By Matthew Kneller
With the end of the tax year fast approaching (5th April 2014), we thought we would share with you our ten tips to make the most of this financial planning deadline.
1. Pensions – Make Use of Your Annual Allowance
The maximum that can be paid into your pension is 100% of your earnings subject to an Annual Allowance limit of £50,000. You can pay in up to £3,600 irrespective of earnings. In the 2014/15 tax year the Annual Allowance reduces to £40,000.
It is possible to Carry Forward unused Annual Allowance from the previous three tax years which enables you to potentially pay in more than £50,000 in any single tax year.
However, when measuring contributions against the Annual Allowance, care needs to be taken around so-called Pension Input Periods (PIPs) and in particular with Defined Benefit Schemes.
Pensions provide attractive tax advantages and making a pension contribution before the end of the tax year can be a good idea for the following reasons:
- You will receive basic rate tax relief on the contribution within the pension;
- Higher rate tax payers can claim additional tax relief through their Self Assessment tax return thereby lowering their overall Income Tax liability;
- Your pension fund itself is then in a highly tax advantaged environment for future potential growth.
2. Pensions – Measure Your Overall Fund Against the Lifetime Allowance
The Lifetime Allowance is the maximum pension fund that you can build up without incurring a Lifetime Allowance Charge. It is important to regularly review your pension fund and measure it against the Lifetime Allowance especially if you are making regular contributions or have accrued pension benefits under a Defined Benefit Scheme.
The current Lifetime Allowance is £1.5m and this will reduce to £1.25m from April 2014. However, it is possible to protect your pension fund against the fall in the Lifetime Allowance and specialist advice may be required.
3. Pensions – Consider Bonus/ Salary Sacrifice
There can often be a significant tax and National Insurance Contributions (NICs) saving for both you and your company by arranging for your employer to make a pension contribution on your behalf by way of effectively exchanging it for a portion or all of your bonus or salary.
Care needs to be taken to ensure that a Bonus/ Salary Sacrifice agreement is set up correctly and that other valuable company benefits such as life assurance are not jeopardised.
4. Use Your Individual Savings Account (ISA) Allowances
It always makes sense to invest as tax efficiently as possible so it is often a good idea to use your ISA allowance. In the current tax year you can invest up to a maximum of £11,520 into a ‘Stocks and Shares’ ISA and this will increase to £11,880 in the 2014/15 tax year.
I do sometimes hear that ISAs are not worth bothering with because the allowances feel modest for some. However, a couple could potentially make a tax-advantaged investment of £46,800 in April by each utilising their 2013/14 and 2014/15 ISA allowances. Investing wisely and repeating this process means funds can quickly accumulate. There are, for instance, ‘ISA millionaires’!
Tax-advantaged investments can also be made on behalf of children or grandchildren into Junior ISAs. The allowance for each child for the current tax year is £3,720 and this will increase to £3,840 in the next tax year.
5. Use Your Annual Capital Gains Tax (CGT) Allowances
Where there are gains in your investment portfolio it is often sensible to make use of your annual CGT allowance to help reduce or eradicate your overall CGT liability. This can also be done in order to fund ISAs and is known as ‘Bed and ISA’ as a similar fund can be repurchased within the ISA wrapper. The current CGT allowance is £10,900.
However, care needs to be taken around the selling and repurchasing of the same investments to crystallise a gain as in most cases a period of 30 days needs to have elapsed between the dates of sale and purchase.
6. Use Your Inheritance Tax (IHT) Allowances
Estate Planning is often a key concern for clients with the standard IHT nil rate band remaining at £325,000 per person until 5 April 2015 at the earliest. Therefore it may be sensible to make use of the main IHT exemptions:
- Gifts of £3,000 in any tax year plus any unused from the previous year;
- Gifts of up to £250 per annum to any number of persons other than those benefitting from the £3,000 exemption;
- Gifts in consideration of marriage/ civil partnership of up to £5,000 from each parent, £2,500 from each grandparent or up to £1,000 by any other person;
- Regular gifts out of ordinary income;
- Gifts to charities.
7. Make Charitable Donations
You should ensure that you have made the Gift Aid election in respect of any charitable donations made, assuming that you have the income to support this. Any higher rate or additional rate tax relief can also be re-claimed through your Self Assessment.
Making a Charitable Donation can also be especially tax efficient if your net relevant earnings are only slightly above an income tax threshold or ‘trap’ such as those for child benefit or where income reaches £100,000.
8. Consider Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT)
For those with a greater tolerance for risk and capacity for loss, an EIS can be a good way to defer a Capital Gains Tax liability as well as attracting Income Tax Relief. A VCT also offers Income Tax Relief.
Both investments effectively invest in smaller companies and we would always caution investors to consider the merits of the underlying investments rather than simply focus on the tax benefits.
A relatively new initiative has been Seed Enterprise Investment Schemes (SEIS) which focus on micro companies and start ups and which attract an even higher level of income tax relief.
9. Make Use of Personal Allowances
It makes sense to use your Personal Allowances as efficiently as possible. For example, where one of you is a higher rate tax payer it often makes sense for the lower rate or nil tax-paying spouse, where practical to do so, to hold the investments thereby minimising the overall tax liability.
For those earning just over £100,000 and who have lost their personal allowance, making a pension contribution or charitable donation can bring their earnings below £100,000 which means they regain their personal allowance.
10. Talk to your Chartered Financial Planner
With the best of intentions it is often very easy to overlook these planning strategies and others, especially with a busy lifestyle. In addition, it is easy to get things wrong which could potentially have serious financial consequences. It therefore makes good sense to employ a Chartered Financial Planner to help you with and oversee your financial planning.
To discuss your financial planning requirements with one of our Chartered Financial Planners, please do give us a call on 01249 700404 or email firstname.lastname@example.org
This article contains the current opinions of the author and does not represent a personal recommendation. Information contained herein has been obtained from reliable sources but cannot be guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission from Fresh Perspective Financial Planning Ltd.