In this guide we explain:
- Why you shouldn’t leave tax planning until the end of the tax year
- How acting now means you can maximise tax-planning opportunities – and minimise stress
- The main tax-planning opportunities in the current tax year from pensions to property, inheritance tax to ISAs, dividends to capital gains tax.
As the end of the tax year gets closer there is a window of opportunity to make the most of valuable allowances, reliefs and exemptions that can help reduce your tax bill and make sure your finances stay tax efficient.
Some of these allowances will be lost if not used before the tax year end on April 5 - and the sooner you claim them the better. Every year, many people leave end of year tax planning until the last minute.
Leaving planning until the eleventh hour increases the risk that you will discover you have left it too late and missed out on the chance to improve your financial position. Acting well before the tax year end means you can be sure that you are maximising your opportunities and minimising your stress.
There are plenty of opportunities out there. The recent leak of offshore tax avoidance records linked to prominent individuals – the ‘Paradise Papers’- may have sparked confusion in some people’s minds about the appropriateness of tax planning. However, government-endorsed allowances, reliefs and exemptions remain both legally and reputationally safe. The government offers these reliefs to encourage investment and they are designed to be beneficial.
This guide aims to highlight the main tax-planning opportunities in the current 2017/18 tax year. However, while tax efficiency is an important part of financial planning, it is not the only part.
At Brewin Dolphin, our experts can work with you to incorporate tax-efficient investing within a broader tailor-made financial plan to make sure the allowances work best for you. We can help you put the money you save in tax to work harder elsewhere.
The changing tax landscape
The UK’s tax system is constantly changing, which means that unless you remain up to date there is always the chance that you could lose out. Sometimes reforms are for the better, as witnessed with the substantial recent increase in the ISA allowance. Others can be for the worse, such as the series of cuts that has been inflicted on pension allowances. The important thing is to remain informed
Building a tax-efficient retirement portfolio
Maximise your annual pension allowance
The annual allowance is the limit on the amount of pension contributions that can be made each year and qualify for tax relief. In the 2017/18 tax year, the standard rule is that you can contribute the lower of your annual earned income or £40,000.*
The annual allowance has changed significantly since it was introduced in 2006 at £215,000 and in recent years has been cut sharply. However, the tax breaks on pensions savings remain pretty impressive.
The government adds income tax relief to your investment. Any growth over subsequent years will be free of income and capital gains tax.
The annual allowance isn’t necessarily lost at the end of the tax year, as you can ‘carry forward’ any unused allowance from the three previous years. However, as you can’t get tax relief on more than you earn, for most people, putting money aside each year is likely to be the best way to benefit from the available tax breaks.
The lifetime allowance – don’t sleepwalk into a 55% tax charge
When you are calculating how much to contribute to your pension this year, you also need to consider the lifetime allowance. This is the maximum amount of pension saving you are allowed to amass over a lifetime without incurring a tax charge.
Currently the lifetime allowance is £1m. Any savings above this level when you begin to draw your pension will be subject to a lifetime allowance charge. For 40% tax payers the charge is 55%; for additional rate taxpayers it is even higher.
Even if you are some way off retirement it is important to establish whether you could breach the lifetime allowance in the future and whether you need to take action to protect yourself from a possible tax charge.
If you expect to breach the lifetime cap in the future or your pension pot is already worth more than £1m you may be able to apply for protection. Alternatively, it may be appropriate to adopt a more conservative investment approach or, if you have already reached your 55th birthday, consider taking your pension now.
The decisions that need to be made are complicated and the most appropriate action will depend on your individual circumstances. So do not hesitate to get in touch with one of our specialist financial planners with any questions.
Minimising tax on your other investments
Make the most of your increased ISA allowance
In our low interest rate environment, making sure that your savings and investments are not needlessly depleted by tax is more important than ever. Individual savings accounts (ISAs) are at the core of most tax-efficient portfolios, and in April 2017 there was a substantial increase in the annual ISA allowance. If you don’t use your annual ISA allowance before the end of the tax year you lose it forever.
In the current 2017/18 tax year, individuals can invest up to £20,000 (£40,000 for a couple) – a significant uplift on the £15,240 ISA allowance for 2016/17.
The tax benefits of ISAs remain the same. With a cash ISA, the interest is tax free. With stocks and shares and other ISAs (including the Lifetime ISA introduced in April 2017), there is no tax to pay on income or capital gains from your investments.
To encourage even wider use of ISAs, the government has introduced several changes in recent years that have potentially made the accounts even more attractive.
- You can transfer ISAs as often as you like, including previous years’ ISA savings. Money held in a cash ISA can be transferred into a stocks and shares ISA and vice versa. Be aware, though, that some providers restrict transfers in.
- If your ISA is flexible, you can take cash out then put it back in during the same tax year without reducing your annual ISA allowance. Not all ISA providers offer this flexibility, and strict rules must be followed. However, if you are interested in this facility your Brewin Dolphin adviser will be able to help you establish if it is possible.
- April 2017 saw the introduction of the Lifetime ISA (LISA), which is aimed at helping younger adults to save for retirement or build up funds towards the purchase of a first home.
A LISA can be opened by anyone between the ages of 18 and 40 and while you can only put in £4,000 a year (which comes out of your full ISA allowance), the government boosts it by 25%, so that for every £4 saved the government adds £1. This means a maximum bonus of £1,000 on the annual £4,000 limit.
