With this in mind, and with tax year end fast approaching, we’ve complied the top 8 things you could do, to protect your wealth from tax erosion.
1) Pensions tax relief – use, don’t lose, your annual allowance
Maximise your tax relief allowance by investing into your pension. You can use carry-forwards from previous tax years, which is especially relevant this year because 2018/2019 is the last tax year you can use the full unused tax relief from the 2015/2016 tax year. This will impact ‘high earners’, affected by the tapered annual allowance. And, don’t forget, you can also make contributions on behalf of your partners, up to the value of your partner’s earnings.
2) Higher earners should utilise their annual allowance too
If you're a higher earner, your standard annual allowance of £40,000 will reduce, by £1 for every £2 of income earned over £150,000, until your allowance is £10,000. However, you may be able to recover the full £40,000 allowance by using carry forward allowances from previous years.
3) Boost income as you approach retirement
If you’re close to retirement and looking to take advantage of income flexibility, you may be thinking of taking an income from your pension. However, if you do this you can only contribute a maximum of £4,000 into your Defined Contribution pension this year, with no carry-forward option. If you need to access some income, it might instead be worth accessing non-pension savings or taking only take free cash from your pension. This will avoid triggering the Money Purchase Annual Allowance (MPAA), and you could retain your £40,000 allowance.
4) Sacrifice your bonus for an employer pension contribution
It’s bonus time for some of us. And while it might be tempting to take that money and spend it on a holiday, it might be prudent to instead exchange it for a pension contribution from your employer. You won’t have to make a NI contribution, meaning more money will end up in your pension than would hit your current account.
5) Business owners can take profit as pension contributions
Own a business? You could pay your profits away in pension contributions. Taking your profits as dividends means you don’t have to pay NI. But dividends are paid from profits after corporation tax, meaning you’ll lose a chunk of your profits to HMRC. You’ll also be taxed as the company’s director. Instead, making a pension contribution means NI and tax savings, and more money in your pension pot.
6) Top up your ISA
Tax year end is otherwise known as ISA season. And for good reason – you can utilise your ISA allowance which allows you to invest, without suffering income and capital gains tax. There’s no carry forward when it comes to ISAs, so make sure you use your allowance, before the 6 April 2019 deadline.
7) Access your personal allowances
Contributing to your pension reduces your taxable income, which can have a positive effect on your personal allowance and child benefit provisions. If your pension contribution reduces your annual income to below £100,000, you will receive a full, tax-free personal allowance. Meanwhile if a pension contribution means your take-home salary is below £50,000, you will retain the full child benefit amount.
8) Reinvest your investment income
If you have an investment portfolio, it may be worth realising any gains from your portfolio, up to the value of £11,700 – the Capital Gains Tax (CGT) allowance. Even if you don’t need the money, you could reinvest it into other investment funds. Doing so will mean you’ll have less CGT to pay, if and when you need to disinvest from your portfolio.
Finally, effective tax planning is a year round job. It’s only at the end of the tax year that you have all the pieces to complete the planning jigsaw, but there are steps you can take now to get ahead of the game and give yourself time to put plans in place.
At Magus, our aim is to build the right investment solutions for your needs, and tax planning is a huge part of this – so make sure your money is working effectively, by being as prepared as you can be for the end of this tax year.
Past performance is not indicative of future performance.
The value of an investment may fall as well as rise. You may get back less than the original amount invested.
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