Old Mutual Global Investors has changed its branding to Merian Global Investors
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.
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
M&G Feeder of Property Portfolio Fund will lift its current suspension of trading from 12 noon Friday November 4th, 2016. Trades can be placed up to 24 hours before that, for a November 4th trade date.
The fund of course feeds M&G Property Portfolio.
It appears the main property fund which remains suspended at the current date is Aviva Property Trust (formerly Norwich Union Property Trust).
The following property funds will resume dealing for the valuation point on the dates stated below.
Threadneedle UK Property Authorised Trust (Feeder) – Monday 26 September 2016
Henderson UK Property PAIF Feeder – Friday 14 October 2016
Standard Life UK Real Estate Feeder – Monday 17 October 2016
The following UK property funds are still suspended:
Aviva Investors Property Trust
M&G Feeder of Property Portfolio
And yet this appears to be a watershed for many. Pension funding is possibly being switched off due to approaching or reaching the LTA without a thought. But such drastic steps should only be taken if there is a better financial alternative.
Of course, contributions made by those with enhanced or fixed protection would result in forfeiture, and so these clients would need more careful attention of the pros and cons before re-starting any funding.
But for everyone else rapidly approaching the £1 million – should they ‘limit’ themselves or make ‘allowance’ for more funding?
Let’s look at busting five common myths that may be contributing to the perception that continued funding above the LTA is always ‘bad’.
The key word is ‘allowance’. It is not a ‘limit’ to funding as some seem to think.
There’s nothing to prevent individuals from continuing to pay in – they still have an annual allowance available (£40,000 if not reduced by the tapering for high earners), allowing them (or their employer) to make contributions and get tax relief at their highest marginal rates. The LTA is not a barrier to pension saving or the growth on the investment, it’s the point where you have to look at what the likely tax treatment of this additional fund will ultimately mean. In this way it is no different to any other allowance such as the personal income tax allowance, annual capital gains tax allowance or the new dividend allowance – once breached, tax will be applied.
Of equal importance for all employees, if funding is stopped, there may be no alternative form of remuneration on offer to replace the employer pension contribution. This can considerably strengthen the argument to carry on funding.
Remember where an employer does offer alternative remuneration this will be fully taxable and the amount available to invest will have suffered income tax and NI.
When individuals hit the LTA with their fund… nothing happens. There’s no immediate penalty, the pensions police do not coming knocking at the door. Your client just has a fund greater than the amount the allowance protects. The tax charge is only incurred when benefits are crystallised, such as when the fund is designated for drawdown.
The charge only starts to bite when there’s not enough LTA to cover the fund that is being crystallised. Benefits are tested when they vest, a process referred to as crystallisation. Each time the individual crystallises some of their pension a percentage of the LTA is used, but the charge itself only comes into play when there’s no longer have enough LTA available to cover the amount being crystallised.
So by phasing retirement, only crystallising enough funds as are needed each year, means that the timing of the LTA charge can be managed, at least up to the age of 75 (at which point uncrystallised funds will be tested along with any investment growth on crystallised funds). When are funds over the allowance are going to be accessed – will that be during their own lifetime or after their death? These considerations will help to predict the potential tax charge on excess funds.
The charge is often expressed as 55%, but that is only payable if the whole of the chargeable amount is taken as a lump sum. If the individual moves it to their drawdown pot only 25% will be deducted (remember there is no tax free cash element). This would be beneficial if the income tax then applied when withdrawing an income is less than 40%, which will be the case for many clients in retirement who are able to control the level of their taxable income from effective management of tax allowances.
Will it even be the client that’ll be drawing the money? Because…
There is no 2nd LTA test on death for crystallised funds. So if the client dies before age 75 their beneficiaries will be able to inherit the pot without any further lifetime allowance charges. And of course, income they take will be tax free – so the only charge incurred was the 25% LTA charge when it was originally put into drawdown.
If the client dies after age 75 then the beneficiaries would pay income tax at their own rates on amounts drawn. So depending on their other income, this could potentially be only subject to basic rate tax, or even covered by their own personal allowance.
