Old Mutual Global Investors has changed its branding to Merian Global Investors
I’ve been busy lately helping clients with strategies to save income tax where they e.g. earn over £100,000, or they are (or might be) subject to the tapered annual allowance for annual pension contributions (causing tax penalties next year). Or they simply wish to look at carry forward for pension contributions but aren’t sure how to proceed. These areas are interlinked.
In the first case, you should be aware that as soon as your income exceeds £100,000, you begin to lose your personal allowance by £1 for every £2 your income exceeds it. This causes an effective income tax rate of 60% for earnings caught between £100,000 and £123,000!
In the second case, those people whose total gross income plus employer pension contributions exceeds £150,000 (“adjusted income”) are likely to have see their combined employer/employee pension contribution restricted – the tapered contributions allowance, with consequent tax penalties. This is a tricky area and many people were not ready for it last year!
But there are some simple ways of mitigating or even eliminating the tax charges which arise, using personal contributions into pension, often via unused pension allowances from the previous three tax years.
I have covered these areas in past blogs, and the links are:
You might also look at the current blog on tax year end opportunities which also sets these out and links to the older blog.
Her’es an example of tax savings that can be made:
In 2017-18, Phil earns a salary of £95,000 excluding bonus, and has taxable P11d benefits of £2,000. His employer pays pension contributions of £18,000 and Phil contributes £18,000 (gross) under the net pay method. He had no bonus last year but this year has a bonus about to be paid of £50,000.
Before taking steps:
Phil makes a personal lump sum contribution of £23,200. This is grossed up by tax relief at source of £5,800, so £29,000 is paid into his pension.
I agree that the foregoing isn’t the easiest to follow, so why not get advice? If you think you are affected and want to know what steps are available to you to avoid paying any more tax than you have to, I will be happy (subject to availability) to talk you through this area of tax planning free of charge by telephone. Just give me a call on 0345 013 6525 and if I can’t deal with it there and then we’ll schedule a time.
The tax year end is a good time to take stock and look at your tax position before the tax year closes. There are opportunities available to many, and in some cases significant tax savings can be achieved.
(Source: Standard Life Technical 2018 – slightly edited)
2017/18 has been a relatively steady year for tax and pension planning. There were no surprises in the Budget, meaning you can continue to benefit from the existing range of tax reliefs and allowances to help save for the future.
This is good news and makes this tax year end very much business as usual. It’s simply a case of reviewing the year to date and identifying where there is still scope to save by maximising unused reliefs and allowances, or even how scope can be created.
The core elements of tax year end planning remain the same:
We’ve created a checklist of our top 10 tax year end opportunities to explore with your clients, together with the key information required to make these a reality.
1. Pension saving at highest rate of relief
2. Keep the pensions annual allowance for high earners
3. Boost SIPP funds now before accessing flexibility
4. Sacrifice bonus for an employer pension contribution
5. Dividend changes and business owners
6. Maximise ISA subscription limits
7. Recover personal allowances and child benefit
8. Take investment profit using CGT annual allowance
9. Cash in bonds to use up PA/starting rate band/ PSA and basic rate band
10. Recycle savings into a more efficient tax wrapper
Only at the end of the tax year do you have all the pieces of the jigsaw. But there are some steps you can take now to get start gathering all the information needed, to be ahead of the game, and give yourself time to put plans in place. And remember, there are less than 5 weeks until the 5th of April.
(Source: Standard Life Technical 2018). I am again indebted to Standard Life technical – in this case their adviser facing article has been adjusted slightly to be more consumer-friendly.
Scottish Widows is removing the exit charge that applies to certain Savings and Investment products. Following a review, they are removing the exit charge on the Savings and Investment products listed below by 23rd October 2017.
Scottish Widows Unit Trust Managers Ltd:
● Scottish Widows Open Ended Investment Company
● Scottish Widows Individual Savings Account
HBOS Investment Fund Managers Ltd:
● Halifax Collective Investment Plan
This will be of potential benefit to many account holders, who can now move their investments to lower cost platforms, and also access a wider range of funds with better track records.
