Tax planning reimagined

Identifying the best options to preserve your wealth.

No one likes to pay tax on their hard-earned money. But due to the complexities of the tax system, without expert professional financial advice, some individuals could be paying more tax than necessary. Before the end of every tax year on 5 April, you have the opportunity to save money on taxes and plan for the year ahead.

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs and options available to you. If you think you may be overpaying tax, here are some ways in which you might be able to reduce your bill. This information should not be construed as advice and is applicable to the 2020/21 tax year end.

INCOME TAX

Keep your personal allowance

Income Tax rules appear simple at first: income under £12,500 is within your tax-free personal allowance, and increasing rates apply to income in higher bands.

But there is an additional rule: for every £2 you earn over £100,000, your personal allowance reduces by £1. Once you reach £125,000 your personal allowance is zero.

If you’re close to the £100,000 threshold, it may therefore be sensible to request tax-efficient alternatives to bonuses or salary increases, such as higher pension contributions.

Transfer assets to your partner

If you’re close to the £100,000 threshold and you have other income yielding assets, you could consider transferring these to a partner with a lower taxable income.

Claim tax relief for working from home

If you’re currently working from home due to the coronavirus (COVID-19) pandemic you may be entitled to tax relief for your increased costs, such as heating or broadband. You could claim the exact amount, based on bills and receipts, or a set amount of £6 per week.

Review your Child Benefit

Individuals with a taxable income of over £50,000 who claim Child Benefit will pay a higher income Child Benefit charge, which could be equal to the benefit you receive.

Your options for reducing this charge include keeping your taxable income below the threshold (by exchanging salary for tax-efficient alternatives), temporarily stopping your Child Benefit, or deciding not to claim.

DIVIDEND TAX

Use your dividend allowance

Dividend income is taxed differently to other income. Every taxpayer has a tax-free dividend allowance of £2,000, above which dividend income is taxed at 7.5% in the basic rate band, 32.5% in the higher rate band, and 38.1% in the additional rate band.

Company owners can therefore benefit by taking income from dividends rather than salary.

CAPITAL GAINS TAX

Use your Capital Gains Allowance

Every taxpayer has a tax-free allowance of £12,300 when realising capital gains. Careful consideration of the split of assets between spouses can have a significant beneficial impact on a couple’s Income Tax burden.

If you’re approaching this limit, you may want to consider transferring assets to your partner to use their allowance.

Invest for capital gains

Capital gains are currently treated more favourably than income and dividends for taxation purposes, at a maximum rate of 20% (28% for residential property), although this is currently under review.

So, for investments outside of a tax-efficient wrapper, for example, an Individual Savings Account (ISA), it can be more tax-efficient to target a return through capital gains than through interest or dividend income.

SAVINGS ACCOUNT (ISA)

Use your ISA allowances

All UK residents over the age of 18 have an annual ISA allowance of £20,000, which can be saved or invested in a tax-efficient environment. Under-18s have an allowance of £9,000 each.

Lifetime ISAs

Contributions into a Lifetime ISA qualify for a 25% government bonus. This can be a tax-efficient way to help adult children buy a home.

PENSION TAX RELIEF

Review your pension contributions

Whether you are about to retire or are still working towards putting your fund together for retirement, there are many things that you should consider when it comes to planning your pension.

Pension contributions made through your employer are often the most tax-efficient. So, discuss options with your employer to exchange some of your salary for larger pension contributions. If you own the company, this could also help you save on Corporation Tax.

Carry forward your pension allowance

Your pension annual allowance (the amount you can make in contributions while claiming tax relief) is capped at £40,000 and reduces for higher earners who exceed the limits on threshold income and adjusted income (as a guide, this typically applies only if your income is above £200,000).

So, if your taxable income increases above these thresholds, your annual allowance could drop dramatically. Carrying forward unused annual allowance from up to three previous years could allow you to claim more tax relief.

Make pension contributions for others

If you have used your annual allowance, you can still contribute to other people’s pensions, including your children and grandchildren, and they will receive tax relief.