Growth is tax free and you can access the money whenever you want. However, to keep the bonus you need to put the money towards buying a first home worth up to £450,000 or wait until you reach the age of 60, after which you can use the money for any reason.
Dividend allowance – act now before it is cut
The level of dividends individuals can receive tax free is expected to be cut from £5,000 to £2,000 from 6 April 2018, just two years after the dividend allowance was introduced.
Assuming the reduction in the dividend allowance comes into force, the measure will particularly affect small business owners who pay themselves income as dividends, as well as investors who hold investments outside of an ISA wrapper. If you are potentially affected by the reduced allowance, you should talk to a tax expert urgently to determine if there is any action you can take to minimise the impact. Your Brewin Dolphin adviser may be able to help you restructure your investments to minimise the potential blow.
In the meantime, in the current 2017/18 tax year, the first £5,000 of dividend income you receive a year is tax free. This is on top of the existing personal allowance for income (£11,500 in 2017/18). Dividends over £5,000 are taxed at 7.5% (for basic-rate taxpayers), 32.5% (higher-rate taxpayers), or 38.1% (additional-rate taxpayers).
Personal savings allowance
The personal savings allowance means that basic-rate taxpayers can earn up to £1,000 of interest on savings without having to pay any income tax. Higher-rate taxpayers can earn up to £500 interest tax free.
Reducing tax on your gains
One allowance that many investors forget is their ‘Annual Exempt Amount’ for capital gains tax (currently £11,300). You don’t pay tax on any profits from the sale of eligible assets (such as shares you hold directly) until you have gone over this level.
If you have a large portfolio of shares outside an ISA, it’s worth using as much of this allowance as possible each year – by selling assets that have risen in value – or you could be storing up a large exposure to capital gains tax for the future. Sharing the ownership of assets with a spouse or civil partner can also enable couples to make significant capital gains tax (and income tax) savings.
Your Brewin Dolphin financial planner or investment manager can help you decide whether it is time to take action. Contacting them now will mean there is enough time to make the necessary decisions.
Rollover relief, helping you to defer capital gains tax, may be available when the proceeds from the disposal of an existing asset are invested in a new one. However, strict rules apply so you must take advice.
Inheritance tax - the power of annual giving
Most people wait until death before passing on their wealth through their wills. But, transferring wealth while you are alive can have a transformative effect on your family’s life and reduce an inheritance tax (IHT) liability.
There are a number of annual gift allowances, which you lose if you don’t make use of them before the tax year end.
- You can give away £3,000 each year and this will not be subject to IHT.
- You can give as many gifts of up to £250 per person as you want during a tax year, as long as you haven’t used another exemption on the same person.
These are just some of the gifts that are available. In addition, parents can give £5,000 to each of their children as a wedding gift, while grandparents can give £2,500.
Gifts of any size to charities or political parties are also tax free. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.
It is possible to make further tax-free gifts – potentially exempt transfers - but you have to survive for seven years after making the gift to get the full benefit of it being outside of your estate for IHT purposes.
If you would like to learn more about how to reduce an inheritance tax bill our financial planners can work with you to build a tax-efficient estate plan.
Don’t get caught out by the new property taxes
Recent tax reforms have made buy-to-let look distinctly less attractive from a tax perspective. If you already own a rental property or are considering becoming a landlord this could affect the profitability of your buy-to-let.
Annual ‘wear and tear’ allowance
Landlords used to be able to automatically claim 10% tax relief each year on their rental income from furnished accommodation to cover ‘wear and tear’. Since April 2016 landlords have only been able to claim for the costs they actually incur when they replace furniture, furnishings, appliances and kitchenware.
Mortgage tax relief
Landlords used to be able to claim tax relief on 100% of mortgage interest costs at their marginal rate (40% for higher-rate taxpayers; 45% for additional-rate taxpayers). That meant all landlords only paid tax on the difference between their expenses and income, their profit.
That changed on 6 April 2017. In the 2017/18 tax year landlords can only claim relief at their marginal rate on 75% of mortgage interest costs. On the remaining 25%, tax relief is restricted to the basic rate of income tax of 20%.
Further restrictions on tax relief will be phased in over the next three years, which means if you are a landlord it may be time for a rethink. Our investment managers can help you explore alternatives to buy-to-let that are more liquid and tax efficient.
Give your children a financial leg up
Finally, it’s worth remembering you can also save tax efficiently for your children and grandchildren. With a Junior ISA, you can put aside up to the maximum subscription limit (£4,128 for 2017/2018) each year, and there are the same tax benefits as an adult ISA. You just have to remember the money is locked away until the child is 18 at which point they can start withdrawing money.
People with no earnings can also get 20% tax relief on pension contributions of up to £2,880 per year (which boosts the value to £3,600). This includes children. Money in children’s pensions can’t be accessed until they are 55, but can then be used to boost their retirement savings.
How we can help you
The use of allowances is a deceptively complex area, and professional advice can help you to maximise the potential of the various tax savings on offer.
Brewin Dolphin’s financial planners can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowance available to maximise returns on pensions, savings and other investments. Our experts can also introduce you to tax specialists where appropriate.
If you would like to discuss any of the issues raised in this guide please call 020 3201 3900 or contact your local Brewin Dolphin office. Remember, don’t leave it too late or you could lose out.