We work with several low-cost platforms for ISA and non-ISA (Unit Trust / OEIC) funds and can help you design an optimum asset allocation and populate it with leading funds from a wide choice, giving you the portfolio you that is designed for you. We don’t force people into categories or into one of a handful of model portfolios – our portfolio design is bespoke.
Here’s a little example. For clients with both ISA and Non-ISA holdings, we design the portfolio and then split it so that the income bearing stocks are in ISA , and the growth stocks (with typically lower dividends) are in non-ISA. This is very effective in mitigating any tax from the non-ISA element, and the growth in the non-ISA element is also usually largely untaxed as as you can carefully use your CGT allowance each year (which otherwise is lost!) You’d be surprised how many high street bank “advisers” and indeed other financial advisers across the country will simply lump your money into the same portfolio across both accounts. We don’t, because to do so is poor advice.
Not only could partial DB transfers offer the best of both worlds to clients, it could also be advantageous to employers and trustees too. Most people with a DB pension will be best advised to stick with it. A DB pension offers the peace of mind of a fixed income for life. It will be too much for most people to contemplate giving up, no matter what level of transfer value is on offer.
But what if the guaranteed income level needed to allow clients to sleep easily knowing that they’re financially secure can be met with only part of their accrued DB promise? Transferring the excess to provide income flexibility when required, or to be passed on efficiently to future generations, could generate a situation where everyone is a winner.
Who might it be right for?
It may be clear cut whether or not partial DB transfers are appropriate for most clients. But there will be some who sit in the ‘grey area’, needing some guarantee but equally attracted to DC and the benefits that freedom and choice can offer. And it’s these clients who will benefit most from seeking a partial transfer.
A guaranteed retirement income may provide peace of mind that the bills will be paid in old age. Giving up this guaranteed, inflation-proofed income for life could be a risk too far. Most simply can’t take on the downside risk of moving to DC and should stick with DB.
But for wealthier clients, worries about paying their bills or running out of money won’t be an issue. A DB income for life may simply mean surplus income and unnecessary tax. A transfer to a modern, flexible DC pension may be a better fit for their needs. The ability to take income and tax free cash from a SIPP at the levels they need, when they need it, may give a more tax efficient income and a larger legacy for loved ones.
The advice framework – and how partial transfers fit in
The FCA rules are clear. An adviser’s starting assumption should be that a DB transfer isn’t suitable. A transfer to DC should only be recommended if it’s clearly in the client’s best interests.
This doesn’t mean it’s safe to leave clients in DB where DC would suit them better. But it gives advisers a useful ‘no transfer’ default for cases in the grey area – and some leeway over where they draw the line.
However, where a partial DB transfer is an option, this changes the advice equation – and can remove any grey area. Although a full transfer may not be appropriate, a partial transfer might meet the client’s needs and aims better than sticking with the full DB pension.
Example – A client with a £40k yearly DB pension may only need a guaranteed income of £24k. A transfer value of £1M is on offer in lieu of the pension. But the client couldn’t sleep at night without their guaranteed £2k a month.
What if a partial transfer was available?
Will schemes offer partial transfers?
Many schemes don’t currently offer the option of a partial DB transfer. It simply wasn’t historically a feature of the DB landscape. But the numbers now offering partial transfers is on the rise.
The barriers holding some DB schemes back from introducing a partial transfer option are the perceived complexity and cost. Legal fees to amend the scheme documents, actuarial fees to develop a transfer basis and the costs of implementing the necessary administrative processes can all be off-putting.
But these are all achievable. If scheme trustees thought about it, they already provide partial transfers every time they receive a pension sharing order. It’s just about industrialising the process. And the payback for all concerned could be worth it.
Clients with DB and DC rights under the same scheme now have a statutory right to transfer their DC rights and leave the DB pension behind (or vice versa). An ‘all or nothing’ transfer ultimatum doesn’t always support the best member outcomes. It’s why the law was changed to allow DB and DC rights to be transferred independently. But there’s currently no statutory right to make a partial transfer of DB rights.
There are some potential legislative obstacles which may prevent a partial DB transfer. For example, the law doesn’t allow for a partial transfer of GMP rights. And scheme specific protection to both tax free cash entitlement and early retirement ages may be affected following a partial transfer. But there are normally ways to plan around these.