Protect your pension

There is a Lifetime Allowance on pension savings, currently £1,073,100. Above that limit, you’ll be taxed severely when taking benefits. If you’re approaching that limit, you should seek advice on applying for protection before accessing your pension.

INHERITANCE TAX (IHT)

Use your IHT nil-rate band

Your nil-rate band for IHT is £325,000, plus any unused nil-rate band from a deceased partner. You also have an additional nil-rate band of £175,000 when leaving a home to a direct descendant.

Claim IHT relief on charitable gifts

If you leave at least 10% of your total estate to charity, IHT is applied on the portion outside of your nil-rate band at a reduced rate of 36% (otherwise 40%).

Use IHT reliefs while available

IHT reliefs currently under review include Agricultural Relief and Business Relief. Business owners in particular should look at how their estate is arranged to ensure their wealth can be passed on efficiently.

Update your Will

When there is any significant change in your financial circumstances, or to tax rules, reviewing and updating your Will can help to reduce your IHT exposure.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Inflation beaters

How to ensure your money is protected from rising inflation.

With current interest rates on cash savings very low, it is difficult to achieve growth above the rate of inflation. And if the cost of living is rising faster than your savings are growing, you’re effectively losing money.

With cash savings, a penny saved is a penny earned. But thanks to inflation, over time, the value of the penny saved could be much less than when it was earned. When looking at investments, always focus on what is the real return or the return net of inflation.

Over longer periods, well-managed investments usually grow by more than cash. Even if inflation isn’t a worry right now, you should still factor it into your investing strategy. Here we explain in simple terms how to beat inflation.

Consistently outpaced inflation

Investments that change in value a lot day-to-day tend to increase in value the most over several years. Investments that change in value a little day-to-day tend to increase by less over several years.

So, if it doesn’t worry you to see falls in value occasionally, and you have enough money in other places that it wouldn’t affect your lifestyle, you might target high growth with higher risk investments, for example, a portfolio of equities. Investing in equities over a long period has consistently outpaced inflation.

Lower risk investments

Otherwise, you might target just enough growth to beat inflation with lower risk investments. One example is bonds: loans given to governments and companies that are repaid at a fixed rate of interest.

Either way, there is always the risk that you could lose money, so you should keep enough savings separately in a cash account to cover any emergency expenses and short-term savings goals.

Ahead of inflation

One good way of staying ahead of inflation is buying stocks that pay good dividends. Dividends are a tangible return paid by companies and can keep up with inflation. And just like inflation, dividends, too, can be calculated annually.

This figure, called the dividend yield, can be measured by adding dividends received during the year and dividing it by the stock price. The yield must be higher than the annual inflation rate. Asset allocation is also critical. In this, one can look at an opportunity to diversify globally. This will make your portfolio more stable and less vulnerable to domestic volatility and inflation.

Investing tax-efficiently

Because investments have potentially higher returns than cash savings, it’s important to protect your returns from tax. Two common ways to do this are through Individual Savings Accounts (ISAs) and pensions.

ISAs currently allow you to invest up to £20,000 a year (tax year 2020/21), which can provide a tax-efficient return through interest, capital gains and dividend income. Pensions offer the same benefits, plus tax relief on your contributions up to a maximum of £40,000 a year (or 100% of your salary if it is less than £40,000). However, you can’t currently access your pension money until you reach age 55.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

ISA deadline 5 April 2021: use it or lose it

Make the most of the tax breaks before it’s too late.

If you hold a Cash Individual Savings Account (ISA) you may be dissatisfied with the low rates of interest you receive, which could make it difficult to grow your money even at a rate that keeps pace with inflation.

Stocks & Shares ISAs offer the possibility of higher returns than Cash ISAs, but only if you’re prepared to take some risks with your savings. These investment accounts offer tax-efficient benefits, and while a Cash ISA is simply a tax-efficient savings account which offers capital security, a Stocks & Shares ISA lets you put money into a range of different investments.

Make the most of your ISA allowance

All UK residents over the age of 18 receive an annual ISA allowance of £20,000 (2020/21 tax year). This is the amount you can pay into your ISA (or split between several ISAs of different types) to allow it to grow through interest, capital gains or dividend income, and you won’t pay tax on these proceeds.

