By John Bawden, Chartered Financial Planner, at Legal Futures Associate Saunderson House
As the United States adjusts to life under President Trump and the UK and Europe assess the implications of Brexit, one could be forgiven for letting events either side of the Atlantic distract from successfully utilising the various allowances and exemptions available before the end of the tax year on 5 April. To help individuals avoid missing out on these valuable opportunities, this short note discusses some of the key considerations worth exploring as the 2016/17 fiscal year concludes.
Contribute to your pension
While individuals are able to contribute up to £40,000 to a pension plan under their 2016/17 annual allowance, it is sometimes argued that Government legislation tapering the amount higher-earners are able to pay to their pensions makes doing so unattractive – individuals earning over £210,000 in 2016/17 only receive tax relief on contributions of up to £10,000. It is worth noting, however, that even a pension contribution of £10,000 gross attracts tax relief of £4,500 for an additional-rate taxpayer
Check your carry-forward allowances
Existing legislation allows individuals to carry-forward unused annual allowances from the previous three tax years. Therefore, depending on the amount contributed to your pensions since 2013/14, it may be possible to pay up to £140,000 gross (£112,000 net of basic-rate tax relief, or just £77,000 net of additional-rate tax relief) before 6 April 2017. Under the intricacies of the legislation, any unused carry-forward allowances from 2013/14 would be lost if not used by 5 April 2017.
Protect your pension funds
Sticking with pensions, 5 April 2017 is also the deadline for applying for Individual Protection 2014 (IP14). IP14 gives individuals protection from the lifetime allowance – the maximum a pension can grow to before punitive tax charges apply (currently £1.0 million) – on the value of their funds on 5 April 2014, provided they were above £1.25 million. This is especially relevant to active members of Defined Benefit pension schemes who may wish to accrue additional years’ entitlement within the scheme.
If your pensions did not exceed £1.25 million at 5 April but you are concerned about the value of the plans in relation to the £1.0 million allowance, it may be appropriate to apply for Fixed or Individual Protection 2016 (though these are not tax-year dependent). Taking action to protect your pensions from the Lifetime
Allowance could save you as much as £275,000 of tax at a later date.
Pay into an ISA
Following the reduction in the amount an individual is able to pay to their pension (and the value to which any existing pension is permitted to grow); taking advantage of the annual ISA contribution allowance is becoming increasingly important to prudent investors. Therefore, consideration should be given to making sure the allowance (£15,240 for 2016/17) is used, especially as this cannot be carried forward. As a reminder, investments held within an ISA grow free of income and capital gains tax and can be accessed anytime. Furthermore, following the introduction of Flexible ISAs, contributions can be withdrawn, and subsequently re-invested, subject to certain conditions, should the need to do so arise.
Take profits from existing investments
Global equity markets have been surprisingly resilient to the turbulent political events in 2016, with numerous indices showing strong gains over the past 12 months. For individuals with investment portfolios subject to capital gains tax it may be worthwhile disposing of holdings to utilise the 2016/17 annual CGT exemption (£11,100). Individuals may also utilise a spouse’s exemption by transferring assets to their name prior to disposal (inter-spousal transfer). In addition, it may be worth considering crystallising gains in excess of the annual exemption in order to take advantage of current valuations and re-base investment portfolios before any potential changes to existing CGT rules – for example, there is speculation that CGT rates may increase in the future.
Consider other opportunities
Alongside the above, and particularly for those individuals that are unable to contribute further to pensions and/or ISAs, it may be appropriate to consider investing in Enterprise Investment Schemes, Venture Capital Trusts and Seed Enterprise Investment Schemes. Consideration should also be given to using the annual Inheritance Tax-free exemption of £3,000 to gift monies to a loved one. It is possible to carry this allowance forward to the following tax year so, where the 2015/16 exemption has not been used, it will be lost if not gifted before 6 April.
Talk about it
Sometimes, just taking the time to talk through these options with a suitably qualified professional adviser will help you get organised, prioritise your objectives, and ensure you do not miss out on any of these opportunities. Investing a small amount of time now can save you lots more in the long term, as well as providing peace of mind and reducing the associated stress, so that you can focus on the things that really matter to you.
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