24th November 2015 at 1:34pm
Being ‘savvy’ with tax is one of the most important factors which can help you make the most of your savings.
We know it can be a tricky area so we thought it would be helpful to pull together five ‘tax smart’ ideas that could be well worth considering and also some up and coming things to think about.
- ISA to pension:If you’re still working and have money sitting in an ISA, consider moving it into your pension.
- In the ISA, it’s inside your estate and liable for inheritance tax at 40% if you die. If it’s in your pension, it’s outside your estate and, in some circumstances, can be passed on to your family income tax free.
- You’ll also benefit from the tax relief top-up from the government worth 25% of the amount you pay in. For example, if save £20,000 into a pension, that’ll be topped up by a further £5,000.
- The tax treatment of investments within an ISA and pension is the same but when you come to take the benefits out, pensions can be more beneficial in many circumstances. It depends on which income tax bracket you are in when you pay in and when you take the money out.
- Pension nomination – When is the last time you reviewed your death benefit instructions?If you are a member of a pension scheme, you can nominate whoever you want to receive the benefits in the event of your death. With the pension changes last April in many circumstances these benefits are tax-free!However, you need to make sure that your written instructions to the pension scheme are up-to-date to get the most tax-efficient outcome for you and your family.
- Junior ISA:As our thoughts turn to Christmas, have you thought about alternatives to the usual presents like socks and perfume? If you have grandchildren under the age of 18, you could put money into their Junior ISA (JISA) if they have one.It can’t be touched until they reach age 18, at which point they can take the money or convert it to an adult ISA.
The current limit is £4,080 a year and with all gains free of tax this could build up over time to a pot of money they could use as a deposit on their first flat, towards university fees, or anything they choose.
If you pay in money regularly, these payments could qualify for the gifts out of excess income exemption for inheritance tax purposes.
- Fund your loved ones:You may have chosen to stop funding your own pension because you’ve retired, but have you considered funding pensions for your loved ones?
- Paying into a pension for your spouse or civil partner will probably mean that as a couple, you’ll pay less tax between you as you take advantage of both your personal allowances and basic rate tax brackets.
- Your payments still benefit from basic rate tax relief so 25% of what you pay in is added to by the government.
- And you can pay in up to the higher of 100% of their earnings and £3,600.
- Again making regular payments could qualify for the gifts out of excess income exemption and could reduce any inheritance tax due.
- Make the most of the tax year:We’ve only a few months left of the 2014-15 tax year so why wait to do all your tax year planning until just before the April deadline? Remember some allowances can only be used in a particular tax year so once that tax year is passed, that allowance is lost.Give yourself time to plan the best point to invest and make sure you use all your tax allowances to make the most of tax allowances, not only for you but for your family too.
April 2016 changes
Whether or not you take professional advice, there are a few things coming up which it’s worth being aware of. April 2016 will see a number of changes which will impact on your tax affairs. We’ve pulled out some of the highlights here:
- The tax treatment of dividends is changing with the rates being applied higher in some cases.
- The government is introducing a tapered annual allowance on pensions from 6 April 2016 which will affect those with income above £150,000. If this applies to you, it could reduce your pension annual allowance by as much as 75%, down from £40,000 to £10,000. There are opportunities left this tax year to maximise your pension before this reduction kicks in.
- The overall Lifetime Allowance available for pensions is reducing from £1.25M down to £1M – but there may be ways to protect against this reduction.
- The pensions death tax rate for individuals above age 75 is changing from 45% to the marginal rate of whoever the payment.
The tax factor
Tax will always be a fact of life whatever stage you’re at. But it’s well worth taking stock and looking at what might be the most tax-efficient options not only for you, but for any legacy you hope to leave behind too.
The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future.
The information here is based on our understanding in November 2015. Your personal circumstances also have an impact on tax treatment.