PensionsMar 5 2020

Making the most of current tax allowances to help your client

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Making the most of current tax allowances to help your client

Every year, as the chancellor gears up to deliver the annual Budget speech, the rumour mill goes into overdrive as to whether pensions, and the tax reliefs that they enjoy, will be in the firing line.

This year is no different as newly appointed chancellor, Rishi Sunak, has been under pressure to drop any plans to cut pensions tax relief for higher earners.

“While we wouldn’t suggest that people act purely out of fear of changes - for example, by withdrawing pension funds that they don’t need - there’s generally no harm in making the most of reliefs and allowances, such as contribution tax relief and the annual allowance, as the rules currently stand,” says Jessica List, pension technical manager at Curtis Banks.

Key Points

  • Speculation is mounting again about pension tax
  • Now is a good time to make use of the annual allowance
  • Clients can use unused annual allowance from previous years

“We know that if there are changes, they will likely be further restrictions, so if clients are in a position to boost their savings and take advantage now then it’s worth considering doing so.”

With only a week to go before the Budget speech, what should advisers be doing to make the best use of their client’s pension as the end of the 2018-19 tax year approaches?

Tapered or not – make the most of the annual allowance

Fiona Tait, technical director at Intelligent Pensions, explains: “The key factor in tax year-end planning for clients is to ensure they make maximum use of their annual tax allowances, and for many people pensions are the most tax-efficient investment available.

Clients are increasingly subject to tapering of the annual allowance.--David Wright

“The majority of people will be subject to the standard annual allowance of £40,000, which means that the income tax that would otherwise be due to pay on their earnings is instead invested in their own pension. More savings, less tax – a win, win situation.”

However, for some, the annual allowance is restricted by the tapered annual allowance or money purchase annual allowance.

Annual Allowance 
Tax yearAmount
2018 to 2019£40,000
2017 to 2018£40,000
2016 to 2017£40,000
2015 to 2016April 6 2015 to July 8 2015 – £80,000 July 9 2015 to April 5 2016 – £0
2014 to 2015£40,000
2013 to 2014£50,000
2012 to 2013£50,000
2011 to 2012£50,000
Source: HMRC

“Clients are increasingly subject to tapering of the annual allowance,” says David Wright, consultant at Mattioli Woods.

“A personal pension contribution could reduce the client’s ‘threshold income’ below £110,000, allowing the full £40,000 allowance to be reclaimed.

“If not planned for properly, however, the reduction in the annual allowance can lead to insufficient financial resources being put into later life income and potential tax efficiencies not being fully used.”

He adds that, as a result, it is important to look at pension alternatives where this is the case and suggests that, for many clients, the answer to this will be Isa contributions, where the annual allowance of £20,000 is not already being used.

“While Isas do not confer tax relief on contributions, the tax-privileged nature of investment returns and the absence of tax on withdrawals can make them a clear pension alternative,” Mr Wright says.

“The lack of a minimum withdrawal age applying to an Isa can also make them suitable savings vehicles over a shorter-time horizon.”

For those that are subject to the tapered annual allowance and are already taking advantage of an Isa, Mr Wright points to venture capital trusts as being “extremely valuable”, although those that do make use of them should proceed with caution.

The key factor in tax year-end planning for clients is to ensure they make maximum use of their annual tax allowances.--Fiona Tait

He explains: “While many are familiar with the tax relief received upon making a new VCT investment, this should arguably not be viewed as the primary advantage of these structures.

“After all, the relief only applies to encourage investment in what would otherwise be a relatively high-risk holding.

“Investing in VCTs for the tax-free dividends they provide leads to them being viewed as an income generator, alongside pensions and Isas.

“Treating VCTs this way is best taken advantage of with regular investments over multiple years.

“This also serves to further diversify, and therefore lessen the overall risk of the proposition.”

Take it forward

When it comes to building pension provision, carry forward can be a very useful tool as, in addition to any unused annual allowance from the current tax year, savers are able to take advantage of any unused allowance from the three years previous.

Curtis Banks’ Ms List highlights: “We’re now in the last few weeks when people can use any remaining allowance from 2016-17.

“Remember that clients have to fully use the current year’s allowance first before using carry forward.

“It’s also important to remember that carry forward gives clients additional annual allowance but does not affect how much tax relief they’re entitled to – this will still be based on their earnings in the current tax year.”

According to Intelligent Pensions’ Ms Tait, carry forward is particularly relevant for any clients who have received a bonus or lump sum payment, or self-employed clients who are likely to see unusually high profits in this tax year.

Meanwhile, Mattioli Woods’ Mr Wright adds that it could be especially useful where the client would benefit from their pension scheme purchasing a commercial property and needs the requisite funds to do so, for example.

“Tax relief on employer contributions is not restricted to the client’s relevant UK earnings, meaning the annual allowance is the only applicable restriction,” Mr Wright says.

“Not only can this increase the client’s later-life funding, and increase the level of corporation tax relief that could be claimed by the business, but it can also put the pension scheme in a position to take advantage of self-investment opportunities.”

Beyond the grave

For any long-term saver, the issue of inheritance tax should always form part of their financial planning and for those clients that are in good health, pension scheme contributions can be one of the most effective forms of IHT planning.

There is no better time than now for that annual review of circumstances.--David Wright

According to Mr Wright, funds held via pension schemes are usually treated as outside of the deceased’s estate and therefore free of IHT.

“Many pension vehicles such as [self-invested personal pensions] and [small, self-administered schemes] are trust-based arrangements.

"But, as pension schemes, they can provide a simple and effective IHT solution compared to a discretionary trust arrangement as the latter can prove more onerous and complex, especially in cases where significant IHT mitigation is required,” he explains.

There is no doubt that as well as being a great way to ensure clients have a decent level of income once they retire, a pension can also be a valuable tool in an individual’s tax planning and with the end of the 2019-20 tax year just around the corner, there is no better time than now for that annual review of circumstances.

Ms Tait concludes: “It is well worth discussing every year how much each client can afford to invest, as well as checking the tax limits that apply to them personally.”

Jenny Turton is a freelance journalist