Bearing in mind these points, when might it make sense for your clients to continue paying into their pensions above the LTA? One key factor will be whether your client is in a workplace pension and whether there is any alternative remuneration/reward being offered.
If a contribution is coming from the employer then the cost to the employee is nil. If the individual is paying the contributions themselves, then what is the cost to them? What level of tax relief does the contribution attract? And does paying a personal contribution gain a matching employer payment?
Getting an employer contribution would seem the most beneficial – no cost to the individual and a taxed benefit is better than no benefit at all (assuming the employer contribution can’t be converted into extra salary).
Another key factor will be whether your client can get higher tax relief on contributions paid in than will be deducted when benefits (retirement income/death benefits) are paid out. If the contribution all gets 40% relief going in, but coming out is subject to the 25% LTA charge and then basic rate tax only, then the return is the same as if it had gone into an ISA. And given that headline tax rates are only part of the story, with effective tax rates taking the overall percentage lower, the actual cost of withdrawing the money could be a lot lower.
A pension income for the member is only part of the story. Funds within a pension also benefit from the fact that:
Ultimately, having a fund approaching the lifetime allowance doesn’t mean that pension saving has to cease. A considered approach can show that there may still be reasons to continue funding depending on the client’s circumstances. And remember from April 2018 the LTA will become inflation linked so it won’t remain £1M forever.
(courtesy: Standard Life technical consulting – July 2016)
Following the EU referendum result the fund has seen an increase in outflows. In order to protect the interests of all investors, Standard Life has decided to suspend the fund. The suspension will cease as soon as practicable. Standard Life will review the suspension at least every 28 days.
Policyholders will be notified and further updates will follow.
Aviva has been experiencing higher than usual requests to sell units in the fund. In order to protect the interests of all investors, Aviva has suspended the fund until further notice.
Policyholders will be notified and further updates will follow.
George Osborne’s Autumn Budget Statement did not contain any major shocks this time around ( a relief for us advisers for a change), but there is still plenty to take on board. The following summary is reproduced with kind permission of Scottish Widows:
Whilst only minor changes affecting the financial services industry were announced in the Autumn Statement the key changes for 2016/2017 set out by The Chancellor previously will still apply. The details and opportunities for financial planning advice are outlined below.
There will be a six month delay in the scheduled increases in the minimum contributions rates for automatic enrolment. This will bring the increases in line with the tax year. The first increase will apply from 6 April 2018. The second increase will apply from 6 April 2019.
Higher earners tapered annual allowance
Pension input periods
Lifetime allowance (LTA)
Pension tax relief reform
Extension of Freedom and Choice agenda to existing annuitants
Lump sum death benefits
Personal allowance and higher rate threshold
TAX EFFICIENT INVESTMENTS
Personal savings allowance
INHERITANCE TAX (IHT) AND TRUSTS
Drawdown funds and IHT
STATE BENEFITS, TAX CREDITS AND THE MINIMUM WAGE
Social care reforms
National minimum wage
** Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the July 2015 Budget and November 2015 Autumn Statement which may change before becoming law.
– Scottish Widows
The First State funds listed below have changed their name by dropping the words “First State” and inserting “Stewart Investors”, (i.e. First State Asia Pacific Leaders becomes Stewart investors Asia Pacific Leaders, etc.):
Earlier this year First State announced some changes to the structure of the First State Stewart (FSS) team which manages a number of their equity funds. These changes have seen the FSS team split to form two new teams; one primarily based in Hong Kong and the other primarily in Edinburgh. The Edinburgh team has become an investment division in its own right and rebranded Stewart Investors. Stewart Investors is a trading name of First State Investments (UK) Limited, which remains responsible for the funds
The changes apply across all investment platforms and personal pension contracts. The new fund names will appear on your valuations, statements and any other correspondence you receive. The fund objectives, risk profiles and Annual Management Charges have not changed.
The listed funds are very popular and are to be found on nearly all investment and SIPP platforms, and there are also insured pension fund versions.
Please call us for further information: 0345 013 6525.
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