EXPLAINING HOW ANNUAL ALLOWANCE AND EARNINGS LIMITS INTERACT- Source – Old Mutual Wealth

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When looking to make a contribution into a pension an individual must consider annual allowance & carry forward, and tax relief limitations relating to earnings.

The annual allowance may limit contributions made each tax year but carry forward can be used to contribute more. Both employer and personal contributions count towards the annual allowance.

Personal contributions can be limited by relevant UK earnings but employer contributions are not.

Employers may be able to reduce their tax bill by making a pension contribution but need to be careful they don’t put in too much, otherwise they will cause a tax charge for their employee.

It is important to understand that the annual allowance, personal contributions and employer contributions all have separate rules but also impact on each other. Understanding these rules will allow you to maximise contributions and avoid finding out later a tax charge applies.

The annual allowance can limit contributions made in the tax year

The standard annual allowance this year is £40,000. The individual’s annual allowance may be lower if they are a high earner or have triggered the money purchase annual allowance.

All contributions, no matter who pays them, count toward the annual allowance limit.

If contributions are made above the annual allowance, this may lead to a tax charge.

Carry forward can be added to the annual allowance

Unused annual allowance from the three previous tax years can be added (carried forward) to the current tax year’s annual allowance.

An individual can only carry forward from a year they were a member of a registered pension scheme for at least part of that year.

If they have triggered the money purchase annual allowance, carry forward is not available for contributions into money purchase schemes,

Tax relief on personal contributions are limited by relevant UK earnings

Individuals are entitled to tax relief at marginal rate on £3600 or up to 100% of relevant UK earnings for this tax year. For most people, this will be their salary. Income from dividends and rental income are not classed as relevant UK earnings.

Most personal pension schemes operate relief at source. This means basic tax relief is added by the pension scheme whilst additional tax relief is claimed via self-assessment. Because tax relief is limited and these schemes give tax relief up front, they will likely only accept contributions up to the individual’s relevant UK earnings.

It is possible to make a gross personal pension contribution above a person’s relevant UK earnings but it may be hard to find a provider willing to accept this.

All personal contributions made will count towards an individual’s annual allowance and carry forward.

Many people confuse unused annual allowance and unused earnings when looking at carry forward. It is only unused annual allowance that is carried forward. Unused earnings from previous years are not carried forward.

Employer contributions are not limited by relevant UK earnings

Employer contributions do not receive tax relief in the pension. As no tax relief is given, the employer contribution is not limited to the employee’s earnings like personal contributions.

However, if the employer pays in more than its employee’s annual allowance and carry forward, the employer will cause a tax charge for the employee. This is because all employer contributions will count towards annual allowance and carry forward.

An employer may be able to reduce the company’s tax bill by making a pension contribution but need to be careful they don’t put in too much

Many employers will want to offset the money they have paid as an employee pension contribution against their company tax bill. A pension contribution can be classed as a business expense. Whether this expense can reduce the company’s tax bill will depend on if the expense is wholly and exclusively for the purpose of the business. An accountant is the best person to assess the business expense.

Whilst an accountant might tell an employer they can justify a certain amount of pension contribution, the amount contributed might cause a tax charge. Remember annual allowance and carry forward include all types of contributions.

The annual allowance, personal contributions and employer contributions all have separate rules but also impact on each other

When deciding on the level of contribution to make an individual will need to consider how these rules and limits interact.

Whilst that individual may have available capital and annual allowance they may not have the earnings to make a personal contribution.

Alternatively whilst they have the earnings, they may not have available annual allowance and carry forward.

An employer may wish to make a pension contribution but not benefit by doing so if the expense is not justified.

It is important to look at how each contribution type is limited and then consider annual allowance and carry forward at the same time. If not, the individual may end up with a tax bill, the employer may not get the tax benefit they thought they would or the pension may have more tax relief within it than it should do.

A simple way to determine what contribution to make would be:

 

  • Determine what the individuals annual allowance is
  • Determine how much carry forward is available from the previous 3 tax years if applicable
  • Add the carry forward figure to this years remaining annual allowance
  • Determine how much has been paid for or will be paid for by all parties in this tax year
  • Decide who will be paying the contribution
  • If it is the employer, determine how much the employer can contribute without an annual allowance tax charge. The employer will determine if they can claim this as an expense
  • If it is a personal contribution, look at this year’s relevant UK earnings.
  • If the relevant UK earnings are higher than the remaining annual allowance and carry forward, the individual will know how much can be contributed
  • Where a contribution receives tax relief,  the maximum contribution will be equal to the relevant UK earnings if they are lower than the remaining annual allowance and carry forward

Examples

Below are some examples that should help bring the rules to life. The assumption for the below examples are that the standard annual allowance applies and the salary is the total relevant UK earnings.

Case 1) Mr A has a salary of £30,000. He is a deferred member of a registered pension scheme opened 10 years ago. He has not made any contributions for the last 5 years. How much can he put in the pension as a personal contribution with tax relief?

Mr A has this year’s annual allowance. He also has the previous 3 tax year’s annual allowance available as he was a member of a registered pension scheme in those years. This means the most that can go into the pension with no tax charge is £160,000 (£40,000 for this year and £40,000 carried forward from each of the previous 3 years).

Mr A only has a salary of £30,000 so regardless of the annual allowance available, he can only make a gross contribution of £30,000. If paying into a scheme that offers relief at source he will pay £24,000 and the pension scheme will add the rest.

This is because a personal contribution is limited to 100% of relevant UK earnings. Making a gross contribution of more than £30,000 will mean Mr A has received more tax relief than he is entitled to.

An employer could pay a contribution to make up the difference.

If Mr A puts more than his earnings into the pension the pension will contain more tax relief than is allowed. This will need to be rectified.

But what about the fact that Mr A earnt £30,000 each year for the last 3 tax years?

Carry forward does not enable unused salary from previous years to be carried forward to make a higher contribution than this year’s relevant UK earnings. You can never make a personal contribution with tax relief in the tax year that is larger than the relevant UK earnings for the tax year.

Case 2) Mr B has a salary of £80,000. He joined a registered pension scheme for the first time last year by paying in £30,000. How much can he put in the pension as a personal contribution with tax relief?

Mr B has this year’s annual allowance and can carry forward unused annual allowance from last year. As he was not a member before then, he cannot carry forward from other years.

This means the most that can go into the pension with no tax charge is £50,000 (£40,000 for this year and £10,000 carried forward from last year).

So in this scenario, even though Mr B has earnings of £80,000 he is limited to £50,000.

Case 3) Mr C has a salary of £70,000. He is a deferred member of a registered pension scheme opened 7 years ago. He has not made any contributions for the last 5 years. How much can his employer pay into his pension?

Mr A has this year’s annual allowance and the previous 3 tax year’s annual allowance available.

This means the most that can go into the pension with no tax charge is £160,000 ( £40,000 for this year and £120,000 carried forward).

Mr C’s earnings are irrelevant as he is not making a personal contribution. The employer can make a contribution of £160,000 gross.

Does that now mean the company can claim £160,000 as an expense that is offset against the company’s tax bill?

Just because a pension contribution won’t cause a tax charge for Mr C does not mean it can automatically be used to offset a company’s tax bill.

