How year-round tax planning can make a big difference to your life
You would be forgiven for thinking tax planning is a chore to be done every March before the tax year ends. The term ‘ISA season’ doesn’t help either, with its implication that there’s a specific time of year when you need to take one out or pay in your allowance.
However, while there’s a lot to be said for booking in a session with us before the end of the tax year on 5 April, experience shows that the most effective tax planning comes when you don’t think about it in isolation.
Tony Clark, Senior Propositions Manager at St. James Place, says: “Tax planning shouldn’t necessarily just be done in March. It’s a part and parcel of the whole financial-planning process and inextricably linked to many different life events.”
This means keeping tax in mind every time you make a significant financial decision.
To give you a better idea of what we mean, here are several scenarios you might encounter where savvy tax planning can make all the difference.
Business had a good year?
The past few years have been tough for the self-employed. However, if you’ve had a bumper year, you may be able to take advantage of carry-forward rules and pay more than the annual allowance (currently 100% of your earnings up to £40,000) into your pension. This allows you to use any unused allowance from the previous three years in the current year.
Contemplating some intergenerational wealth planning?
Recent years have also added to younger generations’ woes, and many older clients are keen to share their wealth with children and grandchildren. This might mean contributing to wedding costs, helping them onto the housing ladder, paying down student debt or chipping in for rent and bills. However, did you know these gifts can also be tax efficient and reduce a potential Inheritance Tax (IHT) bill further down the line?
Each year, you can give away £3,000 in gifts tax free to reduce your estate, with additional allowances for wedding gifts. Allowances are per person too, so couples can effectively double these. You can also make ongoing gifts from income, so long as it doesn’t harm your own standard of living. “The important thing is to make sure you have documented any gifts you make, in case it’s challenged later,” says Tony.
Received a windfall?
Whether you’ve received a bonus at work or an inheritance, there’s often a strong argument for paying the money into your pension. Not only will this shelter the money from major UK taxes, but subject to certain limitations, the contribution will also be topped up by tax relief at your marginal rate.
This can be particularly helpful if a bonus has tipped your earnings over £100,000 as it can help you avoid the tapering of the personal allowance that can result in the 60% tax trap. “It’s a double hit. You get the benefit of reducing your income for tax purposes plus the benefit of tax relief,” says Tony.
Had a child or grandchild?
Premium bonds have long been a popular gift on the birth of a new child. But what are the odds of winning big time? The recipient will have a better chance of eventually becoming a millionaire if you set them up with a child’s pension.
Each year, you can invest £2,800 in a pension for a child, which will be topped up to £3,600 by pension tax relief. Whilst a child’s pension can only be set up by a parent or legal guardian, anyone can contribute to one. The power of compounding means just one £3,600 contribution at birth could give their pension saving a massive head start. It could also give girls the edge they desperately need to beat the women’s pensions crisis and avoid retiring on less than the men in their lives.
Still paying money into a Cash ISA?
We all feel comfortable having easy-access cash in the bank. However, paying into a Cash ISA may be making the most of your annual ISA allowance. The Personal Savings Allowance means basic-rate taxpayers can earn up to £1,000 in savings interest before they need to pay tax, while higher-rate taxpayers can earn up to £500. It’s important to have some money in cash, but over time you’ll likely be better off using your £20,000 allowance for a Stocks & Shares ISA.
These are just a few examples of ways to plan your finances tax effectively throughout your life. By talking to us on a regular basis and sharing what’s going on in your life, you’ll find there are plenty more opportunities to reduce your tax bill or shelter your wealth from tax.
Get in touch to find out more.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.