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Tax year end is a great opportunity to sit down with clients and take stock of their existing planning. Beyond topping up Isa subscriptions, what other tax year end discussions should advisers consider having with their clients?
While not exhaustive, this article will look at some of the key considerations.
The tax year end is also traditionally the time when many employees receive their annual bonuses. The bonus declaration is often the final piece of the remuneration jigsaw. This leads to a spike in income around March. So what do advisers need to consider once they are aware of their client’s income and bonus?
Pension funding changes and reductions in the lifetime allowance have meant the tax year end has taken on even greater significance for retirement planning.
Once total earnings for the year are known, it is possible to look at any potential for further pension contributions. Maximising pension contributions by utilising carry-forward of unused annual allowance from the previous three years is set to become a staple part of tax year end planning. A few months ago HMRC announced a change to the carry-forward rules. The crux of the change is that “overpayments” above £50,000 for tax years 2009/2010 or 2010/2011 will no longer be treated as eating into any unused AA carried forward from earlier years. This means that some clients may have more unused AA than previously anticipated and may be able to make further contributions.
This means that clients who made large contributions when the AA was £255,000 may now be able to make further contributions.
The deadline for registering for fixed protection is 6 April 2012 after which the lifetime allowance will be reduced to £1.5m. A trade-off for electing for fixed protection and retaining a £1.8m lifetime allowance is that contributions to money purchase schemes must cease. The carry-forward rules allow a last chance to boost funding before applying for fixed protection.
Pension contributions can reduce your client’s income tax liability in several ways. They mitigate exposure to income tax at higher rates and help a client to retain personal income tax allowances.
For example, Sam has a salary of £100,000 and received a bonus of £14,500 in the tax year. His personal allowance of £7475 is reduced by £1 for every £2 over £100,000. The loss of personal allowance effectively means the income above £100,000 is taxed at 60 per cent. Paying the bonus into his pension allows Sam to retain his personal allowance. Sam has effectively received tax relief of 60 per cent by making the contribution.
Even better results can be achieved if the contribution is made by bonus sacrifice. Sacrificing the bonus in favour of an employer pension contribution will provide national insurance savings for both Sam and his employer. Sam’s employer may even agree to the national insurance savings being paid to his pension scheme.