In the UK, people retiring rely on income from numerous sources. Such as personal or workplace pensions, state pension, property income, savings and dividends etc. But 1 main concern is most people is about the amount of income tax they pay.
When speaking to people during day to day employment about how they access their respective pensions. They have 2 main concerns which are, how do products work because we don’t teach people how annuities or drawdown works. The other main obstacle is the idea that income accessed from a pension is taxable after the 1st 25% has been initially taken. Any income will then be added onto any other sources of income received during each tax year.
So what tax bands are applicable at present ?
Between 0 to £ 12,570: Nil rate payable.
Between £ 12,570 to £ 50,270: 20% being basic rate
Between £ 50,270 to £ 125,140: 40% being higher rate
Over £ 125,140: 45% additional higher rate.
There is another allowance for banding to be aware is between £ 100,000 to £ 125,140. As you will lose some of your personal allowance. For every £2 of income you lose £ 1 of your personal allowance. Until you reach the threshold of £ 125,140 at which point it is completely gone.
So what steps can I take to reduce my investment tax bill ?
- Maximise your tax-free allowances
Pensions: With regard to investing in a pension you have an annual allowance of £ 60,000 per annum. or lower amount if earning a lower salary. So if you earn £ 30,000 you can contribute up to that salary. As long as you were a member of a recognised pension scheme, you can use any unused allowances from the 3 previous years.
If you are not working you can still contribute although you are limited to £ 2,880 net, which is increased to £ 3,660 per annum through tax-relief added by HMRC.
At present you can build up a pension pot to no limited amount as the LTA (lifetime allowance) previously £ 1,073,100 has been scrapped. Although the amount of tax-free cash is restricted to £ 268,275 (25% of the LTA), but for the vast majority of people they will amass pension pots nowhere near that threshold.
As long as your pensions stay within the pension wrapper, they will remain tax-free and IHT.
ISA: At present you can contribute £ 20,000 across the numerous types of ISA (Individual Saving products) each tax year. ISA’s come in 4 different formats being cash, stocks & Shares, Lifetime, Innovative. So a couple could contribute £ 40,000 as a couple each tax year.
There is no limit of the total amount that can be built up across ISA’s, but any income drawn from the pot in future will remain income tax free.
The only restrictions apply with regard to the Lifetime ISA, in that it has to be used to purchase a property or accessed as a pension from the age of 60. If you access or transfer before age 60, you will be liable for tax charge of 25%.
2. Increasing pension contributions:
As stated above you have an annual allowance up to your salary or £ 60,000 whichever is the highest. But most people will make contributions through payroll, by something called salary sacrifice.
So a simple example: if you are earning £ 50K per annum and you contribute £ 10K into your pension. Your earnings will be classed as 40K, so you will be paying less tax and NI and you are in effect earning a lower salary.
If you be more effective as your earnings income, if you are earning over £ 100K. You could remain as a 40% tax payer instead of being a 60% tax payer. For most people it could be quite simple as they may move from 40% tax bracket down into the 20% tax bracket.
The idea of increasing pension contributions will ultimately come down to affordability. Can you afford to increase so called pension contributions. Beware once contributions are invested, you will not be able to withdraw until the age of 55, although this will increase to age 57, (with effect from 6th April 2028)
If you are going to increase your level of contributions, consider what funds or investments they will be placed in. Do you pick your own funds or are you in a default or lifestyle fund. Plus look at the illustrations for what that pot value may be in future years. Most providers will have online tools and calculators to help you.
3. You can transfer investments to your spouse.
If you do hold any investments outside the ISA or pension tax free wrappers. You may wish to review the idea of putting assets in a spouse’s name, especially if you have already reached thresholds in place.
Simple example: You may have contributed £ 20K into a ISA, but you could also invest that amount of behalf of a spouse.
If a spouse is earning a lower salary of income, you may wish to transfer assets into their name. So they will pay income tax at lower value when they access in future.
No capital gains tax is due or payable when transferred to a spouse, so it could provide to be very tax efficient in later years.
4. What about capital gains ?
At present the annual capital gains tax limit on any gains is £ 3,000 per annum as of April 2024/25 tax year. Which has been reduced dramatically in recent years, as it was £ 6,000 in the previous tax year, and £12,300 prior to that in 2022/2023.
Capital gains could be taxed at 10% (basic rate tax-payer )or 20% (higher rate tax-payer) for most assets, or for property 18% or 28%. So it could be worthwhile to limit the amount of gains applicable or payable in future.
See gov.uk for greater details: https://www.gov.uk/money/capital-gains-tax
Remember ! Capital gains tax is only due once as asset is sold and it related to the difference between the sale price and the initial cost. So a profit or loss could apply.
5. What other tax breaks could I take advantage of ?
You could give donations to a charity through he idea of gifting, such as through gift aid. https://www.justgiving.com
Or you could invest via EIS (Enterprise Investment scheme) or VCT (venture capital trust). These investments may appear complicated for the vast majority of investors but they could be very effective for some wealthy investors as part of their future tax planning.
Greater information can be found at: https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme&ved=2ahUKEwiO273T2dmIAxUvXEEAHZFCC0MQFnoECB4QAQ&usg=AOvVaw3tMG8uDMwNDqBvRvR8bt5P
You may be limited to dealing with certain specialist companies or regulated financial advisers. when investing via these 2 options.
So consider careful planning with regard to your future tax planning and take advantage of the annual allowances available to you. But be aware that allowances have a habit of being amended after a event as a budget or the start of the new tax year.
Ideally you should invest as part of an overall strategy and your attitude to risk. Give careful consideration into why you are investing in the first place. What are your short and long term goals and objectives with regard to your investments.
If you found the above information useful, then check out other posts on pensions, investments, personal finance etc. So you can improve your investment knowledge, on https://moneyminted.co.uk
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