Techzone

With the tax year end approaching, clients should be making the most of the tax reliefs and allowances currently available. This can lead to a reduced tax bill and potentially a boost to savings.

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% or 45%. For those with income over £100,000, the point at which the personal allowance is eroded, an individual contribution can reverse this
• Those with sufficient earnings can use carry forward to make contributions in excess of the current annual allowance
• 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 three years

2. High earners: making a pension contribution before the TYE could increase their annual allowance

• High income clients could face a cut in the amount of tax-efficient pension saving they can make, although the thresholds before this cut  kicks in are higher this year. This means some high earners will be able to pay more in this year than last. The standard £40,000 annual allowance is reduced by £1 for every £2 of 'income'  over the new ‘adjusted income’ limit of £240,000 , until the allowance drops to £4,000
• If a client exceeds the adjusted income limit, 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 £200,000 or less (the ‘threshold income’ limit). A large personal contribution using unused allowance from the previous three tax years can bring income below £200,000 and restore the full £40,000 allowance for 2020/21
• Remember the annual allowance available in the carry forward years 2017/18 to 2019/20 will be based on income in those years and the lower adjusted income and threshold income limits of £150,000 and £110,000 respectively

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 three years

* Further details of what is included in adjusted and threshold income can be found in our new practical guide.

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 annual allowance 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.

If income is required, it might be worth considering other ways of meeting that need. In this way, the MPAA can be deferred and the full annual allowance retained for a while longer . Alternatively, clients who do 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

The tax year end often coincides with business year ends and, for some employees, this could mean a bonus payment . ‘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 three years.
• Does the employer allow bonus sacrifice?
• Employer's 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 will have full unrestricted access to their pension savings, although this might trigger the MPAA of £4,000 if any income is taken in addition to tax free cash
• 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 instead, tax and NI savings can boost a director’s pension fund
• Employer contributions made in the current financial year will get relief at 19%

Key information

• Company accounting period
• Company pre-tax profit
• Pension annual allowance available from current year and previous three 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 or a pension, 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.

Key information

• Remaining annual ISA allowance

7. Recover personal allowances and child benefit

• Individual pension contributions can reduce a client’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 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 three years

8. Investments: take profits using CGT annual allowances

• Whether or not there are future changes to CGT following the report from the Office for Tax Simplification (OTS) at the end of last year, the CGT allowance will be lost if not used
• Clients looking to supplement their income tax-efficiently could withdraw funds from an investment portfolio and keep the gains within the annual exemption
• Even if cash isn’t needed, taking profits within the £12,300 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 fund 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%
• More information on how to use the annual CGT exemption can be found in our new practical guide

Key information

• Sale proceeds and cost pool for mutual funds/shares
• Gains already made as a result of any rebalancing of portfolios during the year
• 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 £18,500 can be taken tax free. This is made up of personal allowance £12,500 plus starting rate band for savings £5,000 plus personal savings allowance £1,000. Remember that non-savings income is taxed before savings income and if the exceeds £17,500 the PA and starting rate band will not be available
• If your client doesn't 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

• 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 three years and relevant UK earnings

Summary

Effective tax planning is a year round job. But it’s only at the end of the tax year that you have all the information needed to use the allowances and reliefs in a tax efficient way. This can be a boost to savings, but remember that in most cases allowances not used before the end of the tax year will be lost altogether.

Our new practical guides provide further help with tax year end planning:

• Tax year end guide to utilising the CGT annual exemption
• How to maximise pension savings
• The tapered annual allowance - adjusted income and threshold income