If this ‘best of both’ option is the best fit for your client’s needs, ask the question of the DB trustees – does their scheme offer partial transfers? And if not, ‘why not?’ By articulating the win/win result this option can produce, it might just trigger a light bulb moment for the employer/ trustees that opens up the most appropriate option for your client and creates the best advice solution for you.
Source: Standard Life technical consulting 10th May 2017
How pension contributions can help business owners
The dividend tax changes have strengthened the case for business owners taking more of their profits in the form of pension contributions. Many directors of small and medium sized companies face an increased tax bill this year as a result of how dividends are now taxed. And pension contributions could provide the best outcome by cutting their future tax bills.
Dividends have long been preferable to salary or bonus as a way for shareholding directors to extract profits. But that advantage has narrowed for many high earning directors. It reinforces the case for directors taking at least part of their benefits as a pension contribution where possible.
Paying themselves dividends remains a better option than salary. But the gap has narrowed for high earning directors. A director receiving a dividend of £100,000 could be £6,300 worse off under the new rules.
Everyone now gets a £5,000 tax free dividend allowance. Dividends in excess of the allowance will be taxable at 7.5%, 32.5% or 38.1%. Previously, business owners only paid tax on dividends when they took income above the basic rate tax band. That’s because the notional 10% tax credit satisfied the liability for basic rate tax payers. But the changes mean that business owners could now be paying a higher rate of tax on a larger slice of their income.
Tax efficient extraction
Pension contributions remain the most tax efficient way of extracting profits from a business. An employer pension contribution means there’s no employer or employee NI liability – just like dividends. But it’s usually an allowable deduction for corporation tax – like salary.
And of course, under the new pension freedoms, those directors who are over 55 will be able to access it as easily as salary or dividend. With 25% of the pension fund available tax free, it can be very tax efficient – especially if the income from the balance can be taken within the basic rate (but remember, by doing so, the MPAA will be triggered, restricting future funding opportunities).
In reality, many business owners will pay themselves a small salary, typically around £8,000 a year – at this level, no employer or employee NI is due and credits will be earned towards the State pension. They will then take the rest of their annual income needs in the form of dividend, as this route is more tax efficient than taking more salary. But what about the profits they have earned in excess of their day to day living needs?
The table below compares the net benefit ultimately derived from £40,000 of gross profits to a higher rate taxpaying shareholding director this year.
taxed at 20% *
taxed at 40% *
|Corporation tax at 20%||£0||£8,000||£0||£0|
|Income tax||(£14,060)||(£10,400) **||(£6,000)||(£12,000)|
|Net benefit to director||£20,387||£21,600 **||£34,000||£28,000|
* Assumes pension income is taxed after taking 25% tax free cash, and there is no Lifetime Allowance charge.
** Assumes full £5,000 annual dividend allowance has already been used against dividends received in the basic rate band.
Tapered Annual Allowance
Many high earning business owners could see their annual allowance (AA) tapered down to just £10,000. However, by reducing what they take in salary or dividends and paying themselves a larger pension contribution instead could mean they retain their full £40,000 AA.
For example – Amy, 55, runs her own business and pays herself dividends of £150,000 for the 2016/17 tax year. She has no other income. She makes employer contributions of £20,000 into her SIPP.
There are two tests which determine whether the AA is tapered:
Her ‘adjusted income‘ is £170,000 (income + employer pension contribution). As this is £20,000 above the £150,000 cap, it would normally cut her AA by £10,000 (to £30,000). This means any opportunity to increase her funding for this year, or in the future using carry forward from 2016/17, would be limited to a further £10,000.
However, if she cuts her dividends by just over £40,000 her ‘threshold income’ (total income without employer contributions) would be below £110,000, preserving her full £40,000 allowance.
She could pay the corresponding amount into her pension as an employer contribution using carry forward of unused AA from previous tax years. This would not affect her AA for 2016/17 because only employer contributions as part of new salary sacrifice arrangement are used to determine threshold income. A shareholder director making an employer pension contribution rather paying salary or dividend is not salary sacrifice.
