Tax Planning

As you grow older, it’s possible you will have surplus income. You’ll have income from your pensions and interest from your savings, while at the same time, your expenditure may be reduced.

This surplus accumulates, either as cash or investments, compounding any existing inheritance tax (IHT) you may have. Understandably, you’d rather that any excess income goes to your loved ones than to the taxman.

Spending your money is one obvious way of reducing your surplus income. Make sure you’re living a comfortable retirement and doing all the things you’ve dreamed of.

But after that, the simplest way of reducing a potential IHT bill is to give your money away while you’re still alive. And while you may be familiar with the main gifting rules, you may not be aware of ‘gifts from income’.

Let’s explore how they can form an important part of your strategy for reducing your IHT plan.

Inheritance tax explained

Soaring property prices and frozen tax thresholds mean many more families may have to pay IHT, i.e. 40% tax on any wealth they inherit. In fact, according to HMRC forecasts, an additional 49,400 households will have to pay the tax by 2027.

The current rules allow you to leave an estate worth £325,000 without it being subject to IHT. This is known as the nil rate band. If you’re also leaving a home to your children or other direct descendants, there is an additional transferrable main residence nil rate band of £175,000, if you meet the criteria.

This can take your total allowance to £500,000, and it is transferable to your spouse when you die or vice versa. So, it’s possible to leave up to £1 million without triggering IHT.

Gifting rules

A sensible way to provide for your loved ones while reducing your estate’s exposure to IHT is to make financial gifts. But you must understand how much you can give.

You’re allowed to give £3000 each tax year without it being added to the value of your estate. This can be to one person or split between several individuals.

You can also carry forward the previous year’s allowance if you didn’t use it, making £6000, but only for one tax year.

In addition, the small gift allowance enables you to make as many gifts of up to £250 to different people as you would like, as long as they haven’t benefited from another gifting allowance.

Plus, there are special allowances for weddings, which means you can give a child £5,000 when they marry, £2,500 to grandchildren or great-grandchildren, or £1,000 to anyone else. You can combine this with the £3000 annual exemption, just not the small gift allowance.

What are ‘gifts from income’?

You can make unlimited ‘gifts from income’, irrespective of how long you live after making the gift, and don’t need to worry about IHT. These are regular payments to another person, known as ‘normal expenditure out of income.’ They could be used to:

• Pay rent for your child
• Help someone with their living costs
• Pay into a savings account for a child under 18
• Give financial support to an elderly relative
• Make regular gifts into trust.
• Fund life policy premiums
• Make regular pension contributions for a family member

There are just certain criteria you need to bear in mind. The gifts need to:

• Be habitual – HMRC will check back over three or four years to see if the gifts were made consistently.
• Come out of your income – the payments must come from pension income, employment, dividends, or rental income, not from your capital or a house sale.
• Maintain your usual standard of living – you should be able to afford the gifts once you’ve paid for your normal outgoings, such as bills, food and personal spending.

Ideally gifts should be of a similar size to make them more easily identifiable as from surplus income. The taxman may allow gifts of different amounts if your income is variable or the gifts cover costs that change, such as school fees.

‘Gifts from income’ is a valuable strategy as it enables you to help your family and see them get the benefit of your wealth before you pass away.

Take the example of a child struggling to pay their mortgage. Giving them £550 a month for a period of three years would reduce your estate by £19,800. As well as easing their immediate money worries, it could also save them £7,920 in tax later.

Note, if you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except the small gift allowance.

Implementing a ‘gifts from income’ strategy

There are a few steps to follow if you’re going to take advantage of the ‘gifts from income; exemption.

Make sure you assess your total income from all your different sources. Be aware that the five per cent annual allowance from an investment bond doesn’t count as income.

Evaluate your living costs so that you have a clear understanding of your monthly and annual expenses. That way, you can be sure your gifting income is genuinely surplus.

Set up regular payments, such as a standing order, to your chosen recipients so you don’t miss a payment and can be confident your giving is consistent.

Keep detailed records of your income, expenditure and the gifts you have made. This will help your beneficiaries prove to HMRC that your gifts were made from surplus income and did not affect your lifestyle.

The seven-year rule

‘Gifts from income’ and the other allowances outlined above are exempt from the seven-year rule, but remember that any other money you give away will still be included in your estate for tax purposes unless you live for another seven years.

