Tax Planning

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Tax Planning

Tax planning is important, as it helps to ensure that you are paying the right amount of tax, but effective tax planning can also reduce the amount that you pay in taxes – quite legitimately. This can be done in a variety of ways, often starting with simply ensuring that you are fully using your normal allowances, but there are other ways that effective tax planning can help to save you money too.

Tax Planning is a vast topic, and can cover means with which to control and often lower the amount of money you will be giving to HMRC as a result of the following taxes:

Income Tax

The tax that you pay on your normal Earned Income. This can take various forms, and can be through your employment, through self-employment, through rental income or just through other regular income that you enjoy throughout the year. A UK resident individual is liable to pay income tax on their worldwide earnings, so even income earned in other countries is likely to need to be declared, and to have tax paid upon it to HMRC.

Capital Gains Tax

The tax that you pay when you realise one-off gains. This is taxed differently to regular income, and might include the gain you make from the sale of a second property, gains on most investments, or even the sale of a precious painting. All of the above need to be declared on your Self-Assessment form each year and tax will be calculated on those gains.

Pensions Taxes

There is no limit on the value of pension savings that can be accrued by an individual. However, if they exceed the lifetime allowance when they take their pension the amount in excess of the lifetime allowance will be subject to the Lifetime Allowance Charge.

The Lifetime Allowance was originally introduced on 6 April 2006 (A-Day) and is reviewed each year. It was originally set at £1m, and is currently £1,073,100 since 6th April 2020.

Lifetime Allowance Key facts:

  • The lifetime allowance is the maximum value of a pension that can be taken from a registered pension scheme without being subject to the Lifetime Allowance Charge.
  • Benefits are only tested against the Lifetime Allowance when one of several specific events occurs.
  • Under certain circumstances it may be possible to protect benefits in excess of the lifetime allowance.
  • Since 6 April 2017 the lifetime allowance increases in line with the Consumer Prices Index.
  • The lifetime allowance charge applies if benefits exceed the lifetime allowance.

There is a cap on the amount of money that can be invested into a pension in respect of any given tax year, known as the Annual Allowance. This is based upon pension contributions from all sources including the individual, their employer or a 3rd party.  

Contributions can be paid into a pension and tax relief gained on those contributions up to the greater of £3,600 or 100% of Relevant UK, subject to the Annual Allowance limit.

Anyone whose pension receives in excess of the Annual Allowance will be subject to an Annual Allowance Tax Charge, which is levied at the member’s marginal rate of tax and usually paid through the member’s Self-Assessment tax return.

The annual allowance has changed several times since it was introduced in 2006 and is £40,000 currently.

Annual Allowance Key Facts:

  • Annual allowance is based on pension input periods.
  • Pension input periods are now aligned with tax years.
  • Annual allowance is currently £40,000.
  • Any contributions over the annual allowance available attract a tax charge.
  • A reduced annual allowance could apply if the money purchase annual allowance or tapered annual allowance has been triggered. See Tapered Annual Allowance

The Tapered Annual Allowance was introduced on 6th April 2016 in an attempt to control the cost of pensions tax relief and help make sure it is fair and affordable. From the date of its introduction a reduced annual allowance may apply to all pension savings by or on behalf of a member, depending on their level of taxable income within the tax year.

It is designed to reduce the Annual Allowance for people on higher incomes, and has the effect of further limiting what they can invest into their pensions each year.

The calculation involves an assessment of an individual’s “Threshold Income” and “Adjusted Income”, and for anyone whose pension is receiving contributions and it is extremely important that anyone who is earning in excess of £200,000 seeks advice to ensure their individual circumstances do not render them subject to the Tapered Annual Allowance.

The maximum reduction to an individual’s Annual Allowance of £40,000 under the Tapered Annual Allowance is £36,000, meaning that anyone with an income of £312,000 or more has a reduced annual allowance of £4,000.

People with high income caught by the restriction may have to reduce the contributions paid by them and/or their employer or an annual allowance charge will apply.

However, the tapered reduction doesn’t apply to anyone with ‘threshold income’ of no more than £200,000.

The Money Purchase Annual Allowance (MPAA) becomes applicable to anyone crystallising and taking income from their pension.

Once income benefits have been paid (i.e. any amount in excess of the tax free cash sum) the amount that person can pay into their money purchase pension will become subject to the MPAA, limiting the amount that they can contribute.

The limit was reduced from £10,000 to its current limit of £4,000 in 2017, and any contributions received into a pension scheme subject to the MPAA in excess of this allowance is subject to a tax charge.

Inheritance Tax

The tax due to be paid on the value of your estate when you die. Upon death, the value of all of your assets are added together to see if they exceed the Nil Rate Threshold, and if they do tax will be due. There are various allowances and exceptions, but it is essential that you plan for Inheritance Tax before you die. Effective planning can often save an estate quite large amounts of tax if sufficient time is given to do so. These savings can be achieved through the use of gifting assets, through the use of Trusts, and through effecting life cover to insure any amount otherwise unattainable.

  • Understanding and using gifting allowances most efficiently
  • Ensuring that Wills are appropriate and up to date to reflect your wishes
  • Using Trusts if/where appropriate
    • to direct assets to specific named individuals
    • to actively reduce your IHT liability
    • to retain “income” and still make gifts