Just like any other expense like a company car or business lunch, it needs to be wholly and exclusively for the purpose of the business to be offset against the company’s tax bill. A company accountant will normally give guidance to an employer about how much it could claim as a business expense.

Annual Allowance and Carry forward
Personal Contributions count
towards annual allowance		 Employer Contributions count
towards annual allowance
Tax relief Limited to 100% of relevant
UK earnings in this tax year		 No limit on what is paid in pension
but may be a limit on how much can
be offset against company tax bill.


The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth’s interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

ISAs 20 years on

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ISAs – 20 years on

– Spensionpigource and Credits – Standard Life Technical

This is the year ISAs turned 20 and statistics suggest it has become a huge hit with savers. The value of adult ISAs stand at over £600 billion, shared between around 22 million account holders.

They have also proved popular with successive Chancellors as a means of encouraging the saving habit with the annual subscription limit having almost trebled since launch.

Their relative simplicity has undoubtedly played a key part in this success, but they’re more than just a tax free piggy bank.

ISAs have evolved over the last 20 years to play an important role in shaping and influencing how clients organise their wealth to achieve their life goals.

Instant Access

One of the main attractions of an ISA is that savings can be accessed at any time, whether invested in cash or stocks and shares. This removes any emotional barrier to not being able to access your own money when you want to and that makes them ideal for building up a ‘rainy day’ fund, or targeting for a specific event at a future date.

The introduction of schemes such as Help to Buy and Lifetime ISA (LISA) have added a little more complexity but with some added incentives for first time house buyers provided they meet certain conditions. The LISA also provides the same incentives for retirement provided clients don’t access the money before age 60.

More recent innovations include:

  • ‘Flexible’ ISAs – ISAs where the provider will allow funds to be withdrawn and replaced within the same tax year without affecting the annual subscription limit. This can be particularly useful for those who need money in an emergency. But before withdrawing funds always check that the ISA manager offers this flexibility. Not all providers offer it and once withdrawn it cannot be repaid to a different ISA.
  • Additional permitted subscriptions (APS) – widowed clients can now claim a one-off subscription limit equal to the value of their deceased partners ISA at date of death. This can be significant in protecting assets from income and gains. ISA savers in the 65 and over group account for the highest average savings value of over £42k, and it’s not uncommon to hear of accounts in excess of £100k. For deaths after 5 April 2018 the value will not only cover the value at date of death, but in most cases the income and capital gains made during the administration period of the estate.

Tax benefits

The ‘tax free’ status of ISA investments is the main draw. There’s no tax on income or gains during roll-up or at the point of withdrawal. This can boost savings, but will also reduce tax administration as self-assessment is not required.

The tax free treatment of income and gains can free up allowances and lower rate tax bands for other assets outside the ISA, such as buy to lets, dividends from owner managed businesses and other investments.

In addition, the income generated from ISAs doesn’t count towards any of the income definitions that determine the personal allowance, pensions tapered annual allowance or child benefit tax charge.

ISAs may also help clients who wish to take gains out of a portfolio within their annual capital gains tax allowance. If they want to buy back the same shares or OEICs, they would normally have to wait 30 days because of the ‘share matching rules’. But such shares can be bought back through an ISA immediately, so that clients are not out of the market for a month. This transaction is sometimes referred to as ‘bed and ISA’.

IHT and retirement planning

ISAs can dovetail neatly with other forms of tax and retirement planning to create a better outcome for clients.

As a client gets older and their need for an ’emergency’ fund diminishes, they may be looking to retirement needs and leaving a tax efficient legacy for their family.

If they’re close to, or at retirement it may make sense to consider maximising pension funding from their ISA savings if they don’t have other resources. There are several reasons for this:

  • Pensions offer the most attractive tax incentives for most people. Tax relief at highest marginal rates on the way in, and the availability of 25% tax free cash on the way out will prove a better deal than ISA for most people seeking a retirement income, even if they pay the same rate of tax in retirement as when they were working.
  • Pensions can be accessed at any time after age 55.
  • Pensions are protected from inheritance tax. ISAs will normally form part of the holder’s taxable estate and potentially liable to IHT at 40%. There could, of course, be a tax charge on pensions when a beneficiary draws money from an inherited pension pot, but only if the member died after the age of 75. Even then the tax charge will be at the beneficiary’s own tax rate which may be less than 40% and delayed until it is actually taken. But there may be an opportunity to manage affairs to ensure it’s taken in a year when other income is low.

The pension option will, of course, depend on clients having enough pensionable earnings and annual allowance, and an eye must also be kept on where funds stand in relation to the pension lifetime allowance.

Funding a pension using ISA funds won’t always be possible, either because a client has no pensionable earnings or has perhaps triggered the £4k money purchase annual allowance. But ISA funds may still have a part to play in effective retirement planning. Retirement income needs could be better served from the ISA rather than pension, again for IHT reasons – better to use a pot that is subject to IHT than one that isn’t.

Clients can, however, engage in IHT planning with their ISA even if they don’t wish to, or are not able to recycle into pensions:

  • Any income produced in the ISA and taken by the client can be included in valuing income in relation to the ‘normal expenditure out of income’ exemption. If this income adds to, or creates ‘surplus’ income, it can be given away and will be immediately outside the client’s estate.
  • Those able to take on greater risk could turn to an ISA that facilitates investment in shares on the alternative share market (AIM shares). Once held for two years, and provided the shares remain qualifying, they won’t get caught in the IHT net.

Investment planning

A client’s plans on how they intend to use their ISA savings will of course influence how it’s invested. If ready cash is needed, or funds are earmarked for a specific date (particularly if that date is short term), they’re not likely to take on much risk. Funds may therefore sit in deposit or fixed interest funds.

But if a client has both ISA savings and non-ISA savings, given the historically low interest rates and the availability of the personal savings allowance (PSA), it may be advantageous to keep their ISA invested predominantly in stocks and shares with their ready cash held outside their ISA. This is because stocks and shares are more likely to provide a higher return than interest, and so the ISA wrapper will give greater protection from tax, particularly if there would be no tax on interest anyway. And stocks and shares can now easily be moved into cash within an ISA if a client’s attitude to risk changes.

Similarly, if a client wishes to use their ISA to hold stocks and shares but there are bear market conditions at the time they wish to make their subscription, they could always make pay into a cash ISA. This means their subscription is not wasted, and will be ready to move into stocks and shares when market conditions are more favourable.

And of course, why wait until the tax year end to take advantage of the annual subscription. Probably down to human nature, but many will leave it until the tax year end before paying in and will have missed out on nearly a whole year of tax free income and growth.

Summary

ISAs have evolved over the last 20 years into a flexible savings plan that’s central to the holistic financial planning for a client. Much more than just a rainy day savings plan.

Source and Credits – Standard Life Technical -30 April 2019

As Independent Financial Advisers we can help and advise you on the tips listed above. Just give us a call on 0345 013 6525 to discuss.

Tax Year End Tips 2019

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Tax year end planning 2019 – top 10 checklist

Source: Standard Life Technical:

Plan your tax allowances and reliefs for tax year end 2019 now

With tax year end just around the corner, it’s time to check your clients are making the most of their tax reliefs and allowances to save for a brighter future. There’s a lot to think about.

We’ve created a checklist of our top 10 TYE planning opportunities to explore with your clients and their families, together with the key information you need to make these a reality. 

