Pay close attention to clients' finances so they do not miss out

But it comes sharply into focus at this time of the year, as the tax year ends and the Budget gets closer.

It is an ideal time for clients to take stock of their finances, including making effective use of allowances while they still have the chance. 

“Paying tax unnecessarily is galling,” says Becky O’Connor, personal finance specialist at Royal London.

Key Points

• March is a good time to check one’s use of tax allowances
• There are certain smaller allowances one may miss
• Rumours abound over tax changes in the Budget

“But savers and investors can end up overpaying tax if they aren’t aware of allowances available on income tax and capital gains tax.

“It’s possible for people to end up overpaying thousands of pounds in tax in a year if they don’t keep an eye on what they are eligible for, particularly as personal financial circumstances, like salaries, savings and investment balances, change over time.

“It’s easy to miss the smaller, lesser-known allowances too, such as marriage allowance, which allows someone who does not pay tax at a rate higher than basic rate to transfer 10 per cent of their personal allowance to a spouse or civil partner who also does not pay tax at a rate above basic rate.”

The prioritisation of pensions over Isas largely depends on the client’s life stage.--Catriona McCarron

Ms O’Connor adds: “Once we enter the new tax year, you miss the opportunity to fill up the previous year’s allowance, which is why March is the ideal time to forensically check that you have made the most of what’s available.

“HM Revenue & Customs does not spell these things out clearly to everyone who is eligible unfortunately, so the responsibility to find out about their allowances lies with individuals.”

Making allowances

Whatever the time of year, a structured approach is key: “It’s important to start with the plan: looking at what your client needs to save and when they will need it,” emphasises Jeannie Boyle, executive director and financial planner at EQ Investors.

So, what should clients be considering now, as a priority, when reviewing their finances?

Catriona McCarron, wealth manager at Ascot Wealth Management, says: “The basic allowances we’d ensure a client is using (especially close to tax year end) starts with pensions and Isas.

“The prioritisation of pensions over Isas largely depends on the client’s life stage, but assuming they’re a younger saver with a shorter time horizon for access, we’d prioritise the use of their Isa allowance.

“For those focusing on retirement planning we’d look to ensure they’ve used their pension allowance for the current tax year, and whether they have carry-forward availability from the previous three tax years.”

Capital gains tax allowances are also a key consideration.

If any clients are thinking about selling an asset worth £6,000 or more, such as property from their portfolio, shares, art, antiques – or other assets that attract CGT, such as sets of vases or chessmen (as HMRC specifies) – the current CGT allowance is only £12,000, which could be exceeded quite easily.

Ross Leckridge, financial planner and associate director at Johnston Carmichael, suggests a potential solution: “For gains in excess of the annual exemption, consider, where possible, multiple disposals over multiple tax years.

“This works for assets made up of many constituent parts, like shares, unit trusts and Oeics, but not for large singular assets, like property.”

Married couples also have the opportunity to pay less CGT.

For instance, they can make use of the inter-spousal exemption, as Mr Leckridge points out: “The inter-spousal exemption allows assets to be transferred between spouses without creating a chargeable gain. 

“This can allow married couples to offset two annual CGT exemptions against large gains to reduce the total CGT payable.”

Possible changes ahead

>“A potential scrapping of higher rate tax relief on pensions has repeatedly reared its head since George Osborne commissioned a consultation into the future of pensions tax relief .--Gary Smith

Looking ahead, are there any rumoured changes to allowances for next year that people should take into account when planning for this year?

Perhaps the most widely reported rumour in circulation pre-Budget is that the new chancellor of the exchequer, Rishi Sunak (pictured), intends to cut the current 40 per cent pension tax relief for higher earners, reducing this to the flat rate of 20 per cent that applies to basic rate taxpayers.

Gary Smith, financial planner at Tilney, wonders if this could be the inevitable direction of travel, given previous government research on pensions.

He says:  “A potential scrapping of higher rate tax relief on pensions has repeatedly reared its head since George Osborne commissioned a consultation into the future of pensions tax relief during his tenure as chancellor.

“A new government with a commanding majority may well feel it is in a position to implement such a policy.” 

While the move to slash the level of relief now appears to have become less likely, given opposition from Mr. Sunak’s colleagues, Budget proposals are still a work in progress.  

Pensions or IHT?

But should clients be paying particular attention to their pension contributions?

IHT appears the most likely to be subject to change in the short term.--Ross Leckridge

Some advisers believe that it might make sense for people to take pre-Budget action, if appropriate, as Ms Boyle observes: “Every Budget there are rumours about changes to pension allowances or the rate of relief.

“These seem to be louder this year. If pension contributions are part of the plan, it is probably worth making them before the Budget.”

Anna Sofat, adviser and associate director at Progeny, agrees and also suggests precautionary action in case CGT is targeted: “As there are rumours of changes to pension tax relief, we are advising clients to make any last-minute pension contributions before the Budget.

“Also, if clients are sitting on big gains in their portfolios, then we are talking about realising some of these to mitigate risk of legislation changes – CGT at 20 per cent is as good as it is likely to get.”

However, Mr Leckridge said inheritance tax may be higher up the agenda than pensions: “Rumours of abolition of marginal-rate tax relief on contributions and reduction of the 25 per cent tax-free lump sum on pension pots have been around for a few years, but nothing has come to pass as yet.

“IHT appears the most likely to be subject to change in the short term. 

“The Office of Tax Simplification published a report in 2019 suggesting a wide-ranging overhaul of the IHT system, including abolishing taper relief on gifts  reducing the value of the gift still deemed to be in the donor’s estate over time  and zeroing capital gains on the death of the asset owner. 

“We don’t yet know if the government will act on these recommendations, but rumours abound.”

Other advisers do not envisage any sweeping changes at all in the forthcoming Budget, as Keith Churchouse of Chapters Financial Planning states: “I’m not convinced there are going to be any changes in personal allowances.

“I’m also not expecting any sea change to occur, other than the possible flat rating on pensions.”   

Fiona Nicolson is a freelance journalist