The new year is traditionally a time when people set themselves goals for the next 12 months. Tilney has put together a checklist to help you prepare both for the end of the tax year and for the future more generally.
1. Pensions remain a priority
It has been almost two years since the transformational pension freedoms were introduced. The key changes can be summarised as follows:
- Flexi-access drawdown, allowing you to take what you want from your pension with the first 25% tax free;
- Uncrystallised Funds Pension Lump Sum, allowing you to take out chunks of pension as and when with 25% of each withdrawal tax free;
- The changes to the tax of pension death benefits have transformed pensions into a family wealth preservation vehicle.
Reviewing pension arrangements is key as it allows you to consider the changes and how they may impact you. A number of older style plans, with big name providers, may not allow for the pension freedoms and it may be that a transfer to a more flexible option is appropriate. Pension nominations should also be reviewed, ideally on an annual basis to check that they are up to date.
The pension Lifetime Allowance (LTA) has now reduced to £1 million. Those who wish to protect the previous £1.25 million LTA must cease to accrue any further pension benefits and can register for Individual and Fixed Protection 2016, provided they have not (personally or otherwise) made contributions to ANY scheme. Individuals with a projected defined benefit pension of £50,000, or more, or those with larger personal arrangements should review their situation as a matter of urgency.
2. Use your ISA allowance
ISAs don't have the upfront tax reliefs that pensions do, but they do have considerable flexibility as investments can be withdrawn at any time without a tax hit on the way out. The ISA allowance is currently £15,240 per person, increasing to £20,000 in the 2017/18 tax year and they can now be inherited by a spouse or civil partner without losing the tax benefits.
With interest rates continuing at historic lows and the introduction of the personal savings allowance, now may also be the time to consider switching funds from Cash ISAs to Investment ISAs. In a recent article for the Journal of the Law Society of Scotland Tilney explores this idea a little further.
3. Dividend allowance
The Dividend Allowance was introduced in April 2016 and means that the first £5,000 of dividends received are taxed at 0%. It is important to note that the first £5,000 are not tax-free, rather taxed at 0% which means they are still counted in order to determine which level of taxpayer you are.
The winners from the Dividend Allowance are higher and additional-rate taxpayers who are within the £5,000 allowance. The losers are the basic-rate taxpayers with dividends in excess of £5,000. There is a tipping point for higher and additional-rate tax payers which is reached when dividends hit £21,660 and £25,400 respectively.
4. Make use of your capital gains allowance – the forgotten allowance!
If investments are owned outside of tax free-wrappers (ISAs and pensions), then you have an £11,100 allowance before you pay Capital Gains Tax (CGT). Investments only become assessable to CGT when a disposal event occurs, which could be when they are sold or transferred to anyone other than a spouse. Unless this takes place, the annual allowance is not used and it cannot be carried forward to future years – effectively a valuable benefit lost. As a result, many investors are hit with sizeable CGT bills when they eventually dispose of their assets.
With ongoing planning, however, some or all of a portfolio can be sold to fully use an individual’s annual CGT allowance – without ever creating a tax liability. The benefit being that upon reinvestment, the base cost used in the CGT calculation will essentially be reset to a new higher level, thereby reducing potential CGT liabilities in the future.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.This article does not constitute personal advice. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. If you are in any doubt as to the suitability of an investment, please contact one of our advisers. Past performance is not a reliable indicator of future returns. Please note we do not provide tax advice.
If you have any questions or would like further information please contact Stephen Parker or Ross Young at Tilney on 0333 014 5429 or by email to email@example.com