As Amy is over 55, she has unrestricted access to the funds in her SIPP. If she made use of the new income flexibilities she would trigger the money purchase annual allowance (MPAA) cutting her future funding to £4,000 a year from April 2017, with no opportunity to use carry forward. However, if she only touches her tax free cash and takes no income she would retain her full AA.
There are some very strong reasons for maximising pension contributions now. Corporation tax rates are set to fall from 20% to 19% from the financial year starting April 2017, with a further planned cut to 17% from April 2020.
Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest.
Business owners who take flexible drawdown income to replace salary or dividends will see their future funding restricted by the MPAA. So they may need to pay now and mop up any unused allowance using carry forward. But remember that dipping into pension savings by only taking tax free cash maintains the full allowance for ongoing funding.
Source: Standard Life technical consulting – February 22 2017
The following measures, which may affect the advice you are providing to your clients, have been removed from the Finance Bill:
Changes which intended to apply in 2017/18
Reduced Money Purchase Annual Allowance (MPAA)
The Money Purchase Annual Allowance (MPAA) will not now be cut from £10,000 to £4,000 at this time. This reduction would have affected those who have accessed their DC pension under the new pension flexibilities and wish to continue paying into their pension. Edit: The MPAA was indeed reduced to £4,000 for 2017-18 after all!
Deemed Domicile Rule Changes
Rules were to be introduced from April 2017 to reduce the number of years non-doms can be resident in the UK before becoming deemed domicile. Currently someone would become deemed domicile in the UK for inheritance tax after they have been resident 17 out of 20 tax years but it had been set to fall to 15 years. It was also intended extend the scope of the deemed domicile rules to also apply to income tax and CGT.
Recalculation of Disproportionate Bond Gains
Measures which would have put an end to chargeable gains on a part surrender of an investment bond have been shelved. From April 2017 HMRC had planned to allow gains which were wholly disproportionate to the investment performance to be recalculated on a just and reasonable basis. This would typically arise where a large part surrender in excess of the 5% allowance is made in the early years of the policy.
Changes which intended to apply in 2018/19
Dividend Allowance Cut
From April 2018, the annual dividend allowance is set to be cut from £5,000 to £2,000. This is no longer part of the current Finance Bill. This would hit small and medium sized business owners who take their profits as a dividend.
What happens next?
While all these changes no longer form part of the condensed Finance Bill it is intended that they will be reconsidered once a new Parliament commences and could form part of the new Government’s first Finance Bill, meaning they may be delayed rather than dropped altogether.
Source – Standard Life
My previous post November 23rd 2016 set out the rules for the tapered annual pension contributions allowance. Many higher earners are getting to grips with this and seeing that their ability to obtain (higher / additional rate) tax relief on pension contributions is severely restricted. This is bonus season, and a recent bonus may push you into this tapering calculation for your allowable pension contributions.
This is the first year of operation and where an individual did not maximum-fund his pension contributions in previous years, they can use up available headroom from the previous three years (after first making maximum contributions in the current tax year). The maximum annual allowances are:
2016/17: (current tax year) £40,000 or as low as £10,000 if subject to tapering
So provided an individual was UK-based AND a member of a UK pension scheme at the time (regardless of whether any contributions were made) in those three previous tax years, if their aggregate gross pension contributions (including employer contributions) were below the annual allowances, then the headroom can be carried forward and used in the current tax year. To do so, one must first use the current year’s, then you may go back up to three previous tax years, using the oldest first. As you can see, after we pass into a new tax year, the oldest of the three years falls away. Therefore, even if you cannot fully fund all of the headroom available, it would be sensible (where funds permit) to fund the current year and then go back and use the remaining allowance from three years ago – 2013/14 as it currently stands.
Give me a call if you have questions or need help with the calculations – 0345 013 6525.
Where carry forward is exhausted, higher earners may wish to look elsewhere for tax efficient long-term investments. These will include ISAs, Venture Capital Trusts (VCTs), (Small) Enterprise investment Schemes (SEIS and EIS), investment bonds (onshore and offshore), maximum investment plans and other vehicles. Not all types of investment are suitable to an individual, so advice is needed when considering them.