They will be considered a potentially exempt transfer (PET), which means the amount of IHT you pay on them reduces over time until seven years have passed and the gift becomes totally tax-free.

Forming your IHT plan

Over time, employing a ‘gifts from income’ strategy can take large amounts out of your taxable estate and reduce the amount of IHT your loved ones eventually pay (out of your assets).

It can make a considerable difference to the amount they receive now, compared with what they would get once you’ve died and 40% tax has been deducted.

It’s worth seeking professional help if you’re considering ‘gifting out of surplus income’ to ensure your strategy is tax-efficient and compliant with HMRC guidelines.

That way, you reduce the risk of any disputes following your death. Do contact us if you’d like any help or guidance with this aspect of your IHT planning.

As a grandparent, you’re no doubt keen to spoil your grandchildren. You’ll slip them a bag of sweets, buy them an ice cream or give them the latest ‘must-have’ item on their birthday or Christmas list.

But what can you do to support them financially in the long term? And what measures are available that will also benefit you?

We look at five key ways to give the gift of financial independence while mitigating your tax bill.

1. Inheritance tax exemptions

You can pass some of your wealth to your grandchildren by making gifts. Currently, you can give a total of £3000 each tax year (known as your annual exemption), without it being added to the value of your estate. This can be to one individual or split among several. And if you don’t spend all of your allowance in one tax year, it can be carried over to the next.

But it’s important to be aware of the inheritance tax rules to avoid a tax charge. Once your annual exemption is used up, you need to consider the seven-year rule which means any gift you’ve given within seven years of your death would be subject to inheritance tax at 40% (although on a taper relief scale after three years).

You can also give unlimited gifts of £250 per year under the small gift allowance, provided you haven’t used your annual exemption on the same person.

And if there’s a wedding coming up in the family, as a grandparent, you can give up to £2,500 to the bride or groom tax-free. You can combine this with your annual exemption but not the small gift allowance.

The other allowance that’s often overlooked is ‘gifts from income’. This enables you to make regular tax-free payments to another individual to help with living costs, such as rent, provided the money comes from your regular monthly income, not your savings, and doesn’t affect your lifestyle.

2. Cash savings

You may have decided to help your grandchild by starting a savings account in their name to help them buy their first car or home.

There’s usually no tax to pay on children’s accounts, although if a child gets more than £100 in interest from money given by a parent, HMRC would need to be told. This is because the interest would count towards the parent’s Personal Savings Allowance (PSA), (£1000 in the 2024/25 tax year for a basic-rate taxpayer). Any interest above their PSA would be liable for the marginal rate of Income Tax.

The good news is that the £100 limit doesn’t apply to money given by grandparents, relatives or friends. And although the threshold isn’t relevant here, it underlines the value of tax-free wrappers, which we’re about to come onto.

3. Junior ISA allowances

It’s worth encouraging your grandchild to make full use of their Junior ISA allowance (JISA) as it’s a tax-efficient way of saving and investing for the long term.

In the 2024/25 tax year, an individual can put up to £9000 in a JISA and it’s tax-free.

Your grandchild can either have a Cash JISA and Stocks and Share JISA or a combination of both. Anyone can pay into a JISA (including grandparents!) but they can only be opened by a parent or guardian.

Once they’re 16, your grandchild can manage their own savings and on reaching 18 they can access the funds.

4. Lifetime ISA for adult grandchildren

Times have been tough for young adults trying to find their way, especially with the cost of living crisis, so you may be keen to help your adult grandchildren get on the property ladder.

One way to do this, if they’re between 18 and 39, is to encourage them to open a Lifetime ISA (LISA) and give them money to pay into it. These accounts are designed for young adults looking to buy their first home or make a start on their retirement savings and they offer the same tax advantage as other ISAs.

Your grandchild can put up to £4000 a year into a cash LISA or a Stocks and Shares LISA. Or they can choose a combination of both. They just need to make their first payment before they’re 40 but can keep contributing until they’re 50. The LISA limit of £4000 a year does count as part of their annual ISA limit, currently £20,000.

This type of account makes a tax-efficient option as the government offers a 25% bonus (up to a maximum of £1000) on top of any LISA contributions. So, if your grandchild can put in the full £4000 in any tax year, this is topped up to £5000. They’re essentially getting an extra £1000 for free. And your gift will go even further.

It’s worth pointing out that if your grandchild withdraws the money before they’re 60 for any reason other than buying their first home, they will face a 25% withdrawal charge.