1. Pension saving: maximise tax relief

  • Additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 40%, 45% or even 60% (where personal allowance is reinstated) while they have the opportunity.
  • Those with sufficient earnings can use carry forward to make contributions in excess of the current annual allowance. Remember this is the last chance to benefit from the potential double annual allowance for 2015/16 before it drops off the carry forward radar: it’s a case of “use it don’t lose it” before tax year end.
  • And it’s not just about individuals! For couples, consider maximising tax relief at higher rates for both, before paying contributions that will only secure basic rate relief. Many clients won’t know they can top-up pensions for their partners – and not just by £3,600, but up to their partner’s earnings. And their partner can get tax relief on top.

Key information

  • Total taxable income.
  • Relevant UK Earnings – e.g. earnings from employment or trade only.
  • Pension annual allowance available from current year and previous 3 years (especially 2015/16).

2. High earners: making a pension contribution before the TYE could  increase their 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’ clients have over £150,000 in a tax year, until their allowance drops to £10,000.
  • But it’s possible that some of these 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 3 tax years can bring income below £110,000 and restore the full £40,000 allowance for 2018/19. And some of it may attract 60% tax relief too.
  • 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.

Key information

  • Adjusted Income for this year (broadly total income plus employer contributions).
  • Threshold Income for this year (broadly total income less individual contributions).
  • Any unused annual allowance available from current year and previous 3 years. 

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 just £4,000 a year – with no carry forward.

So it might be worth considering other ways of meeting income needs that don’t restrict future pension saving. Could other non-pension savings be used? And remember, 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.

Key information

  • ‘Income’ required.
  • Non-pensions savings that could support ‘income’ required.

4. Employees: sacrifice bonus for an employer pension contribution

We’re approaching ‘bonus season’ for many companies. ‘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 pension pot for every £1 lost from take-home pay.

Key information

  • Size of bonus.
  • Pension annual allowance available from current year and previous 3 years.
  • Does employer allow bonus sacrifice?
  • Employer willingness to share NI savings.

5. Business owners: take profits as pension contributions

  • For many directors, taking significant profits as pension contributions could be the most efficient way of paying themselves and cutting their overall tax bill.
  • Of course, if the director is over 55 they now have full unrestricted access to their pension savings (although this might come at the price of a lower annual allowance going forward – see 3 above).
  • 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%, 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 rather than later, if they have the profits and the cash available.

Key information

  • Company accounting period.
  • Company pre-tax profit.
  • Pension annual allowance available from current year and previous 3 years. 

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’s possible to avoid the chore of completing self-assessment returns.

The ISA 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 2019 will count against next year’s allowance.

Key information

  • Remaining annual ISA allowance.

7. 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 that reduces income to below £100,000 will restore your client’s full tax free personal allowance. The effective rate of tax relief on the contribution could be as much as 60%.
  • 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 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

  • Adjusted net income (broadly total income less individual pension contributions).
  • Relevant UK earnings. 
  • Pension annual allowance available from current year and previous 3 years.

8. Investments: take profits using CGT annual allowances

  • Clients looking to supplement their income tax-efficiently could withdraw funds from an investment portfolio and keep the gains within their annual exemption.
  • Even if cash isn’t needed, taking profits within the £11,700 CGT allowance and re-investing the proceeds means there will be less tax to pay when clients ultimately need to access these funds to meet spending plans.
  • 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 their pension or ISA. Alternatively the proceeds could be immediately re-invested in the same investments, but in the name of the client’s partner.
  • If there is tax to pay on gains at the higher 20% rate, a pension contribution could be enough to reduce this rate to the basic rate of 10%.

Key information

  • Sale proceeds and cost pool for mutual funds/shares.
  • Gains/losses on other assets sold  – e.g. second homes.
  • Losses carried forward from previous years.

9. Bonds: cash in bonds to use up PA/starting rate band/PSA and basic rate band

  • If your client has 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.
  • 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 your client does not have any of these allowances available, but their 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

  • Details of all non-savings and savings income.
  • Investment gains on each policy segment.

10. No bonus? No problem: recycle savings into a more efficient tax wrapper

  • As mentioned in 8 and 9 above, 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 than might otherwise have been the case. That is to say, when your clients actually need 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 their 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 don’t 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; for clients over (or approaching) 55 – should ISA savings be recycled into their pension to benefit from tax relief and IHT protection?

Key information

  • Unused personal allowances for extracting investment profits.
  • Remaining annual ISA allowance.
  • Pension annual allowance available from current year and previous 3 years and relevant UK earnings.

Summary

Effective tax planning is a year round job. It’s 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 get ahead of the game and give yourself time to put plans in place. And with less than 8 weeks until 6 April, there’s no time like the present to get started.

Source and Credits – Standard Life Technical

As Independent Financial Advisers we can help and advise you on the tips listed above. Just give us a call on 0345 013 6525 to discuss.

Does it make sense to gift surplus pension income?

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Pension freedom changed the dynamics of estate planning, with many individuals now gifting or spending assets which are part of the estate before touching their pension pot which remains IHT free. So does it make sense to gift surplus pension income? Gifting surplus pension income using the ‘normal expenditure out of income’ IHT exemption might seem a pointless exercise. After all, why give away something which isn’t in your estate in the first place?

But if pension withdrawals can be taken tax free (or at least at a lower tax rate than the beneficiary may pay on any inherited pension) there may still be a strong motivation to do so as part of an effective estate planning strategy.

There is no statutory limit on what can be given away and successful claims on regular gifts are immediately outside the estate. Combined with the flexibility offered by pension freedom, this can be remarkably efficient.

Estate planning with pension income

Many clients don’t start thinking about estate planning until after they have ceased working. The first priority must, of course, be ensuring their own income security in old age. But once this is done, should thoughts turn to gifting? Even with a fall in income in retirement, some clients may still have more coming in than they need.

Fixed incomes

Income from annuities or DB pensions can’t be adjusted, so any excess may end up simply being accumulated in the estate and could be subject to IHT on death. Even if it’s subsequently given away as a lump sum it would take seven years to be outside the estate.

However, if that surplus income is given away on a regular basis and the exemption claimed it is immediately outside the estate and offers an opportunity to pass on pension wealth tax efficiently.

This is perhaps an easier decision to make for these clients as the question is simply about what to do with their surplus income, and not whether to take more income from a flexible pension, unless they also have one of these.

Flexible incomes

Those in drawdown have greater freedom to pass on their accumulated pension savings. Any unused funds on death are available as either a lump sum or as inherited drawdown.

The remaining pension funds are typically free of IHT, so there’s unlikely to be an IHT advantage in taking more drawdown income than is needed. But there could be other motivations for doing so.

On a practical level, beneficiaries may need the money now rather than after the client has died. Or the client may simply wish to see their loved ones enjoy the money.

There could also be an income tax benefit. If the client dies after 75, any undrawn tax free cash entitlement will be lost. So what could have been taken tax free before their death would become taxable in the beneficiary’s hands.

However, if surplus income can be generated by making withdrawals which are tax free (or at a lower tax rate than the beneficiary is likely to pay) then there may be good reason to do so.

This takes us to a critical question.
What counts as  ‘income’ from a flexible pension? Flexi-access drawdown, (where there are no limits on what can be taken and withdrawals can be taken as combination of tax free cash and taxable income), gives significant scope to take withdrawals tax efficiently.

