of your Estate
• Plan for the new residence nil rate band taking effect from April 2017