5. Tax relief on third-party pension contributions

Taking their pension may seem a long way off for your grandchildren, but the earlier they start to build their pot, the greater the growth can be. And as a grandparent, you can make contributions to a Junior Personal Pension (Junior PPP) for them at any age – right from the day they’re born.

Like the JISA, a Junior PPP needs to be opened and managed by a parent or legal guardian until the child is 18 but anyone can pay into one on their behalf. Your grandchild will be able to access the money you’ve added to their Junior PPP once they’re 55 (57 in 2028).

You’re also enabling them to benefit from tax relief, valid on third-party contributions. The Junior PPP allowance is £3600 for the 2024/25 tax year, so you can pay £2800 in and the government will top it up by 20% or £720, making a total contribution of £3600.

Taking action

Being aware of the allowances available and making the most of them will help you stay tax-efficient while at the same time providing your grandchildren with financial security.

Please contact us if you’d like any more recommendations on how to use your finances effectively so you can lend a helping hand.

With the end of the tax year fast approaching, it’s a good time to organise your finances and make sure you make the most of your tax allowances, reliefs, and exemptions. Some of these allowances will be lost if you don’t use them before the end of the tax year. Additionally others will be reduced in the new tax year due to legislative changes.

This guide explains the main areas of planning you need to consider before the end of the tax year.

This year it’s important to note that the tax year end falls just after the long Easter weekend and therefore processing times may take slightly longer than usual. Our advice is always to beat the rush by being prepared and organised well in advance.

Individual Savings Accounts (ISAs)

• You can contribute up to £20,000 to your ISA in the current tax year.
• You need to use this allowance by 5th April 2024, or it will be lost.
• If your ISA is a ‘flexible ISA’ then you can also replace any withdrawals within the same tax year. Again, you need to do this by 5th April, or that additional ‘replacement subscription’ opportunity is lost.
• No tax is payable on any of the income or growth within your ISA, and you can usually withdraw money without penalty. Any money withdrawn can be replaced in the same tax year without using any of your allowance.
• Choose a Cash ISA if you are likely to need the money within a shorter timeframe (say, within 3-5 years). Interest rates have significantly improved in the last year so it’s worth shopping around.
• A Stocks and Shares ISA might be for you if you are seeking long-term growth and can cope with some potential market volatility. You can switch between Cash and Stocks and Shares later if you wish.
• Consider a Lifetime ISA (LISA) if you are saving for a first home.

Pension Contributions

• Pensions are extremely tax-efficient.
• You should make sure you take advantage of any pension funding offered by your employer.
• It’s worth making the maximum contribution to your pension, depending on your available allowances and personal budget.
• Check you are reclaiming higher and additional rate tax relief, particularly if you are making personal pension contributions.
• Higher and additional rate taxpayers can also use pension contributions to reduce their effective earnings, and bring them into a lower tax band.
• Make use of your carried forward allowances if available.
• If you have already taken taxable benefits from your pension, you might have triggered the Money Purchase Annual Allowance. If this applies to you, it’s even more important that you use your allowance before 5th April.
• Check if your remuneration will exceed £260,000 (including employer pension contributions) as this will also reduce your annual allowance.

Income Tax Allowances

You have a number of income tax allowances that can help to increase your net household income. If you arrange your income and assets efficiently, there is still time to make the most of these before the end of the tax year. For example:

• Personal Allowance – you can earn up to £12,570 before paying tax. If you are taking income from a pension, or planning a withdrawal from a bond, you can use this allowance to offset tax. Similarly, if you own a business, it’s a good idea to take some of your income as a salary to make use of this allowance.
• Marriage Allowance – a lower-earning spouse can transfer up to £1,260 of their tax-free personal allowance to their higher-earning partner, potentially reducing the family’s tax bill by up to £252.
• Dividend Allowance – dividends of up to £1,000 per year may be drawn (from your own company or from investments) without tax liability. This is reducing to £500 from April 2024, so if you have retained profits in a company, it’s worth making the most of this now.
• You can transfer assets to your spouse if they pay a lower rate of tax, or to make use of both savings allowances.

