The Ultimate 2017/18 Tax Planning Guide
Welcome to the Reeves 2017/18 Tax Planning Guide.
Taxes, as we know, are one of the two great inevitables in life. We all have to pay our taxes. There’s no getting away from that fact. But that doesn’t mean sitting back and taking whatever the taxman throws at us.
Being careful with how you manage your financial affairs can minimise the impact of tax on you, your family and your business. In fact, the Government actually encourages you to make the most of the reliefs and allowances available.
And that’s why we’ve published this guide. It’s a starting point to help you with three core objectives:
- Guide you through the most important areas of taxation
- Show you the steps to take for real results, and
- Highlight the most relevant and valuable resources within this blog
If you’re curious about who created this guide, please read this About Us page to learn more about my firm’s story.
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Okay, ready to get busy? Good, let’s begin…
First, A Word of Caution
Aggressive tax avoidance is the subject of intense media scrutiny and is being targeted by HMRC. It should probably be avoided. However, you can still ensure your own financial well-being by saving tax wherever it’s reasonable to do so.
When considering any tax planning there are four important points to bear in mind.
- The tax effect of a decision, whilst important, is only one factor to take into consideration. The commercial practical and financial implications of the decision are also critical. The tax tail should not wag the investment dog, for example.
- The benefits of careful tax planning can be undone by failing to submit the correct tax information on time, or by not paying your tax liabilities by the due date. In either case, the penalties which HMRC will levy could wipe out any tax savings made. You might find that HMRC is also minded to pay closer attention to your tax affairs in the future!
- Tax rules and rates change regularly. The tax regime is subject to frequent changes so carrying out a regular review of your financial situation is a must. Last year’s tax saving opportunity could be counter-productive this year.
- Plan in advance where possible. It’s more difficult to manage your finances tax-efficiently after the event. Think about the tax implications of plans such as the sale of your business or property before you execute any transaction.
Thursday, 5 April 2018 is the final day of the 2017/18 tax year. If you don’t use certain tax allowances and exemptions by then, they will be lost in relation to the tax year.
Speak to our team of pension specialists and take action sooner rather than later to take full advantage of your tax reliefs and exemptions.
Personal pensions are often known as defined contribution or 'money purchase' schemes. Your employer may offer you one in the form of a workplace pension and add to or match your regular contributions. Whether you invest in a workplace or personal pension, your money will usually be invested in a mixture of assets including shares, bonds and cash.
DIFFERENT TYPES OF PERSONAL PENSION
Stakeholder pensions are a type of defined contribution personal pension with capped charges and low minimum contributions.
Self-invested personal pensions (SIPPs) offer greater flexibility about where you can invest.
The tax advantages of pensions
The most that can be paid into a pension and receive tax relief is the greater of £3,600 or 100% of your earnings. There is also an annual pension tax-free allowance of normally £40,000. So any contributions over that amount will not attract income tax relief, unless you have any unused annual allowance to carry forward from the previous three tax years.
The tax relief means that as a higher rate tax payer looking to invest £8,000 in your personal pension, you would only effectively invest £4,800 of your own money as £3,200 would be added by HMRC as tax relief. Your initial payment would be £6,400, with 20% added by pension tax relief and the other 20% claimed back through the HMRC self-assessment process.
Taking your pension benefits
The money you receive from your pension will depend on a number of factors including the level of contributions over the years and how its investments have performed. When you reach the minimum pension age (currently 55) you may be able to take up to 25% of the money as a tax-free lump sum. The remaining 75% can be taken in several ways. The options include:
- Take it as cash (which is liable to income tax).
- Buy an annuity product that gives a guaranteed income for life (which is also taxable).
- Leave your pension fund invested in a drawdown contract with the potential to take income when you choose.
Each pension provider will have different rules around taking your pension so speak to us or provider to get a clear picture.
Here are the key actions that you should consider:
- Maximise your pension contributions up to the annual tax-free pension allowance of normally £40,000.
- Make use of any unused annual pension allowance available to carry forward from the previous three tax years.
- Make use of any unused annual pension allowance available to carry forward from the previous three tax years.
- Make sure you’re getting tax relief at the appropriate rate if you’re a higher or additional rate taxpayer.
