The end of the tax year is looming once again – it seems to come around so quickly these days. The 5th April each year represents the end of the UK tax year and as this date approaches a flurry of activity is often created within the Chancellor offices, predominantly by those looking for advice who are not existing clients of ours. Most of Chancellor’s clients have an agreement in place for ongoing services, which includes an ongoing financial review, which aims to avoid any year end panics.
In recent years, the regime for pension planning has changed somewhat in that pension contributions are now aligned to tax years. The previous system caused some degree of confusion, as it was based on what were known as “pension input periods”, which were normally linked to the start date of the pension plan or when the pension scheme membership first started. This was particularly confusing for clients if they had more than one pension plan.
Pension contributions paid by an individual can attract tax relief of up to 45% making them incredibly tax efficient in most cases (please bear in mind that the rules for pension contributions paid by an employer are different). Saying that, pension contributions should be considered as part of an individual’s overall financial planning needs, as there are many other aspects to consider beyond just the tax efficiency. For example, in recent years changes have taken place to the rules relating to what are known as the Lifetime Allowance (£1,055,000 for the tax year 2019/20 – beyond which tax charges may be applied) and the Annual Allowance. The Annual Allowance is currently limited to £40,000 per annum, although it may be possible to use any unused allowances that exist from the previous three tax years as well, meaning that the maximum that could be contributed in some cases is as high as £160,000. However, for those with taxable income in excess of £110,000 and taxable income plus employer contributions above £150,000, or for those where some types of pension benefits are already in payment, contributions can be restricted even further. In the worst-case scenario, tax-efficient pension contributions can be limited to £4,000 per annum.
If contributions are made in excess of an individual’s allowance, this will lead to additional tax liabilities being created. There are many issues to consider, so it is recommended that financial advice is taken from a specialist in this area of planning.
Many of Chancellor’s clients also take the opportunity to invest in Individual Savings Accounts (commonly known as ISAs) during a tax year. There are two main types available; cash and stocks and shares. The current limit is £20,000 per individual, per tax year. ISAs were introduced as a replacement for Personal Equity Plans (PEPS) and Tax Exempt Special Savings Accounts (TESSAs) and many of our readers over a certain age will possibly remember these. Initially, there was a Life Assurance ISA option with a limit of £1,000 – to this day we do not know of any client who actually took one out!!
The subscription limit was set at £7,000 when ISAs were first introduced in 1999 and this has increased over time to the current level of £20,000 per annum. The two main types of ISA went more or less unchanged for many years, however more recently we have seen the introduction of the Help to Buy ISA (new accounts can no longer be opened), replaced to a degree by the Lifetime ISA (LISA). Innovative Finance ISAs and Junior ISAs (JISA) have been introduced.
Chancellor have helped many of our clients assist their children and grandchildren with JISA arrangements. If this is something you feel we could help with, in addition to your own ISA requirements, we would be pleased to help.
Initially, it was not possible for investors to transfer from a Stocks and Shares ISA to a cash version, but that changed back in 2014.
A very powerful development within the ISA market introduced in 2013 is in how they can be used by investors when considering planning to reduce their estate’s liability to Inheritance Tax (IHT). The main attraction of most ISAs is that any returns are generally free of income tax and capital gains tax, but nevertheless they will still form part of the investor’s estate in the event of death. Where an individual’s estate already has a liability to IHT, this would potentially mean that Inheritance Tax equivalent to 40% of the value of the ISA portfolio may be payable to HMRC. This may reduce some of the tax efficient returns that may have been generated. It is now possible to make subscriptions to (or transfer existing ISA holdings into) shares on the Alternative Investment Market (AIM), which may, in time, qualify for Business Relief. If these are held for a period of two years and are still held at the date of death, then the assets would normally be exempt from IHT on death. Clearly, there are potential drawbacks to be aware of, including the acknowledgement that investments on AIM are higher risk in nature, and these investments are certainly not suitable for everyone. It is also important to realise that not all investments on AIM will qualify for Business Relief. It is therefore recommended that people seek professional advice before taking any steps.
AIM shares are high risk investments and you may lose capital.
This article simply aims to highlight some of the major aspects of year end tax planning and is not exhaustive, so if you would like to discuss any aspect of your ISA or Pension planning, then please do not hesitate to get in touch with your usual Chancellor adviser on 01204 526 846