Capital Gains Tax Exemptions

• When you sell investments or property, you might need to pay Capital Gains Tax (CGT) on the profits.
• You can use your annual exemption to avoid building up large taxable gains. This tax year, you can realise gains of up to £6,000 without paying tax. This is reducing to £3,000 from April 2024, so you could save tax by realising more in the current tax year.
• Sell shares to realise a loss. The loss can be carried forward to set against gains in future years.
• Allocate some shares to a spouse. This does not incur tax, and means that you have double the exemption to set against gains.

Inheritance Tax Planning

• You can reduce your estate (and potential IHT liability) by making gifts to individuals, charities, or trusts. Charitable gifts are immediately outside your estate.
• You can gift up to £3,000 per year, which is immediately outside your estate. You can also carry forward this allowance by up to one tax year. A couple could potentially gift up to £12,000 by using two tax years’ worth of allowances. Some other exemptions are also available.
• If no exemptions apply, most gifts drop out of your estate after 7 complete years, so making the gift now starts the clock ticking earlier.

Tax Advantaged Investments

• Consider investing in smaller, early-stage companies. This can be done via Alternative Investment Market (AIM) listed shares, Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT). These are very high-risk investments and are only suitable for experienced investors who can afford to lose the money. Advice is strongly recommended.
• Investing in this type of asset could reduce your income tax bill by up to 30% of the investment amount, or 50% if the investment is allocated to a particularly high-risk version of the EIS.
• An EIS investment offers the added advantage of being able to carry-back relief to the previous tax year, as well as the option to defer CGT on gains realised from other investments.
• AIM and EIS investments are also considered to be business assets and are usually subject to 100% Inheritance Tax relief if held for at least 2 years.

Charitable Gifting

• Make any charitable gifts you were planning before the end of the tax year. Gift Aid can increase the value of the gift in the hands of the charity, as well as reducing your tax bill.
• Remember to claim tax relief on any charitable gifts made in 2022/2023, as you can carry-back tax relief to the previous tax year, providing this is done before your tax return is due. This can be useful if your tax bill was higher last year.
• Think about gifting shares. No capital gains tax is due either when you gift the shares, or when the charity eventually sells them.

Saving for Children

• Top up any Junior ISAs for your children or grandchildren. You can contribute up to £9,000 in the current tax year.
• Consider making pension contributions for your child. Anyone can contribute up to £2,880 per year (grossed up to £3,600) to a pension for tax-efficient growth.
• These gifts can be extra efficient if you use them in conjunction with your gifting allowances above, or as regular gifts from surplus income.

Please don’t hesitate to contact a member of the team if you would like to find out more about planning for the tax year-end.

If you are fortunate enough to receive a bonus this year, you may be considering ways to save tax. While a cash windfall is always welcome, your bonus might push you into higher rates of tax, meaning that you receive less than you were expecting.
Below, we explain how your bonus is taxed and some options for making savings.

Your Bonus – Tax Treatment

If you receive a bonus, this is added to your other income for the tax year to calculate your tax liability. This means you will pay tax on your bonus at your highest marginal rate.

National Insurance will also apply and if you have any other deductions from your salary, such as student loan repayments, these will also factor into the calculation.

A key point to be mindful of is that receiving a bonus can push you into the next tax band. Going from basic rate to higher rate tax can mean increasing your tax bill on the bonus by up to 20%.

If your bonus takes your earnings over £100,000, you will also start to lose your personal tax-free allowance of £12,570. This can take the effective tax rate on your bonus as high as 60%, as not only are you paying higher rate tax, but you are also extending the amount of income that is taxed overall.

Even if you have checked the tax treatment and are comfortable with the extra tax, remember to check your pay slip for emergency tax coding. Sometimes when you receive a one-off payment, HMRC will assume you will receive the same amount every month and adjust your tax code accordingly. This means paying significantly more tax, potentially for the rest of the tax year. It is normally corrected at the end of the tax year, or you can contact HMRC to receive a refund sooner.

How You Can Save Tax by Making Pension Contributions

Making a pension contribution is one way to reduce the amount of tax you pay on your bonus.

If your employer can arrange this through salary sacrifice, the administration is fairly simple. The bonus will be paid into your pension as an employer contribution and you won’t pay tax or National Insurance on it.

If your employer makes pension contributions via the ‘net pay method,’ your tax will be automatically reduced, but you won’t necessarily receive relief from National Insurance contributions.

If your employer is unable to pay the bonus into your pension, or you decide to make the contribution later, you can arrange a personal contribution. Basic rate tax relief is credited automatically, which means that for every £80 you contribute personally, HMRC adds a further £20. This means a gross contribution of £10,000 will only cost you £8,000 from net income.