- Consider how to efficiently pass death benefits to your beneficiaries. For example, pension holders can nominate who they wish to receive the benefits in the event of their death by completing an ‘expression of wish’ form. Pension trustees will usually, but aren’t obliged to, take this into account.
Contact us to find out how much you can contribute to your pension.
Further Reading: Pensions
Pension Lifetime Allowance Changes: Could You be Affected?
Government figures show the pension lifetime allowance is catching out an increasing number of pension investors. Are you one of them?
7 Ways to Use Pensions to Pay Less Tax
Want to reduce the income, capital gains and inheritance tax you pay? Here are seven ideas of how use your pension to pay less tax.
Using salary sacrifice for pension contributions
An explainer on how to use salary sacrifice for pension contributions to increase your pension contributions without changing your take home pay.
ISAs (Individual Savings Accounts)
Why invest in a product that has no tax benefits when you can invest in another that offers tax efficient returns? That’s the beauty of ISAs. Each year you can save money without any tax being charged on any interest, growth or dividends earned. If you don’t use your tax-free allowance within a tax year, that’s it. It’s a case of ‘use it or lose it’.
What you can invest in
The investment can be in cash, corporate bonds or shares or a combination of both. Our Reeves Portfolio Management Service is perfect for clients using their ISA allowance every year to build a tax free portfolio. But it is important to remember that what you do invest in an ISA each year will continue to accumulate interest or capital growth tax free for as many years as it remains inside your ISA wrapper.
How much you can invest
In the 2017-18 tax year, the maximum that can be saved per person in an ISA is £20,000.
DIFFERENT TYPES OF ISA
There are currently five types of ISA:
Cash ISAs can include savings in bank and building society accounts and some NS&I (National Savings and Investments) products.
A Help to Buy ISA is designed for people saving to buy a first home. Depending on how much you save, it could provide a maximum bonus of £3,000.
A Junior ISA is a tax-efficient children’s savings account into which you can make contributions on your child’s behalf, subject to an annual allowance. Junior ISAs replaced the Child Trust Fund (CTF), but there is no government payment into Junior ISAs.
Stocks and Shares ISAs can include unit trusts, investment trusts, shares in companies, and corporate bonds. However, non-ISA shares that you already own cannot be transferred to an ISA.
Innovative Finance ISAs are a recent arrival. Innovative finance ISAs can include peer-to-peer loans (loans that you provide to other people or businesses without using a bank). However, pre-existing peer-to-peer loans cannot be transferred to an ISA.
How the ISA’s tax-free wrapper works
An ISA is a tax-free wrapper which can be put around a host of investment products that would not normally be tax free. For example, there are thousands of collective funds (unit trusts, OEICs, corporate bonds and investment trusts) that can sit within your ISA and provide tax efficient returns. The same funds outside of an ISA and might be subject to tax on any dividends or capital gains. Certain investment returns may be received by the ISA Manager with tax credits or after-tax deductions which cannot be reclaimed.
It’s important to consider all your options before taking action, but the following are the key areas that you should consider:
- Use your full annual ISA allowance if you can - you can’t carry it into the next tax year.
- Transfer existing investments which are subject to tax on any growth into a tax-efficient ISA.
- Use your annual ISA limit to accumulate a tax-protected investment portfolio.
- If you and your partner fully utilise your allowances for the 2017/18 tax year, you will create a £40,000 tax efficient fund.
Further Reading: ISAs
How to keep the taxman’s hands off your savings
Here’s how to keep the taxman’s hands off your savings. But you’ll have to be quick because your annual isa allowance will expire on 5th April.
One simple step that will transform your savings growth
Have you got cash invested an ISA account? Frustrated by low returns? Here's one simple step that will allow you to improve ISA returns
How to Retire at 55: 21 Things to Help You Get There
Fed up of the daily grind? Dream of taking a long holiday? If you want to know how to retire at 55 these 21 tips that will help you get there.
Although it is primarily associated with money you earn from employment, income tax can also be applied to: some state benefits; pensions; annuities; rental income from property; employee benefits; dividends; savings (above your annual allowance); and income from trusts.
