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Thursday, February 20, 2020
When the clock strikes midnight on 5th April, millions of pounds of tax allowances and exemptions will be lost without being used.
We caught up with Simon Davis from The Grove Private Wealth Limited to get his top tips for maximising your allowances, whatever stage of life you are at.
Saving for a deposit
Our conveyancers routinely apply for funds from our clients’ Lifetime ISAs (LISA). Simon explains “if you are between 18 and 40 you can take out a LISA and invest up to £4000 every tax year and the Government will top this up by 25% when you use the funds to buy your first home or at retirement. This means that if you use all of your £4000 annual allowance this year the government will add £1000 on top of any interest, dividends or capital growth that you get on the funds while they are invested
Saving for the future
Simon reminds us that “savings and investments in ISAs are free of income tax and capital gains tax and everyone has an annual allowance of £20,000. If you have used your allowance, make sure that your spouse or partner has used theirs as well. You can also make contributions of up to £4368 into junior ISAs to give the next generation in your family a head start.” Parents or Grand Parents can also contribute to a pension for a child, up to £2,880 per annum, per child. This would generate basic rate tax relief of £720 per annum which is effectively a 20% return on the contribution. If invested then any additional growth would be on top of this basic rate tax relief, making pensions a very attractive savings vehicle for the next generation.
Trying to reduce your income tax
If you have a high income you will not only see your income taxed at a higher rate, but other benefits start to disappear. For anyone earning over £100,000 their personal allowance is reduced by £1 for every £2 of earnings in excess of £100,000. This means that someone earning over £125,000 per annum would have lost their £12,500 personal allowance meaning they will effectively be paying 60% income tax on this portion of their income. Simon suggests that high earners consider reducing their taxable income by making pension contributions or charitable donations. “This can help you get your income below the additional or higher rate band, regain your personal allowance and avoid losing child benefit
Passing on wealth and saving inheritance tax
When advising clients on their Wills we are often asked about inheritance tax planning. Many people are aware of the 7-year rule, but many are unaware that everyone has an annual allowance of £3000 which is exempt from inheritance tax straight away. Simon agrees that “if you are likely to be an inheritance taxpayer it makes sense to fully utilise your annual gifting exemption as well as any unused allowance from the previous tax year. For those with surplus income, there is also the option of using the ‘gifts out of normal income exemption’, although if you are doing this it is a good idea to take advice to make sure that you gift the right amount and that appropriate records are kept.” In certain circumstances, you can still retain access to a predetermined tax-deferred fixed income for life from any gifts made into trust. This is particularly useful if you want to make a gift to family members to save on Inheritance Tax but still require an income.
Tax savings for company owners
Finally, Simon points out that for owners of companies there are additional options for saving tax, both personally and for their company. “If you own a company consider taking dividend income instead of salary. Not only does this avoid NI contributions, but the first £2000 of dividend income you receive each tax year is completely tax-free. The other thing that you can consider is diverting your company’s pre-tax profits into a personal pension. This reduces Corporation Tax, income tax and NICs.”
From speaking with Simon, it seems that no matter what your situation there is at least one thing that you can make sure you have done this tax year. We all know that money doesn’t grow on trees, but a tree can’t grow unless you first plant a seed. Taking action to make what seem like small savings now could reap much greater benefits in the future than you imagine.
Written by Felicity Nelson, Senior Associate and Head of Wills, Probate & Trusts
With Simon Davies, Partner, The Grove Private Wealth
Simon is a partner at The Grove Private Wealth, the Partner Practice of St James's Place Wealth Management.