I’ll be blogging more about these areas as we approach tax year-end, but since demand is high if you are contemplating making a last minute lump sum contribution into pension I suggest you do so several working days before April 5th, 2017 to ensure properly received and recorded by the pension provider.
Source – Royal London – pensions technical, 2015.
This measure restricts pension tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with an adjusted income of over £150,000 and a threshold income over £110,000.
Since 6 April 2016, individuals who have taxable income for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted. It will be reduced, so that for every £2 of income they have over £150,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.
The maximum reduction will be £30,000, so anyone with income of £210,000 or more will have an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.
However the tapered reduction doesn’t apply to anyone with ‘threshold income’ of no more than £110,000.
Clearly the definitions of the two incomes are crucial to understanding whether someone is affected by the tapered reduction or not.
Both include all taxable income. So this is not restricted to earnings – investment income of all types and benefits in kind such as medical insurance premiums paid by the employer will also be included.
The difference is pretty simple; adjusted income includes all pension contributions (including any employer contributions) while threshold income excludes pension contributions.
Unfortunately, HMRC’s definitions of adjusted and threshold income tend to cause a bit of confusion because they start with something called ‘net income’. A common sense meaning of this would be ‘income after tax’, but it’s not.
Net income in this context is all taxable income less various deductions. The most important (or at least the most common) of these deductions are member contributions paid to an occupational pension scheme, both money purchase and defined benefit, under the net pay arrangement. This is where the sponsoring employer of the pension scheme deducts employee contributions before deducting tax under PAYE.
The other deductions are things like trade losses, share loss relief and gifts to charities. A full list of the deductions can be found at s.23 of the Income Tax Act 2007.
However it all becomes a bit easier if we consider taxable income from a more practical view point.
When someone says ‘I earn £x p.a.’, they don’t usually mean that that’s the amount after the deduction of net pay arrangement contributions. We can therefore assume that when someone has earnings of £160,000 and pays contributions of £20,000 under the net pay arrangement, they’ll state their earnings as £160,000, not £140,000. The £160,000 includes the pension contributions.
This is therefore a good place to start for calculating adjusted income (which includes pension contributions). For threshold income, all member pension contributions need to be deducted and you wouldn’t add in employer contributions.
*for a DB scheme, this would be the pension input amount less any employee contributions.
Phil is a company director and sole shareholder of his own company. His taxable income is £100,000 and he decides to pay an employer contribution of £60,000 (using carry forward to avoid an annual allowance charge).
His adjusted income is therefore £160,000 which would on the face of it trigger a reduction of £5,000 in his annual allowance (half of the £10,000 excess over £150,000).
However his threshold income is only £100,000 and so the tapered reduction does not apply.
To avoid individuals entering into a salary exchange or a flexible remuneration arrangement after 9 July 2015 so they received additional pension contributions but reduce their adjusted or threshold income anti-avoidance rules have been put in place.
The anti-avoidance rules apply if:
If the anti-avoidance rules apply then the income used to calculate the reduction to the annual allowance for that tax year is the one before any adjustments were made.
It’s still possible to carry forward unused annual allowance from previous years to a year where the taper applies.
However the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.
Where an individual flexibly accesses their pension savings they are subject to the money purchase annual allowance.
Individuals who have flexibly accessed their pension savings will continue to have a money purchase annual allowance of £10,000. But where this applies, the alternative annual allowance (normally £30,000), against which their defined benefit savings are tested, will be restricted by the same taper.
This means that those with incomes of £210,000 or more will have an alternative annual allowance of £0 although any available carry forward can be added to this.
If someone is subject to the MPAA as well as tapering, the taper reduces the ‘alternative annual allowance’ which applies to any DB benefits they may have. This is the standard annual allowance less the MPAA of £10,000, so currently the alternative annual allowance is £30,000.
………… (Royal London – July 2015)
The UK Economy: Artemis Fundmanagers’ CEO Peter Saacke gives his opinion on about Sterling’s recent fall and where the UK economy might be headed in 2017.
Please note this is not necessarily DFM’s opinion. We do however expect to see imported inflation fairly soon, and some tough decisions for the Bank of England.
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