When it comes to gifting those withdrawals, the IHT rules also help here. The ‘normal expenditure out of income’ exemption doesn’t use the income definition used for income tax purposes. As income is not defined in the IHT Act, it follows normal accountancy practice to determine what is income.

HMRC have confirmed to us that regular withdrawals from flexible pensions, irrespective of the levels withdrawn and whether taken as tax free cash or taxable income, always count as income for the purpose of the IHT exemption. This creates an opportunity for at least 25% of the pension fund to be taken and gifted both income tax and IHT free.

Other conditions

But it is important to remember that the gifts still have to satisfy two additional conditions.

Firstly, the gifts have to be part of normal expenditure. Taking the full 25% tax free cash entitlement and giving it away is a one-off gift. The exemption clearly will not apply and the gift will be a potentially exempt transfer. There has to be an established pattern of gifting. Spreading the gifting of tax free cash over a number of years using a phasing strategy, so that all the tax free cash is taken by the client’s 75th birthday, is a better option.

The second condition is that the gifts should leave the client with sufficient income to maintain their usual standard of living. Any pension withdrawals needed to maintain this standard will not be ‘surplus’. Similarly, the amount of the gift which qualifies for the exemption may be limited if the client has to draw on other capital assets, such ISAs, bonds or OEICs, to supplement their lifestyle.

There is an obvious estate planning advantage to making gifts of assets which form part of the estate before giving away pension funds which do not. So capital gifting may take precedence over income gifts unless other savings have already been exhausted.

Record keeping

Last but not least, it is good practice for anyone who intends using the exemption to keep not only details of the gifts made but also their income and expenditure. This can be captured on the IHT403 form. Ultimately it will be down to the executors to make the claim. And it can be extremely difficult to collate this information post death.

Source: Standard Life technical consulting –
Information correct at 11/12/18

Income Tax Traps – there’s still time to avoid them

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I’ve been busy lately helping clients with strategies to save income tax where they e.g. earn over £100,000, or they are (or might be) subject to the tapered annual allowance for annual pension contributions (causing tax penalties next year). Or they simply wish to look at carry forward for pension contributions but aren’t sure how to proceed. These areas are interlinked. UK income tax monopoly

In the first case, you should be aware that as soon as your income exceeds £100,000, you begin to lose your personal allowance by £1 for every £2 your income exceeds it. This causes an effective income tax rate of 60% for earnings caught between £100,000 and £123,000!

In the second case, those people whose total gross income plus employer pension contributions exceeds £150,000 (“adjusted income”) are likely to have see their combined employer/employee pension contribution restricted – the tapered contributions allowance, with consequent tax penalties. This is a tricky area and many people were not ready for it last year!

But there are some simple ways of mitigating or even eliminating the tax charges which arise, using personal contributions into pension, often via unused pension allowances from the previous three tax years.

I have covered these areas in past blogs, and the links are:

You might also look at the current blog on tax year end opportunities which also sets these out and links to the older blog.

 

Her’es an example of tax savings that can be made:

In 2017-18, Phil earns a salary of £95,000 excluding bonus, and has taxable P11d benefits of £2,000. His employer pays pension contributions of £18,000 and Phil contributes £18,000 (gross) under the net pay method. He had no bonus last year but this year has a bonus about to be paid of £50,000.

Before taking steps:

  • Phil’s taxable income is £129,000. He will lose all of his personal allowance, and inter alia will effectively pay income tax at 60% on the band of earnings between £100,000 and £123,000.
  • Phil’s “threshold income” for pension annual allowance purposes is £129,000. He therefore exceeds the £110,000 threshold, and the tapered annual allowance will apply.
  • Phil’s “adjusted income” for pension annual allowance purposes is £165,000, which means he stands to lose £7,500 of his annual pension contributions allowance, reducing it to £32,500 (i.e. below the contributions already made!).

Solution:

Phil makes a personal lump sum contribution of £23,200. This is grossed up by tax relief at source of £5,800, so £29,000 is paid into his pension.

  • It reduces Phil’s taxable income to £100,000, saving £16,200 in tax (an effective rate of 55.9%!).
  • The lump sum pension contribution also reduces his threshold income below the threshold for tapered annual allowance (£110,000), so his annual pensions contributions allowance is not reduced and the full £40,000 allowance applies in 2017-18.
  • His total pension contributions exceed £40,000 (£18,000 + £18,000 + £29,000 = £65,000), but Phil is allowed to utilise carry forward allowance (unused annual allowance contributions) from 2014-15, 2015-16 and 2016-17 in order to cover the excess £25,000 contributed.

I agree that the foregoing isn’t the easiest to follow, so why not get advice? If you think you are affected and want to know what steps are available to you to avoid paying any more tax than you have to, I will be happy (subject to availability) to talk you through this area of tax planning free of charge by telephone. Just give me a call on 0345 013 6525 and if I can’t deal with it there and then we’ll schedule a time.

Best wishes

Tony Devine

 

Tax Year End Checklist – Our Top 10 Tax Year End Opportunities

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The tax year end is a good time to take stock and look at your tax position before the tax year closes. There are opportunities available to many, and in some cases significant tax savings can be achieved.

Checklist of our top 10 tax year end opportunities

your checklist for tax year end

(Source: Standard Life Technical 2018 – slightly edited)

2017/18 has been a relatively steady year for tax and pension planning. There were no surprises in the Budget, meaning you can continue to benefit from the existing range of tax reliefs and allowances to help save for the future.

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 reliefs and allowances, or even how scope can be created.

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.

We’ve created a checklist of our top 10 tax year end opportunities to explore with your clients, together with the key information required to make these a reality.

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 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.
Key information

  • Total taxable income to current tax year end.
  • Relevant UK Earnings e.g. earnings from employment or trade only.
  • Pension annual allowance available from current year and previous 3 years.


2. Keep the 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 AA will be reduced by £1 for every £2 of ‘income’ clients have over £150,000 in a tax year, until their allowance drops to £10,000.
  • But 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 provided it is made before tax year end. And some of it may attract 60% tax relief too.
  • Remember that high earners may also have a reduced annual allowance from 2016/17.
  • For further detail see Higher Earners are you affected by the new tapered (restricted) tax relief on pension contributions? Read on for Possible Solutions
Key information

  • Adjusted Income for this year and last (broadly total income plus employer contributions).
  • Threshold Income for this year and last (broadly total income less individual contributions).
  • Pension annual allowance available from current year and previous 3 years.


3. 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 5th tax year end, 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 a client is subject to the MPAA, they cannot use carry forward.
  • Clients requiring money from their pension can avoid the MPAA and retain the full £40,000 allowance if they only take their tax free cash.
Key information


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.
  • 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.
Key information

  • Size of bonus (if yet to be paid and before tax year end).
  • Pension annual allowance available from current year and previous 3 years.
  • Employer willingness to pay in NI savings.
  • Provisions for changing contract of employment.


5. 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 themselves and cutting their overall tax bill. (further details at MPAA and Dividend Allowances cuts delayed as Finance Bill trimmed )
  • And, of course, if the 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 2 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.
Key information


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’s 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 

  • Remaining annual  ISA allowance.


7. 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 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.
Key information

  • Adjusted net income (broadly total income less individual pension contributions).
  • Relevant UK earnings.
  • Pension annual allowance available from current year and previous 3 years.


