Sam Ratnage, Wealth Manager
Lots of rumours surrounded the build-up to this year’s budget with the government’s spending and debt soaring following their intervention in the wake of the coronavirus pandemic. The questions quickly moved on to how the government pays off this debt and, more importantly to our customers, who they target. In short, whilst the horizons start to clear, we are still in the middle of the pandemic and so the answer is probably too early to say, whilst the spending remains high.
From a personal taxation perspective there was not that much in the budget. The planned, but small increases to the Personal Allowance and Higher income tax threshold due in April will go ahead, increasing to £12,570 and £50,270 respectively, but then these will then be frozen until 2026. The rates themselves, national insurance and VAT will remain unaltered. Inheritance tax thresholds, pension lifetime allowance, ISA allowances and annual capital gains tax exemption will all be frozen too until 2026. The stamp duty holiday has also been extended for a further 3 months to 30 June.
By freezing all these allowances, rates and exemptions in theory an economic recovery will help push wages and asset values higher, assuming this happens more tax will be collected by the government. This along with increased corporation tax on businesses making profits above £250,000. That is the theory at least and only time will tell whether this works and makes a dent in the government’s debt.
So, whilst the content of this budget was of particular interest and anticipation, I suspect future budgets will perhaps be more interesting on the personal taxation side than this one. As a team of Wealth Managers and Financial Planners and with the impending tax year-end we thought this was a good a chance as any to reiterate good sensible tax planning and making use of your allowances that the government give you. As I have said previously, remember that good, sensible financial planning can save you money in reduced taxes, increasing your net of tax returns without taking any additional risk.
Key questions you should ask yourself:
1. Am I utilizing my yearly allowances correctly? Each year you have a personal allowance where your first £12,500 (up to £12,570 in April) of taxable income is exempt of tax. Every year you also have an ISA allowance of £20,000 which is a shelter for savings where you pay no additional tax on income or gains. Both of these are lost if you don’t use them in a tax year.
2. Am I paying any unnecessary tax? Taking withdrawals from your pension or another taxable source to top up an income which pushes you into a higher rate tax payer when you could avoid this by taking the income over a longer term period or from another source.
3. Are there tax planning opportunities available to me in my position?Someone that earns an income can still contribute to a pension and receive tax relief in full. Dividend allowances and capital gain allowances are not utilized by everybody so can you take advantage of these. Offshore bonds offer another opportunity for those who have already used in full their ISA, dividend and capital gains tax allowances.
4. Am I using my allowances correctly? Cash ISAs offer a very small return at the moment with interest rates so low, so the risk here is inflation. Have you got extra savings you have built up that you can put aside to make a return and use the ISA allowance more sensibly, as the tax free element of an ISA is much more beneficial for an investor than a cash saver?
5. Am I going to exceed the lifetime allowance? If you are in excess or close to the lifetime allowance, are you continuing to contribute to your pension or can you contribute elsewhere and crystallise your pension now, redistribute assets to help mitigate the extra 25% or 55% tax you have to pay on the amount in excess.
6. Can I use other assets to create an income? Often at Tideway we talk to our customers about retirement income and not just pension income. Are your other assets working for you and creating a tax efficient income for you?
7. What is my goal, what am I saving for? We have a lot of handy calculators to help you understand what a sustainable retirement strategy and income would look like.
You will have seen members of our team, Ben, Mike and myself write about inheritance tax, offshore bonds, pension contributions, lifetime allowance planning and creating a tax efficient income over the past few months. So, if you are interested and would like to know more about the contents of these articles, do get in touch with your Wealth Adviser or book in an initial free of charge session with one of our Advisers who will happily talk you through the rules and options. At Tideway we have a number of experienced Chartered Financial Planners and Wealth Advisers who can work together for you and find an appropriate solution based on your personal circumstance.
Have a good weekend,
The Tideway Team
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