Current income tax bands for 2017/18• Personal allowance: Up to £11,500, tax rate 0%• Basic rate: £11,501 to £45,000, tax rate 20%• Higher rate: £45,001 to £150,000, tax rate 40%• Additional rate: Over £150,000, tax rate 45%
Personal savings allowance
In April 2016, the Treasury introduced a new personal savings allowance. Basic rate tax payers can now earn up to £1,000 interest in their savings account each tax year without having to pay tax and higher-rate tax payers can earn up to £500 of interest. Those in the highest tax bracket, earning over £150,000 a year, do not benefit from the allowance.
When it comes to dividends from shares-based investments, you have a dividend allowance and so won’t pay tax on the first £5,000 of dividends that you get in any tax year. If you exceed this allowance, the tax you pay on the excess depends on your income tax band.
Income tax on savings accounts
Tax is no longer deducted at source by your building society or bank. Interest is now paid to you gross and if this interest exceeds your yearly allowance, you will need to inform HMRC in order to pay any tax due. They will normally do this by changing your tax code for the following year so that you can pay over the course of the year and not in a single lump sum. You’ll pay tax on any interest over the yearly allowance at your usual rate of income tax – that is 20% for a basic rate taxpayer, 40% for higher rate and 45% for those in the additional rate band (with an annual taxable income over £150,000).
Income tax on dividends
You may be subject to income tax on the dividends paid from companies you have shares in. Your tax charge will depend on the level of dividend income you receive within the tax year, with the first £5,000 usually free of income tax, and on whether you are in the basic, higher or additional rate tax band. The rates currently applied to these bands are 7.5%, 32.5% and 38.1% respectively.
Your personal allowance
You can use your personal allowance (up to £11,500) to earn interest tax-free if you haven’t used it up on your wages, pension or other income. If you have no other income you may able to receive up to £5,000 in interest tax-free. This is your starting rate for savings. However, you will not be eligible for this if your other income is £16,000 or more.
Income tax can be applied widely – not just to your salary. Here are some of the options which can help you reduce your income tax bill:
- Make a pension contribution to reduce your taxable income.
- Escape the child benefit tax charge by making a pension contribution to reduce your income below the £50,000 threshold.
- Move funds to your spouse/civil partner so that the income is earned in their name.
- Review strategies to invest for capital growth instead of income.
One other option - if you are over 55, have a pension and have no other income, consider taking up to your £11,500 personal allowance, as this is in effect tax free income!
Further Reading: Income Tax
Annuities: Pros and Cons of Fixing your Retirement Income
Almost everyone now has the freedom to choose how to access their pension. This article presents the pros and cons of annuities.
3 Reasons For and Against Taking a Tax-Free Lump Sum From Your Pension
Taking a big tax-free lump sum from your pension on retirement might not always be the right thing to do. Here’s the argument for and against.
Pension Drawdown Rules: 25 Questions Answered
Pension drawdown rules are complex. So, to bring some clarity, here are the answers to 25 of the most common questions asked by investors.
Capital gains tax (CGT)
CGT is a tax charge when you dispose of an asset that has increased in value. You don’t necessarily have to sell the asset, because CGT can also apply to gifts. The tax is on the profit you make – the gain – and not on the total amount you receive for the asset. Some assets don’t attract the tax and you don’t pay it if all the gains are under your annual tax-free allowance.
How CGT works
CGT is a tax on the profit when you dispose of an asset that has increased in value. The tax only applies to the gain and you don’t have to pay anything if all your gains in a year are below your tax-free allowance which currently stands at £11,100 in 2016-17. There are also some exemptions to CGT, for instance you don’t usually pay tax on gifts to your spouse, civil partner or a charity.
Currently those who pay basic-rate income tax will pay CGT at 10% and higher-rate taxpayers will be charged CGT at 20% or 28% if gains are from residential property (for basic rate taxpayers the charge is 18%).
With CGT there is some leeway too. You might have profited handsomely by selling an antique you picked up at auction, but your CGT liability will be based only on the profit above any unused part of your annual CGT allowance.
Options to reduce CGT There are ways to reduce a CGT liability. We would be happy to give you more information about the options shown below:
- Make the most of your £11,100 annual CGT exemption.
- A reported loss on a chargeable asset can be deducted from the capital gains you made in the same tax year.