8. Take investment profit using CGT annual allowance

  • Clients 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 and re-investing the proceeds means that there will be less tax to pay when clients ultimately need to access these funds for their 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 they could be re-invested in a similar fund or through their pension or ISA . Alternatively the proceeds could be immediately re-invested in the same investments but in the name of the client’s partner.
  • If there is tax to pay on gains at the higher 20% rate, a pension contribution could be enough to reduce this rate to the basic rate of 10%.
Key information

  • 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 your client has 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 your client does not have any of these allowances available but their 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

  • 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 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 your client’s actually need 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 their 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 client’s pension in order to benefit from tax relief and IHT protection?
Key information

  • Unused personal allowances for extracting investment profits.
  • Remaining annual ISA allowance.
  • Pension annual allowance available from current year and previous 3 years and relevant UK earnings.


Summary

Only at the end of the tax year do you have all the pieces of the jigsaw. But there are some steps you can take now to get start gathering all the information needed, to be ahead of the game, and give yourself time to put plans in place. And remember, there are less than 5 weeks until the 5th of April.

 

(Source: Standard Life Technical 2018). I am again indebted to Standard Life technical – in this case their adviser facing article has been adjusted slightly to be more consumer-friendly.

Pension contributions – How they can help business owners.

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How pension contributions can help business owners

The dividend tax changes have strengthened the case for business owners taking more of their profits in the form of pension contributions. Many directors of small and medium sized companies face an increased tax bill this year as a result of how dividends are now taxed. And pension contributions could provide the best outcome by cutting their future tax bills.

Dividends have long been preferable to salary or bonus as a way for shareholding directors to extract profits. But that advantage has narrowed for many high earning directors. It reinforces the case for directors taking at least part of their benefits as a pension contribution where possible.

Dividend changes

Paying themselves dividends remains a better option than salary. But the gap has narrowed for high earning directors. A director receiving a dividend of £100,000 could be £6,300 worse off under the new rules.

Everyone now gets a £5,000 tax free dividend allowance. Dividends in excess of the allowance will be taxable at 7.5%, 32.5% or 38.1%. Previously, business owners only paid tax on dividends when they took income above the basic rate tax band. That’s because the notional 10% tax credit satisfied the liability for basic rate tax payers. But the changes mean that business owners could now be paying a higher rate of tax on a larger slice of their income.

Tax efficient extraction

Pension contributions remain the most tax efficient way of extracting profits from a business. An employer pension contribution means there’s no employer or employee NI liability – just like dividends. But it’s usually an allowable deduction for corporation tax – like salary.

And of course, under the new pension freedoms, those directors who are over 55 will be able to access it as easily as salary or dividend. With 25% of the pension fund available tax free, it can be very tax efficient – especially if the income from the balance can be taken within the basic rate (but remember, by doing so, the MPAA will be triggered, restricting future funding opportunities).

In reality, many business owners will pay themselves a small salary, typically around £8,000 a year – at this level, no employer or employee NI is due and credits will be earned towards the State pension. They will then take the rest of their annual income needs in the form of dividend, as this route is more tax efficient than taking more salary. But what about the profits they have earned in excess of their day to day living needs?

The table below compares the net benefit ultimately derived from £40,000 of gross profits to a higher rate taxpaying shareholding director this year.

  Bonus Dividend Pension income
taxed at 20% *		 Pension income
taxed at 40% *
Gross profit  £40,000 £40,000 £40,000 £40,000
Pension contribution  £0 £0 £40,000 £40,000
Corporation tax at 20%  £0 £8,000 £0 £0
Dividend  £0 £32,000 £0 £0
Employer NI £4,850 £0 £0 £0
Gross bonus £35,150 £0 £0 £0
Director’s NI (£703) £0 £0 £0
Income tax (£14,060) (£10,400) ** (£6,000) (£12,000)
Net benefit to director £20,387 £21,600 ** £34,000 £28,000

* Assumes pension income is taxed after taking 25% tax free cash, and there is no Lifetime Allowance charge.
** Assumes full £5,000 annual dividend allowance has already been used against dividends received in the basic rate band.

Tapered Annual Allowance

Many high earning business owners could see their annual allowance (AA) tapered down to just £10,000. However, by reducing what they take in salary or dividends and paying themselves a larger pension contribution instead could mean they retain their full £40,000 AA.

For example – Amy, 55, runs her own business and pays herself dividends of £150,000 for the 2016/17 tax year. She has no other income. She makes employer contributions of £20,000 into her SIPP.

There are two tests which determine whether the AA is tapered:

  1. If adjusted income is more than £150,000 the AA is reduced by £1 for every £2 subject to a minimum allowance of £10,000
  2. But only if the threshold income is greater than £110,000.

Her ‘adjusted income‘ is £170,000 (income + employer pension contribution). As this is £20,000 above the £150,000 cap, it would normally cut her AA by £10,000 (to £30,000). This means any opportunity to increase her funding for this year, or in the future using carry forward from 2016/17, would be limited to a further £10,000.

However, if she cuts her dividends by just over £40,000 her ‘threshold income’ (total income without employer contributions) would be below £110,000, preserving her full £40,000 allowance.

She could pay the corresponding amount into her pension as an employer contribution using carry forward of unused AA from previous tax years.  This would not affect her AA for 2016/17 because only employer contributions as part of new salary sacrifice arrangement are used to determine threshold income. A shareholder director making an employer pension contribution rather paying salary or dividend is not salary sacrifice.

As Amy is over 55, she has unrestricted access to the funds in her SIPP. If she made use of the new income flexibilities she would trigger the money purchase annual allowance (MPAA) cutting her future funding to £4,000 a year from April 2017, with no opportunity to use carry forward. However, if she only touches her tax free cash and takes no income she would retain her full AA.

Why now?

There are some very strong reasons for maximising pension contributions now. Corporation tax rates are set to fall from 20% to 19% from the financial year starting April 2017, with a further planned cut to 17% from April 2020.

Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest.

Business owners who take flexible drawdown  income to replace salary or dividends will see their future funding restricted by the MPAA. So they may need to pay now and mop up any unused allowance using carry forward. But remember that dipping into pension savings by only taking tax free cash maintains the full allowance for ongoing funding.

Source: Standard Life technical consulting – February 22 2017 

High Earners – Time is Running out to Maximise Pension Funding and Guarantee your Tax Relief.

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It has already been announced that high earners will see their annual allowance for tax relieved pension contributions reduced from £40,000 to as low as £10,000, commencing next tax year 2016-17.

But the impending budget on March 16, 2016 may well contain an announcement concerning the outcome of the pension tax relief review which could limit the level of tax relief which is allowed. If it does, then higher rate and additional rate taxpayers are most likely to be affected.

Whilst it is possible that no material changes will occur, it is also possible that substantial changes to the pension tax relief system may be enacted with immediate effect on March 16th. For those in a position to do so therefore, it would be prudent for higher rate and additional rate taxpayers in particular to consider maximising pension contributions between now and March 16, to obtain tax relief at the taxpayers highest marginal rate whilst it is still available.

Take advantage of carry forward to utilise contribution allowance available from 2012-13.

