End of year tax planning, are you ready?
- Cash based - £20,000 allowance for the tax year which cannot be carried forward or back
- Stock based
- Junior (JISA) - £4,368 contribution CPI per tax year which they can access when they are 18 years old.
- Lifetime (LISA)
- For personal contributions of £4,000 each tax year which you receive £1,000 tax relief
- 25% tax relief and tax free
- Not only for first time buyers, for anyone under 40, a really good vehicle for retiring
Do keep an eye on any investments that are not in ISAs, bond or pension, as the gains will be subject to capital gains tax.
Very useful to use your capital gains tax (CGT) allowance, can use up to £12,000 in gains before you actually start paying any CGT.
For married couples, if there is one person that is holding the investments, transferring and making them in joint accounts means you have two allowances that you can use, making it £24,000 free of CGT. Any transfers between couples does not trigger any CGT liabilities.
- Standard Annual allowance
Can contribute up to £40,000 subject to you having an earning of £40,000 in that same tax year
- For pension purposes it is specifically earnt income
Tapped annual allowance
- individual has earnings of more than £150,000
- Earning from all sources of more than £150,000, this also includes employer pension contributions. The £40,000 ends up being tapered away to £10,000
- For tapered annual allowance, it is all earnings
- If you haven’t used the full £40,000 allowance, you can go back to 2016/17, look at your contributions for the past three years to see if you have anything you can mop up
- Salary sacrifice / salary exchange - you give up a proportion of your salary, so you get your tax relief automatically. Not all employers offer this.
- If you are a higher rate taxpayer, making personal contributions, you only get 20% tax relief unless you inform HMRC you are making them as there is no way for them to know that otherwise. Look out for reclaimed tax relief
- For earnings over £100,000, up to £125,000 there is an affective tax relief of 60%. Calculated by when your income creeps over the £100,000 mark, up to £125,000, you will see a gradual reduction in your personal allowance. (Personal allowance is £12,500 without paying any tax)
Pension contributions for non-earners
- Which could be spouses not working, partners, children or grandchildren, there is an ability to make a contribution of £3,600 per tax year, but it will only cost you £2,880
- If a grandparent contributes to a pension from the year of birth to the 18th birthday, the grandchild will have a million-pound* pension pot by the time they get to the age of 60. *based on 6% growth rate
Pensions vs ISAs https://smithandwilliamson.com/en/insights/pension-vs-isa/
Mind the pension gap https://smithandwilliamson.com/en/insights/mind-the-pensions-gap/
[21.39] Lifetime allowance
- Where somebody might want to apply for individual protection 2016 - lifetime allowance is the amount that you can have into in the pension fund, which is £1,055,000 this will go up again this April 2020.
- Anything above that amount suffers an additional tax which is lifetime allowance
- There is an opportunity to apply for fix protection in 2016 still and individual protection
- When you're applying for individual protection 2016, you need to get your values as of 5th of April 2016 so you don’t miss an opportunity to have a higher lifetime allowance, make consideration that some providers are only obliged to provide them till the end of this tax year
[25.03] Inheritance Tax (IHT)
- If you are making gifts of capital, you can gift £3,000 to an individual and gifts of £250, if you haven’t used it for the current tax year, you can go back one year
- Enterprise investment schemes (EIS) & Venture capital trusts (VCT) - in general are for higher earners who maybe haven't got the scope to make pension contributions
- You have to have investment horizon patient, will need to have the appropriate level of risk which you’ll get 30% percent tax relief on the contribution
- The whole reason why these schemes were created or invented was to stimulate start-up companies
- It is very high risk however, if somebody who hasn't got the option for pensions, it is worth investigating to seeing if this is appropriate for your circumstances
- common myth that they’re income tax free
- only subject to income tax on the gain, it is deferred, the beauty of bonds is that you can choose when that event happens and who it happens to so they are quite nimble for planning; and
- if you you've got large levels of growth within a bond, it's probably worth looking at what the income tax position is, what the liability is and who it might fall upon.
This episode was recorded on 26/02/2020
This S&W The Pulse podcast is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said. The views expressed are not necessarily those of the presenter or of Smith & Williamson or any of its affiliates. No reproduction of this podcast may be made in whole or in part for professional or recreational purposes. No action should be taken based on this podcast and we accept no liability if we change your views on any of the subjects mentioned.
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The Pulse from Smith & Williamson
Financial Planning Show: End of year tax planning, are you ready?
Broadcast on Smith & Williamson at 09:00, 26th of FEBRUARY 2020
Available online from 10:00 on the same day .