- Pay less tax by using losses from previous years to reduce this year’s gains.• Consider making a pension contribution to bring your CGT liability down from 20% to the 10% applied to basic rate tax payers.
- Use the ‘Bed and ISA’ or ‘Bed and SIPP (Self-invested Personal Pension)’ planning to realise gains up to the annual exemption by selling assets and then immediately buying them back within an ISA or SIPP.
Pro-Tip: Many clients find themselves with assets that have made significant gains. You can transfer assets to a spouse without an CGT and then use both CGT allowances to offset the tax. If done correctly, you can sell an asset with up to £22,200 with no taxable gains. This particularly useful for second properties and shares.
Further Reading: Capital Gains Tax
Buy to Let or Pension? Making the right choice.
Should you invest your money into buy to let or pension? This article discusses taxes relevant to buy to let and how they affect retirement saving.
How to Beat Buy-to-Let Taxes
Buy-to-let is no longer a tax-efficient investment. Find out the latest opportunities for using the tax benefits of your pension to invest in property.
Inheritance tax (IHT)
IHT is a tax on the estate (the property, money and possessions) of someone who dies. If your taxable estate is worth more than £325,000, you should think about IHT planning. When you die, your estate could face a tax bill that your loved ones will have to pay. By planning ahead, you could make that less of an issue for them, either by acting to reduce your tax bill or by setting up a way for them to pay it easily.
IHT can be payable on the value of your assets when you die. It covers your estate, which can include: your house; savings and investments; jewellery; cars; art; other properties, including holiday homes abroad; and payouts from life insurance policies. The level of IHT your estate will pay will depend on the amount your taxable estate is worth and the tax allowances in place at the time.
The IHT threshold
An IHT charge only applies if the value of the estate is above the IHT threshold – which is currently £325,000. This is often referred to as the ‘nil rate band’. You will not pay any IHT if you leave everything to your spouse or civil partner, a charity or sports club. These are just some examples of exemptions.
If you’re married or in a civil partnership and your estate is worth less than £325,000, the unused percentage can be added to your partner’s threshold on their death. This means the threshold can be as much as £650,000.
IHT and the next generation
When the inheritors are the children rather than the spouse, on the death of both parents a potential IHT charge may apply. The inheritors will pay IHT of 40% of anything over the threshold. However, as we previously established in relation to unused thresholds, the potential maximum nil rate band available to offset against their combined assets will be £650,000.
Gifts and IHT
You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year - but only for one year. You can also give as many gifts of up to £250 per person as you want during the tax year so long as you haven’t used another exemption on the same person.
IHT changes introduced this tax year
From 6 April 2017, you get a larger IHT threshold if you give away your home to your children or grandchildren. A new residence allowance (the residence nil rate band or ‘RNRB’) was announced in the 2016 Budget. The allowance is set to increase by £25,000 each year, from £100,000 in April 2017 to £175,000 per person by 2020/21. This is in addition to the main nil-rate band.
There are several ways to reduce an IHT liability. Options to reduce IHT include:
- Make lifetime gifts to reduce your taxable estate.
- Use the annual exemption, small gifts and regular gifts from income.
- Plan for the new residence nil rate band taking effect from April 2017.
- Consider using trust for generation inheritance tax planning.
Further Reading: Inheritance Tax
How to Protect Your Wealth: A 5-Step Plan
If you want to know how to protect your wealth, here’s a simple 5-step plan to make sure your assets are preserved for your children.
How to Use Final Salary Pension Transfer to Reduce Inheritance Tax Liability
Final salary pension transfers can create a significant family asset that can be passed down the generations without incurring any inheritance tax.
What happens to your pension when you die?
One thing is for sure is that the new rules since April 2015 now make it possible to pass pensions on to loved ones in a more tax-efficient manner.
The content is based on our understanding of current tax legislation. Tax benefits are subject to change, interpretation, and depend on the individuals’ circumstance. We cannot accept liability for any personal loss which could arise from the information shown in the following pages. The information was correct, to the best of our understanding, at the time of original publication but may have changed since that date and may not be correct and up to date. Before any action is taken, the current position should be ascertained and where appropriate, advice obtained.