One must use all of this year’s remaining annual allowance, then you can look back up to three years and use earlier unused allowance. The tax relief obtained is applied in the current tax year. The example below shows how this might stack up:

PIP start PIP end Annual Allowance actual Pension input Available Notes
10-07-15 05-04-16 nil £16,500.00 £23,500.00 Special rules. Balance of 2015-16 capped at £40k. This will be available for c/fwd.
01-04-15 09-07-15 £80,000 £5,500.00 nil Up to £40k additional was available from 1-4-2015 to 9-7-2015 (only) (no c/fwd applies)
01-04-14 31-03-15 £40,000 £22,000.00 £18,000.00
01-04-13 31-03-14 £50,000 £20,000.00 £30,000.00
01-04-12 31-03-13 £50,000 £12,500.00 £37,500.00
£109,000.00 Total Allowance remaining in 2015-16
£61,000.00 Gross payment required to use all of 2012-13 allowance

In the example above, The maximum contribution which would still attract tax relief is £109,000. The lesser payment of £61,000, which comprises the remainder of the current tax year plus all of the remainder of 2012 – 13, may be attractive as it utilises that tax year’s remaining allowance before it disappears.

If you have sufficient earnings to obtain 40% or 45% tax relief on a large lump sum payment now, and have the means to do it, then you should consider this very closely.

It can even be sensible for certain individuals to pay more than they can comfortably afford at the moment, in effect paying next year’s contributions now in order to obtain the certainty of tax relief, particularly in view of the “squeezed” annual contributions allowance which applies next tax year for higher earners.

What is the new reduced annual allowance and who is affected?

I covered this in an earlier blog – see https://dfmadvice.co.uk/november-2015-autumn-budget-statement/ , but to summarise:

Test one: If your “adjusted income” exceeds £150,000 in a tax year, then your annual pensions contribution allowance will be reduced by £1 for every £2 of excess ” income”, until your allowance reaches £10,000. “Adjusted income” is essentially your income from all sources plus employer pension contributions.

Test two: If your “threshold income” (your income from all sources but excluding employer pension contributions) does not exceed £110,000 for the tax year then test one does not apply to you and there should be no reduction of annual pensions contribution allowance.

Therefore the ability for higher earners to make large pension contributions and obtain tax relief at their highest marginal rate is going to be severely reduced starting next tax year.

So what happens when pension contributions in excess of the annual allowance are made? The contributions can still go into your pension plan, but employee contributions will not receive tax relief on the excess, and employer contributions will be taxed on the excess.

Conclusion

Whilst the above is admittedly quite tricky to follow, what it adds up to is that higher earners should be considering making extra pension contributions between now and March 16th, to make sure of obtaining tax relief at their highest marginal rate, 45% or 40%.

 

Disclaimer: the foregoing does not constitute financial advice . We do not hold a crystal ball and do not know what the outcome of the budget review will be. And as ever we cannot state whether any particular course of action is best for one individual over another. The information offered in this blog is intended purely to inform and where necessary act as a call to action, namely to review your situation and consider whether the taking of certain steps is to your advantage. It is essential therefore that if you intend making any major pension contributions in the coming days and weeks that you seek independent financial advice.

NOVEMBER 2015 AUTUMN BUDGET STATEMENT

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George Osborne’s Autumn Budget Statement did not contain any major shocks this time around ( a relief for us advisers for a change), but there is still plenty to take on board. The following summary is reproduced with kind permission of Scottish Widows:

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SUMMARY IMPACT

Whilst only minor changes affecting the financial services industry were announced in the Autumn Statement the key changes for 2016/2017 set out by The Chancellor previously will still apply. The details and opportunities for financial planning advice are outlined below.

 

PENSIONS

Automatic enrolment

There will be a six month delay in the scheduled increases in the minimum contributions rates for automatic enrolment. This will bring the increases in line with the tax year. The first increase will apply from 6 April 2018. The second increase will apply from 6 April 2019.

Annual allowance

  • The standard annual allowance in 2016/2017 will be £40,000.
  • The money purchase annual allowance in 2016/2017 will be £10,000.
  • The annual allowance for high earners will be reduced to between £10,000 and £40,000 (see below)

Higher earners tapered annual allowance

  • The reduced annual allowance will affect those with both ‘adjusted income’ of more than £150,000 and ‘net income’ of more than £110,000.
  • ‘Adjusted income’ includes employer and employee pension contributions (except those made under the ‘relief at source’ basis). ‘Net income’ excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July 2015. This is to prevent tax avoidance. Where adjusted income and net income exceed the respective thresholds, the taxpayer’s annual allowance will be reduced by £1 for every £2 of adjusted income in excess of £150,000. The maximum reduction is £30,000, which would result in an annual allowance of £10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is £210,000.

Pension input periods

  • All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period. All pension input periods closed on 8 July 2015 (the pre-alignment period). A further pension input period runs from 9 July 2015 to 5 April 2016 (the post alignment period). This change was to ensure no tax charges arise against those who had fully funded their pensions in advance of the change. The total annual allowance for the pre-alignment period is £80,000, up to £40,000 of which is available to carry forward into the post alignment period.
  • Carry forward from the 3 previous tax years will be available as normal. However when using carry forward from 2016/2017 onward it will be based on the tapered annual allowance rather than the standard annual allowance.
  • The money purchase annual allowance of £10,000 will still be available, however, taxpayers who are affected by both the money purchase annual allowance and the tapered annual allowance will retain the £10,000 money purchase annual allowance but will suffer a reduced annual allowance for funding non-money purchase schemes.

Lifetime allowance (LTA)

    • The LTA will reduce to £1 million for 2016/2017 and 2017/2018. There will be a new round of transitional protection; Fixed Protection 2016 and Individual Protection 2016. These will work in the same way as Fixed Protection 2014 and Individual Protection 2014. Those applying for Fixed Protection need to cease contributions/benefit accrual by 5 April 2016. The application process isn’t expected to be available until July 2016.
    • The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019.
    • As a reminder, those who want to apply for Individual Protection 2014 must do so online by 5 April 2017.

Tax relief

    • Other than for higher earners as noted above, there’s no change to the rate of tax relief for member contributions, which will continue to be based on the individual’s highest marginal rate.

Pension tax relief reform

    • The Government is considering the responses to the consultation of the reform of pensions tax relief. It will publish its response in the 2016 Budget.

Extension of Freedom and Choice agenda to existing annuitants

    • The ability to sell annuities in payment is being deferred for a year, from April 2016 to 2017. The Government will set out its plans for the secondary annuities market in December 2015.

Lump sum death benefits

    • Lump sum death benefits paid following the death of a member aged 75 or over will change from being taxed at the flat rate of 45% to the beneficiary’s marginal rate of income tax from 6 April 2016.

Salary exchange

    • Whilst there were no changes to salary exchange the Government remains concerned about the growth of these arrangements and so the cost to the taxpayer. The Government restated that it will actively monitor the growth of schemes and the impact on tax receipts.

