New tax year – Get ahead with your financial planningWhilst we are only just into the new tax year, it is a good opportunity to consider some planning areas to maximise the reliefs and allowances available to you.
Indeed, with the recent changes to the timing for budgets and autumn statements, many are looking to consider their planning earlier in the tax year. Here are our top areas to review now:
Pension ContributionsFor high earners, a significant change came into effect from 6th April 2016, where a tapered annual allowance reduced the available annual contribution limit down from £40,000 gross to £10,000 gross for those with “adjusted” income in excess of £210,000.
The reductions start for those with “adjusted” income over £150,000, so those who leave it too late in the tax year to consider how best to structure their remuneration strategy, could see their ability to contribute reduce significantly or may have to deal with the prospect of an excess contribution.Action: Consider income planning and subsequent pension contribution strategy as soon as possible.
Pension Lifetime Allowance PlanningOver recent years, we have seen the reduction in the Standard Lifetime Allowance (SLA) which is the maximum value of benefits an individual can have in pensions without incurring tax charges on the surplus.
The current level of £1m is the most recent reduction and for those who were affected by the change, HMRC have once again provided a lifetime allowance protection that can be claimed, known as Fixed Protection 2016 (FP16). FP16 maintains the allowance at up to the previously higher SLA of £1.25m, however certain restrictions do apply.Care is needed if FP16 is to be considered as whilst the protection does not have to be claimed straight away, the protection is only valid if no further contributions are made beyond 6th April 2016.
Those with pension benefits through final salary pension schemes should also take note. It is often forgotten that the capitalised value, for SLA purposes, of such benefits is calculated at 20x the gross income payable in retirement. So, for example, someone with a pension payable, now or in the future, of say £25,000 pa gross would see their capital value for calculation purposes set at £500,000. Add this to any other pension benefits and the limit could be closer than imagined.Action: Consider the implications of the changes and whether now or in the future, with investment growth, the value of pension funds could get close to the SLA limit.
Changes to the Taxation of DividendsOver many years investors and small businesses have sought the payment of dividends from their investments and businesses, as a means of extracting wealth in a tax efficient manner.
In the 2016/17 tax year we saw significant changes to the way dividends are taxed meaning for those who have not considered the implications fully and potentially adjusted their planning, an increase in tax was on the way.For each individual, the first £2,000 of dividend income in each tax year will be at a zero rate (previously the first £5,000 of dividend income). Dividend income above this level will be taxed at 7.5% for basic rate taxpayers and 32.5% for higher rate taxpayers.
Action: Whilst it may not be possible to adjust dividend payments, a strategy review for the future could ensure that the remuneration planning is as tax efficient as possible, under this regime.
With ISA contributions and capital gains tax exemptions on the list to consider as well, it is important to take the time to review your overall planning early in the tax year, to maximise the opportunities.