End of year tax planning. Could you recoup enough tax to pay for your summer holiday?
We’re now well into January, the festive season is a distant memory and, odds are, your New Year resolutions have fallen by the wayside.
Why not reboot your New Year? Start looking forward to your summer holiday and, while you’re about it, why not get the taxman to pay for it by doing a little end of tax year planning and making use of all available allowances, which could net you thousands in regained tax.
At the time of writing, we’re only a few days away from formally leaving the European Union and thereafter the future is uncertain. At Reeves, we can’t control that, but we can help you with your tax planning. We want to make sure that our clients are using all the tax allowance opportunities that are available to them.
Let’s take a look at how we helped one of our clients, Graham Rouse, save thousands in tax through our expert advice.
Graham earns £100,000 a year and has £100,000 in cash savings. On our advice, Graham is paying £80,000 into his pension fund. This will gain an immediate £20,000, added by HMRC in the form of pension tax relief. Because he’s a higher rate taxpayer, he can also claim back another £10,000. Now, rather than sitting in his bank account, earning a derisory rate of interest, which is taxable, the money in his pension enjoys tax free growth. Also, his pension fund sits outside of his estate for IHT planning, so that if he was to die, his family can inherit it tax-free.
It’s worth pointing out here that it’s not only people such as Graham, who are financially comfortable, who should do some of end of tax year planning to take advantage of allowances. Even somebody who has earned no money in the year can pay £2,880 into their pension and receive £720 off the taxman straightaway. Similarly, somebody earning £10,000 a year or less, perhaps in the run-up to full retirement, can make a pension contribution and get relief, even though they won’t have paid any income tax in the year.
We then advised Graham to pay the remaining £20,000 into his ISA, making full use of the annual allowance. This can grow and earn dividends free from income and capital gains tax.
Glen Moore, who owns his own company, has reached his lifetime allowance for his pension of £1,055,000, so can’t make any more contributions himself. On our advice, his company has made a contribution of £80,000 into the pension scheme of his wife, who is also an employee/director of the company. This is a way of generating extra value in retirement from the business to benefit their family without incurring any additional tax liability. Paying into an employee’s pension is an allowable business expense and can be used to reduce the company’s corporation tax bill.
Graham and Glen have done their end of year tax planning and so have laid the foundations for a prosperous New Year - even if they did break all their resolutions.
These articles are for information only. These articles are based on specific clients and their situation may be different from yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.