IMPACT:

      • Those who had paid less than £80,000 in their pension input period ending on 8 July 2015 can make further contributions without exceeding the annual allowance. The maximum contribution that can be made without an annual allowance tax charge arising, is the amount of the unused £80,000 annual allowance for the pre-alignment period, up to a maximum of £40,000 plus carry forward from 2012/2013, 2013/2014 and 2014/2015.
      • Higher rate taxpayers still benefit from higher rate relief on contributions of at least £40,000 in 2015/2016. With further potential restrictions to tax relief being considered, those with sufficient funds could consider funding sooner rather than later while full tax relief is still available.
      • The reduction in the Lifetime Allowance to £1 million from 6 April 2016 will greatly widen the scope of those within the restrictions. While the introduction of index-linking from April 2018 is welcome, it’s far short of a return to the £1.8 million LTA in place in 2011/2012 which itself was originally intended to rise in line with inflation. The next round of pension protection will help mitigate the impact for some clients. Those clients with significant funds and no previous protection should consider applying for Fixed Protection 2016 and/or Individual Protection 2016 or Individual Protection 2014.
      • The delay in the implementation of the secondary annuity market to 2017 is welcome as it gives more time for providers and advisers to ensure they are fully prepared for any changes.

 

DIVIDENDS

    • From April 2016, the current 10% dividend tax credit will be abolished. It will be replaced with a new £5,000 a year dividend tax allowance.
    • The new rates of tax on dividend income above the allowance will be:
      • 7.5% for basic rate taxpayers
      • 32.5% for higher rate taxpayers
      • 38.1% for additional rate taxpayers.

IMPACT:

        • The Government’s stated intention is for these reforms to reduce the incentive to incorporate and remunerate through dividends. The tapered annual allowance for those with incomes including pension contributions of over £150,000 will also apply from April 2016. There will be considerably less scope to use dividends and employer pension contributions to maximise tax efficient director’s remuneration in future. Companies with undistributed profits should consider taking advantage of the last chance to make the most of these strategies before the end of the current tax year.
        • Higher rate and additional rate taxpayers with modest dividend income from share/OEIC portfolios will welcome the change, with a potential saving of up to £1,250 a year from 2016/2017 for a higher rate tax payer, compared to now.

 

INCOME TAX

Personal allowance and higher rate threshold

    • In 2016/2017 the income tax personal allowance will see another substantial increase of £400 to £11,000. A further increase to £11,200 was announced for 2017/2018.
    • The basic rate band increases to £32,000 for 2016/2017. Those entitled to the full standard personal allowance will pay 40% tax on income above £43,000. The threshold for higher rate income tax increases by £615 for 2016/2017.
    • The basic rate limit will increase to £32,400 for 2017/2018. Together with the planned increases in the personal allowance, this means the higher rate threshold will be £43,600 for 2017/2018. These are the next steps in the Chancellor’s stated aim of increasing the higher rate threshold to £50,000.

Property letting

    • From 1 April 2016 higher rates of stamp duty will be charged on further purchases of residential property i.e. second homes or buy to let properties. The additional rate will be 3% above the standard rate and will apply to properties worth more than £40,000. It is not expected to apply to corporates or funds making significant investments in residential property. The Government will consult on the policy detail,
    • The tax relief on mortgage interest will be restricted to basic rate for mortgages on ‘buy to let’ residential properties. The restriction will be phased in over 4 years from April 2017.
    • ‘Rent a room’ relief will be increased from £4,250 to £7,500 from April 2016. The relief had been frozen since 1997.
    • From April 2019, if capital gains tax (CGT) arises from a disposal of residential property the taxpayer must pay it within 30 days of completion. Under the current system tax is due between 10 and 22 months after disposal.

IMPACT:

      • Higher rate taxpayers will welcome the further increases in the higher rate threshold, however, the rates from 2016/2017 and 2017/2018 are still a long way off the Chancellor’s stated aim of a £50,000 higher rate threshold. In the meantime pension contributions benefiting from higher rate relief remain an attractive savings option.
      • A further substantial increase in the personal allowance means that higher earners can achieve even greater benefit by using pension contributions to reduce adjusted net income above £100,000. For someone with gross income of £122,000 a pension contribution of £22,000 will cost just £8,800 in 2016/2017, attracting tax relief of 60%.
      • A further blow to the buy to let market. The 3% increase in stamp duty coupled with the reduction in the tax relief on mortgage interest will significantly increase the costs, along with bringing forward the CGT payment date by up to 21 months. It may also prove difficult to work out the correct taxable gain and the amount payable within 30 days of completion, particularly where valuations and complex calculations are required.

 

TAX EFFICIENT INVESTMENTS

ISAs

    • The ISA limits will remain unchanged for 2016/2017. The main ISA limit will remain at £15,240 and the limit for Junior ISAs and Child Trust Funds will be £4,080.
    • The ‘Help to Buy’ ISA will be available from 1 December 2015. This new product will enable first time buyers to save up to £200 per month towards a first home, with an initial one-off deposit of £1,000. The Government will boost savings by 25% up to a maximum of £3,000, which will be paid when a property is purchased.
    • New flexible ISA rules will be introduced from 6 April 2016. The rules will allow investors to pay withdrawals from a cash ISA back in to the account before the end of the tax year, without reducing their subscription limit further. The change will also cover cash held in stocks and shares ISAs.

Personal savings allowance

    • From 6 April 2016, a tax-free savings allowance of £1,000 will be available to those with taxable income of less than£43,000 i.e. basic-rate payers and below. Higher rate taxpayers benefit from a £500 tax-free allowance. Those earning over £150,000 are not entitled to an allowance.

IMPACT:

      • Some savers and investors will be disappointed in the freezing of the ISA allowance, however they have received substantial increases in recent years
      • The personal savings allowance provides more incentive for savers with even higher rate taxpayers benefiting from an allowance. However, it’s most generous for low earners who will potentially pay no tax on their savings where total taxable income is less than £17,000 in 2016/2017, after taking into account the £5,000 savings band.
      • New flexible ISA rules allowing cash withdrawals to be returned to an ISA by the end of the tax year will help to maximise the benefits by removing an effective penalty on those who are forced to access their savings temporarily.

 

INHERITANCE TAX (IHT) AND TRUSTS

    • The Government aims to reduce the number of estates paying IHT by introducing an additional nil-rate band from April 2017. This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021 with CPI indexation applying thereafter. As with the existing nil-rate band, any unused nil-rate band will be able to be claimed on the death of their surviving spouse or civil partner. Those with net estates worth more than £2 million will see the additional nil-rate band scaled back by £1 for every £2 over this threshold. Further guidance on the downsizing provisions was published in October 2015 with legislation on this aspect in Finance Bill 2016.
    • The IHT nil-rate band is currently frozen at £325,000 until 5 April 2018 and this will continue to apply until April 2021.
    • Following the review of deeds of variation no changes will be made. The Government will continue to monitor their use.

Drawdown funds and IHT

    • The Government will introduce legislation to clarify that no IHT applies on unused drawdown funds remaining on death. The legislation will be backdated to April 2011.

IMPACT:

      • The changes to IHT remove the family home from the IHT net for all but the wealthiest homeowners although the maximum benefit of £1m won’t be available until tax year 2020/2021 due to phasing of the allowance.
      • Those with larger estates will still need advice on steps they can take to mitigate IHT.

