At the end of last tax year we sent out our newsletter to explain the end of tax year opportunities. However, we don’t need to wait until the end of the year to make sure we utilise our allowances.
Top 10 tax year end opportunities
There were no surprises in the last Budget, meaning you can continue to benefit from the existing range of tax relief options and allowances.
This is good news and makes this tax year end very much business as usual. It’s simply a case of reviewing the year to date and identifying where there is still scope to save by maximising unused relief options and allowances.
The core elements of tax year end planning remain the same:
• Make full use of available tax advantaged savings, such as pensions and ISAs
• Ensure tax allowances are fully utilised and opportunities to extract savings tax efficiently aren’t wasted
• For families, don’t ignore the respective tax rates and unused allowances of both partners.
Below is a checklist of the top 10 opportunities that we can assist with. We have also added the key information required to help you prepare, so if you do need our assistance, then please get in touch right away.
1. 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 wish to contribute an amount to maximise tax relief at 40%, 45% or even 60% (where the 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.
Key information required
• Total taxable income.
• Relevant UK earnings – e.g. earnings from employment or trade only.
• Pension annual allowance available from the current year and previous three years.
2. Keep the pensions annual allowance for high earners
• Some high income earners have a reduced amount of tax-efficient pension saving they can make. The standard £40,000 annual allowance is reduced by £1 for every £2 of ‘income’ you have over £150,000 in a tax year, until your allowance drops to £10,000.
• It is possible that you may be able to reinstate your full £40,000 allowance by making use of carry forward. The tapering of the annual allowance will not normally apply if income less personal contributions is £110,000 or less. A large personal contribution utilising unused allowance from the previous three tax years can bring income below £110,000 and restore the full £40,000 allowance for 2017/18. For some taxpayers the amount may attract 60% tax relief too.
• Remember that if you are a high earner, you may also have a reduced annual allowance from 2016/17.
Key information required
• Adjusted Income for this year and last year (broadly, total income plus employer contributions).
• Threshold Income for this year and last year (broadly, total income less individual contributions).
• Pension annual allowance available from the current year and previous three years.
3. Boost SIPP funds now before accessing flexibility
• If you are looking to take advantage of income flexibility for the first time you may want to consider boosting your 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 as of April 2017. If you are subject to the MPAA, you cannot use carry forward.
• If you require money from your pension you can avoid the MPAA and retain the full £40,000 allowance if you only take your tax free cash.
Key information required
• ‘Income’ required.
• Non-pension sources that could support ‘income’ required.
4. 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.
• Any employer and employee NI savings made could be used to boost pension funding, giving more to the pension pot for every £1 lost from take-home pay.
Key information required
• Size of bonus.
• Pension annual allowance available from the current year and previous three years.
• Employer willingness to pay in NI savings.
• Provisions for changing contract of employment.
5. Dividend changes and business owners
• If you are a director of a small or medium sized company, you 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 yourself and cutting your overall tax bill.
• If you are over 55 you will of course have full unrestricted access to your pension savings if you wish.
• 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 for those business owners who cannot fund a pension every year, you may wish to pay sooner rather than later if you have the profits and the cash available.
Key information required
• Company accounting period.
• Company pre-tax profit.
• Pension annual allowance available from the current year and previous three years.
6. Maximise ISA subscription limits
• 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 the chore of completing self-assessment returns.
• The 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 6 April 2018 will count against next year’s allowance.
Key information required
• Remaining annual ISA allowance.
7. Recover personal allowances and child benefit
• Pension contributions reduce your taxable income. In turn, this can have a positive effect on both the personal allowance and child benefit for those of you that are higher earners, resulting in a lower tax bill.
• An individual pension contribution that reduces income to below £100,000 will mean you 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 an 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.
Key information required
• Adjusted net income (broadly total income less individual pension contributions).
• Relevant UK earnings.
• Pension annual allowance available from the current year and previous three years.
8. Take investment profit using CGT annual allowance
• If you are looking to supplement your income tax efficiently you could withdraw funds from an investment portfolio and keep the gains within their annual exemption.
• Even if an income is not needed, taking profits annually within the CGT allowance and re-investing the proceeds means that there will be less tax to pay when you ultimately need to access these funds for your 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 they could be re-invested in a similar fund or through a pension or ISA. Alternatively, the proceeds could be immediately re-invested in the same investments but in the name of your partner.
• If there is tax to pay on gains at the higher 20% rate, a pension contribution could be enough to reduce this to the basic rate of 10%.
Key information required
• Sale proceeds and cost pool for mutual funds/shares.
• Income re-invested into mutual funds (for income and accumulation units/shares).
• Details of any share re-organisations.
• Gains/losses on other assets sold, e.g. second homes.
• Losses carried forward from previous years.
9. 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 (PA), Starting Rate Band or the Personal Savings Allowance (PSA), 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.
Key information required
• Details of all non-savings and savings income.
• Investment gains on each policy segment.
10. Recycle savings into a more efficient tax wrapper
• As mentioned in items 8 and 9 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 you actually need to spend your savings, tax will be less of a 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 is no tax relief or IHT advantage as with a pension, fund growth will still be protected from tax.
Key information required
• Unused personal allowances for extracting investment profits.
• Remaining annual ISA allowance.
• Pension annual allowance available from the current year and previous three years and relevant UK earnings.
Summary
Before you take any action, however, it is important to seek advice on how the relief options and exemptions above apply to your own personal circumstances.
If you are not currently a client of Plutus and you would like to take advantage of an initial consultation without charge then please do get in touch, just email info@plutuswealth.com to make an appointment with a member of the Plutus team.
If you are already a client and want to discuss your options again then we are here and happy to help.
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