There are, of course, limits to this. Pension contributions are generally capped at your gross annual earnings or the annual allowance (£60,000), whichever is lower. However, if you earn more than the annual allowance, you may be able to carry forward allowances from up to three previous tax years. This means that higher earners receiving a large one-off bonus have considerable scope to top-up their pensions.

The limits on pension contributions and tax relief available are explained further here.

Pensions are highly tax-efficient investments and do not incur any tax when the funds are invested. Currently, you can also pass the funds to your beneficiaries tax-free if you die before age 75. After age 75, any income drawn by your beneficiaries is simply taxable at their own marginal rate.

Are There Any Downsides?

The main downside to funding your pension is that you can’t access the money until your minimum retirement age. This is currently age 55, but is expected to rise to 57, and subsequently 58 as the State Pension is also due to increase.

At your retirement age, you can take up to 25% of your pension as a tax-free lump sum. The remainder is then taxed at your marginal rate. So, while you can substantially reduce the amount of tax you pay on your bonus, particularly if you move from higher to basic rate tax in retirement, you will probably still pay some tax on it eventually if you take benefits from your pension.

There is also the chance that the investments in your pension will be exposed to market volatility. You may even lose money, particularly if you make the an investment into equities close to your retirement age.

You also need to be mindful of pension allowances. Breaching the annual allowance means not only being taxed on the money as if it was earned income, but that the money is now tied up in a pension, to be taxed a second time if you take retirement benefits.

If you earn over £240,000 or have already taken benefits from your pension, you will have a lower annual allowance.

These risks can easily be addressed by careful planning, for example:

• Keeping enough cash to cover potential emergencies and any planned spending.
• Only investing if you can hold the fund for at least five years (ideally longer).
• Investing in a suitable range of funds which is well diversified and matches the appropriate risk level.
• Taking advice on larger pension contributions, particularly if you are a higher earner.

Other Options for Saving Tax

If you have maximised your pension allowances or wish to take a different route, there are a few other options to tax-efficiently invest your bonus, for example:

• ISAs – while you don’t receive any tax relief on your contributions, all income and growth are tax-free and you can access your savings flexibly. This might be a suitable option if you are likely to need the money before retirement age and are comfortable paying tax on the bonus.
• Venture Capital Trusts (VCTs) – these offer income tax relief of 30%, providing the relief is no more than your tax bill and you hold the investment for at least five years.
• Enterprise Investment Schemes (EIS) – similarly, these schemes offer income tax relief of 30% (as well as benefits in terms of capital gains tax and inheritance tax), with a minimum holding period of three years.
• Seed Enterprise Investment Schemes (SEIS) – these are a subset of the EIS regime and offer income tax relief of up to 50%. However, they are significantly higher risk as they target very early-stage companies.

The latter three options are very high-risk investments which invest in smaller companies. While the tax relief is a strong incentive to invest, you could lose some or all of your capital.

It’s a good idea to seek tax advice if you are considering higher risk investments or tax planning, as getting it wrong can cost much more than you saved.

Please don’t hesitate to contact a member of the team if you would like to discuss financial planning and tax.

Some employees are able to claim tax relief on work-related expenses if their employers have not already reimbursed these.

This can include items such as:

• work clothing and uniforms, including a laundry allowance
• any equipment required for their work
• professional fees and subscriptions (such as membership to professional bodies)
• using their own vehicles for work travel (not including the usual home to work commute)
• costs of working from home, if there is no other option

The gov.uk site has guidance on who can claim and what for. You’ll first need to set up a Government Gateway login, if you don’t already have one, and from there the process is relatively simple.

However, if you were to use a search engine, the Government’s own site might not be the top result. There are many claims companies, offering to help you claim the tax relief. These companies also advertise widely on social media, with a simple ‘click here’ to begin the process.

The claims companies will liaise with HMRC on your behalf, as your ‘agent’ and arrange any reliefs you might be eligible for. As you might expect, the claims companies charge, for their ‘help’, often taking a percentage of the tax reclaim before passing it on to you.

HMRC are urging individuals to apply directly themselves, online or, if by post, by form P87 only, as the information required is exactly the same as they would need to provide to the claims company in any case.

Invitation

Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with our team here at WMM.

You can call us on 01869 331469.