 

NON-DOMICILES

    • From April 2017 foreign domiciles who have been long term resident in the UK – more than 15 of the past 20 tax years will be deemed to be UK domiciled for taxation purposes. This will mean they will no longer be able to utilise the remittance basis of taxation and will be subject to tax on a worldwide basis on their income and gains. They will also be deemed domicile for IHT purposes – bringing forward the point at which IHT applies to their worldwide assets from the current period of 17 out of the past 20 years ending in the year of transfer.
    • It will no longer be possible for individuals born in the UK to UK domiciled parents to leave the UK, claim non-domicile status then return to the UK and continue to claim non-domicile status for tax purposes.
    • The Government also intends to introduce new rules from April 2017 to ensure IHT is payable on all UK residential property owned by non-domiciles regardless of their residence status.

 

CORPORATION TAX

    • The corporation tax rate will be cut from 20% to 19% in 2017 and then to 18% in 2020.
    • For accounting periods starting on or after 1 April 2017, corporation tax payment dates will be brought forward for companies with annual taxable profits of £20 million or more. This threshold will be divided by the number of companies in a group. These companies will pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.
    • The permanent level of the Annual Investment Allowance (AIA) will increase from £25,000 to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.

IMPACT:

      • Companies may consider making employer pension contributions before the lower rates of corporation tax reduce the effective rate of tax relief available.

 

NATIONAL INSURANCE

    • The £2,000 National Insurance employment allowance, which reduces the overall cost of employer National Insurance Contributions (NICs) for employers will increase from £2,000 to £3,000 from April 2016. From the same date, companies where the sole employee is the director will no longer be able to claim this allowance.
    • The Government will actively monitor the growth in salary exchange (also known as salary sacrifice) schemes used to reduce the amount of employee and employer NICs.

IMPACT:

      • As automatic enrolment continues to roll out, employers and employees are looking for ways to reduce the net cost of pension contributions. Salary exchange arrangements, where an employee opts to give up salary in exchange for a higher employer pension contribution, still offer NICs savings for both employees and employers.

 

STATE BENEFITS, TAX CREDITS AND THE MINIMUM WAGE

State pension

    • The basic State Pension increases in line with the triple lock by £3.35 to £119.30 a week for 2016/2017.
    • The Pension Credit Standard Minimum Guarantee increases by £4.40 to £155.60 a week for a single person and by £6.70 to £237.55 a week for couples for 2016/2017. The Savings Credit threshold will increase to £133.82 for a single pensioner, reducing the single rate of the Savings Credit maximum to £13.07. It will increase to £212.97 for couples, reducing the couple rate of the Savings Credit maximum to £14.75.
    • The new single tier State Pension for people who reach state pension age from April 2016 will start at £155.65 a week for those entitled to the full rate.

Welfare reforms

    • The proposed cuts to tax credits have been withdrawn and the current system remains in place, although these ‘in work’ benefits will be gradually replaced as Universal Credit rolls out. The Universal Credit rollout schedule currently starts in 2016 with completion due by 2021.
    • From April 2016, payment of Housing Benefit and Pension Credit will stop for claimants who travel outside the UK for longer than 4 consecutive weeks.

Social care reforms

    • As previously announced, the ‘Dilnot’ reforms to social care funding in England are on hold until 2020. (Scotland, Wales and Northern Ireland all have their own social care funding arrangements.)

National minimum wage

    • The current rates shown below apply since 1 October 2015, with the previous rates shown in brackets:
    • £6.70 (£6.50) per hour – main rate for workers aged 21 and over.
    • £5.30 (£5.13) per hour – workers aged 18 to 20.
    • £3.87 (£3.79) per hour – workers aged under 18 and above school leaving age.
    • £3.30 (£2.73) per hour – apprentice rate for apprentices under 19 or 19+ and in their first year.
    • From April 2016, those aged 25 and over will benefit from an increased rate of £7.20 an hour, branded as the National Living Wage.

 

IMPACT:

  • Remember the minimum wage when planning with salary / dividend / pension profit extraction and salary exchange / sacrifice.

 

** Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the July 2015 Budget and November 2015 Autumn Statement which may change before becoming law.

– Scottish Widows

I smell a rat

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money rat

Keep this guy away from your dosh!

Maybe it’s the cynic in me, or maybe my natural in-built auditor, but it seems to me that dodgy investments and tax schemes are on the increase.

One reason for this may be the fact that our authorities continue to be particularly lenient to companies which make promises, collect cash, fail to deliver and then are liquidated (or just disappear), only to reappear in a similar form and under a new name shortly afterwards, while the creditors receive nothing or only pennies in the pound.

Another reason is that there is just too much fraud around, and the country’s fraud squads are spread far too thinly.

Sometimes downright fraud is at the core of the issue, but there are varying degrees.  There seem to be quite a few who carry on in this manner who have a nose for what they can get away with, just about staying within the statutes or knowing how to work the areas that simply aren’t enforced. Either way these people are duplicitous and acting without any level of integrity.

Sometimes, as an independent financial adviser, I am feted by some pretty dodgy looking companies to act as an introducer of clients to them. This is usually by way of an email, and often  the company has a very impressive website. The promoters, who make much of the introducer commissions they offer,  may be pushing unregulated investments, such as property developments (particularly holiday property overseas), or maybe tax schemes  – particularly for persons contracting through their own limited companies, and so on.

Occasionally, the business and its product are bone fide, but nevertheless non-mainstream and requiring significant due diligence from anyone who might recommend or otherwise promote them. Frequently they are not.

So can I make a few basic recommendations here? (spot the over-used old sayings):

  • With only a very small number of exceptions (linked to the UK Treasury or National Savings and Investments), there is no such thing as a guaranteed return on an investment. 
  • If you are a UK contractor and are encouraged to join a scheme that involves any kind of offshore trust, loans back to you personally, gifting of income or invoicing an unrelated entity, it will almost certainly fail as and when it comes under HMRC’s spotlight. This is likely to have very serious implications, and additional costs to the contractor. Occasionally, you end up with a very large debt due to the offshore company involved too. Avoid these schemes. If you are a UK contractor and want to minimise your tax bill, come talk to me for sensible tax advice.
  • There are no free lunches!
  • If you are contacted by anyone who is promoting any kind of investment product which they profess to be either a hot stock, something with guaranteed returns, low risk and high returns, or whatever, agree to nothing. Always always run it past a trusted professional such as your independent financial adviser. But before you even do that, try asking some common sense questions of that person and write down the answers so that you can check their story. What is the full name of the individual calling and of the company which they are a part of,  where does it have its office address and what is its telephone number? You can easily check the existence of a UK company at companies house online, and it is even operating a free documents service at present allowing you to look up the directors and officers, and even look at the accounts of the company. By clicking on the directors names, you can see other companies with which they are connected. This is my first port of call in any basic due diligence.
  • And never never never agree to pay money over the telephone for anything. There are some very persuasive people out there with some very clever, well honed stories to tell. Assume it is dodgy. One may not be able to prove it is dodgy, indeed maybe no investors have been screwed (yet), but if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.  

Of course, there can be exceptions to anything and occasionally a tax scheme or unregulated investment promoted direct that initially seemed dodgy can be a pretty decent proposition to certain people at certain times. But in all cases I would recommend you keep your chequebook in your pocket until you have spoken to a seasoned professional adviser. There are a host of excellent investment opportunities out there and a good investment adviser will be able to help you find the appropriate investments with which to populate your portfoli, which carry a suitable amount of risk in line with your requirements and achieve your objectives.

Now I really must get on. Apparently I’ve won the Nigerian lottery (!), and I need to sort out a rather complicated claims process……………….