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2017-2018 Money Tips: Getting The Best Deal From Your Allowances (Part II)

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Continuing on with our previous article on Money Saving Tips in 2018, we’re looking here at more ways you can improve the savings you can make on your tax bill.

Gifting (Tax & Inheritance)

Many people in Nottingham and further afield are simply unaware of inheritance gifting exemptions. Everyone has a £3,000 annual exemption which can be carried forward one tax year if unused as long as the donor fully uses the current year’s exemption first. Then there is the “regular gifts out of surplus income” exemption would could be perhaps used by making payments into a regular savings vehicle in trust.

Then there is the £250 small gifts exemption which allows an unlimited number of such gifts to different people as long as no other gifts are made to the same people in the same tax year. All these exempt gifts are immediately outside the donor’s estate for IHT purposes. Our Nottingham-based financial advisers specialise in this area, so if you need help with your inheritance tax planning, please get in touch.

Pensions

Your annual pension allowance is a vital area of consideration, for effective financial planning. This allowance effectively acts as a limit on the contributions that can be made to your pot, tax-free per annum. This is linked to your salary, with a cap of £40K, however, if an individual exceeds their annual allowance it is possible, if eligible, to “carry forward” unused annual allowances from the previous three tax (as long as an individual has been a member of a registered pension scheme at some point in each year being carried forward from – it doesn’t matter whether they actually made any pension contributions in that tax year).

Also, the person does not have to make contributions to the pension arrangement that they have been a member of in order to take advantage of carry forward – they can make contributions to a different pension arrangement. However, high earners in Nottingham and across the UK may be subject to the Tapered Annual Allowance where tax relievable contributions are restricted. Again, our financial advisers specialise in this complicated area of financial planning, so if you need help with your pension planning, please get in touch.

Money purchase annual allowance (MPAA)

Anyone who has triggered the MPAA will have the maximum further tax-efficient pension contribution they can make (to money purchase pensions) of only £4,000 pa and bear in mind that unused MPAAs cannot be carried forward to future years.

Planning using pension contributions

Consider whether there is any scope to make further contributions this tax year (and next) in order to reduce income so that:
Income falls into a lower tax band;
The Personal Allowance remains available (i.e. reduce adjusted net income to £100k or less to keep the full personal allowance or to below the age allowance limit in order to avoid the age-related personal allowance being reduced);
Entitlement to Child Benefit remains fully or partially available – if the income influencing the child benefit charge can be brought down to £50k pa or less then a full entitlement to child benefit is reinstated (i.e. no charge will apply) and any reduction in income between £50k and £60k will reduce the child benefit charge payable.
the main methods for reducing income are via the making of pension contributions and the use of salary sacrifice; however, bear in mind that maximising contributions as soon as you hit the new tax year may not be the best course of action and a greater benefit might be obtained by staggering or postponing pension contributions, e.g:
Those with income over £100k might consider staggering their pension contributions in order to bring income below £100k over a number of tax years in order to avoid the loss of the Personal Allowance (which means an effective tax rate of 60% on affected income);
Those with income over £50k (and especially £60k) again might consider staggering pension contributions over a number of tax years in order to avoid the effective loss (or reduction) in Child Benefit via the Child Benefit Charge

Single premium investment bonds (onshore and offshore)

Investment bonds can represent a useful tax planning tool. They are non-income producing; the annual 5% cumulative allowance can enable tax to be deferred until a time when gains might be taxed at a lower level (or not at all); bonds (or segments) can be assigned to someone paying tax at a lower rate without causing an immediate chargeable event (as long as the assignment represents a genuine unconditional gift). Consideration should be given as to whether there is any tax advantage in carrying out bond encashments before 6th April or after. Offshore bond gains can be offset against the 0% starting rate band for savings if available and/or the Personal Savings Allowance.

Maximum Investment Plans

The maximum annual contribution to new qualifying policies is now £3,600 per year per person (with any excess being non-qualifying) and includes any qualifying policies taken out since 21st March 2012. Taking advantage of this £3,600 pa limit may be suitable for higher or additional rate taxpayers looking to make regular savings over the longer term. Within policies taxation is usually no higher than 20% overall and the policy proceeds after 10 years are generally tax free in the hands of the policyholder regardless of their personal tax rate.

Enterprise Investment Scheme (EIS)

Up to £1,000,000 of investment per tax year per person is permitted which would benefit from 30% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Unlimited CGT deferral is also potentially available as long as the investment is made within the period 1 year before and 3 years after the disposal creating the chargeable gain. WARNING: Such investments are not for the faint hearted!

Venture Capital Trusts (VCT)

Up to £200,000 of investments per tax year can be made per person with 30% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Dividends paid are tax free and any capital gains are also tax free, but like EIS investments, VCTs are higher risk and certainly not suitable for everyone.
Tax and legal advice is not regulated by the Financial Conduct Authority (FCA). The tax treatment of investment products, tax levels and reliefs can depend on an individual’s circumstances and can change. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken. The value of investments and the income from them can fall as well as rise and is not guaranteed which means you could get back less than you invest. Past performance is not a guide to future performance.

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