Tax planning means keeping more of your own money
It won’t come as a surprise to most people to be told that good tax planning can help you hang on to more of your hard-earned money.
But many people don’t realise just how much money this can be.
We saved one client, Richard, tens of thousands of pounds in tax by advising him to apply for the lifetime allowance individual protection. This is a reasonably obscure piece of tax regulation and even though Richard, 55, is financially astute and well-informed, he hadn’t been aware of it.
In summary, over the past seven years the amount of money you can have in your pension pot and still enjoy its tax advantages has been reduced to £1,055,000.However, for the people who had more than this in their pots, there are opportunities to apply for some types of protection. If certain conditions apply, you can have the old limit of £1.25m to compensate people with big pension pots for the reduction. In reviewing Richard's position, we found he was eligible for this protection and a huge tax saving.
Another client is Antony, who received an inheritance and was unsure how best to invest it. He knew something about pensions but, like most people, regarded them purely as a retirement savings vehicle, and not also as an extremely powerful tax efficiency tool.
We advised Antony to pay his inheritance of £32,000 into a pension scheme and, as a standard rate tax payer, he immediately received a 20% tax relief of £8,000. This was added to his pension pot as soon as the £32,000 was paid in.
To get an £8,000 return on £32,000 through any other sort of investment vehicle would take a few years. So, if you have assets, make sure that you're using your pension to maximise their value and remember, this is money you can access from the age of 55 without losing any tax benefits. Antony is 53, so he only has to wait two years before he can take advantage of his enhanced inheritance.
Daniel also had money to invest. He’s a director with his own business and had accumulated £100,000 of cash within the business and wanted to invest it. Again, we advised him to pay the money into his pension pot, which he could do by using previous years' unused allowances.
If Daniel was a higher rate tax payer, his tax relief would have been 40%, meaning the taxman added £40,000 to his pension pot. But in his case he paid the pension contributions direct from his business. The payment into his pension from his business can be classed as an employer's contribution, which can be set against his annual corporation tax bill. With the corporation tax rate currently standing at 19%, this saved him another £19,000.
He has therefore withdrawn a substantial amount of benefits from the business without paying income tax, national insurance or corporation tax.
Remember, by planning ahead and taking advice you can minimise the amount of tax you pay and maximise the amount of hard-earned income that you retain for the benefit of yourself and your family.
Please note: This article has been published with the use of a fictional character to outline a case study. The client examples in this article pertain to their individual circumstance and objectives and are to demonstrate the advantages of good tax planning only. No content in this article constitutes advice and is the opinion of Reeves Independent only and should not be acted upon. If you are interested in any of the ideas in this article then seek independent advice before taking action.