Because you can’t carry over your ISA allowance into a new tax year, it’s important to use it by 5 April each year. You need to bear in mind, though, that tax rules can change in future and that their effects on you will depend on your individual circumstances.

Don’t obsess over timing

When getting started, a common concern is that the market will fall just after you’ve made a large investment. Some people make the mistake of trying to ‘time the market’ – buying in just before prices spike – which, while tempting, is very difficult given the unpredictable nature of investments.

If appropriate, a safer strategy can be to drip-feed money into your Stocks & Shares ISA throughout the year. Sometimes you might buy when the market is high, and sometimes when it is low, but over time the aim is for this to average out.

Time to make your decision

When you set up your Stocks & Shares ISA, you’ll make some decisions about how your money is invested. How involved you are in your investment decisions varies between different ISA providers; some allow you to choose individual investments, while others provide ready-made portfolios.

Either way, your professional financial adviser can explain how funds work. These funds may invest in shares in specific markets, regions or industries, or in bonds, in property, in a combination of these, or in entirely different assets.

Match your investment goals

Funds tend to advertise themselves based on their past performance, so it’s naturally tempting to choose those that have achieved the most growth in recent years. But past performance doesn’t guarantee future performance and outstanding performance last year could be the result of a trend that will self-correct this year. Don’t base your decisions on this factor alone.

Instead, select funds with a stated objective that matches your investment goals in terms of risk and return. Any investment involves an element of risk. But multiple factors can raise or lower the risk level of a fund, including the assets it invests in, the region, industries and companies it invests in, and the way it is managed. Consider all these factors.

Review your investments regularly

Once you have made your investment selections, you should review your Stocks & Shares ISA regularly to make sure it still meets your needs, which may change over time. For example, if you hope to buy a house in ten years, you might initially choose higher-risk investments, but after five years you might want to reduce your risk level to protect your existing capital.

While annual reviews of your investment strategy are wise, more frequent adjustments are not usually recommended. There are many reasons you might be tempted to adjust your investments. You might have heard of a well-performing stock that’s offering unbelievable returns. Or you might have suffered a sudden loss and decide your existing investments are underperforming.

Investments, by nature, fluctuate in value

It’s more helpful to recognise that investments, by nature, fluctuate in value. A sudden rise in one doesn’t mean you should buy and a sudden fall in another isn’t a sign you should sell – in fact, you may recoup that loss quicker by holding it.

Constantly moving funds can be stressful and ultimately unproductive. In most cases, you’re better off sticking with your investments through ups and downs. Diversification (which can be achieved by investing in several unrelated funds) can also help to manage your risk level.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Wealth needs managing – now more than ever

Achieving your financial goals through investing, and one size does not fit all.

Even as we hope to put the coronavirus (COVID-19) pandemic in the rearview mirror in 2021, uncertainty regarding both the virus and Brexit is likely to continue to weigh on the UK and global economies as well as on our personal finances during this year.

While we hope volatility is less elevated this year, financial markets and the economy could still remain at the mercy of COVID-19 developments.

Setting specific investment goals is key

Understandably investment volatility can make it easy to focus on the short term and those temporary peaks and troughs. Setting your specific investment goals is important to keep you focused when you need it and will enable you to build a portfolio to get you where you want to be. Investment strategies should include a combination of various investment and fund types in order to obtain a balanced approach to risk and return. Maintaining a balanced approach is usually key to the chances of achieving your investment goals, while bearing in mind that at some point you will want access to your money.

Market factors that determine volatility

Market volatility can be nerve-racking, even for the most seasoned investors. Many different factors can impact market volatility, sending values of investments in either direction. Some of the most common factors that determine the volatility of the market include investor concern, political events, natural disasters and major events in foreign markets. But it’s important to keep matters in perspective. Avoid making rash decisions and focus on your long-term goals. Keep investing as you normally would. Also don’t attempt to pick the market bottom or the turnaround to jump in. Fight the impulse to think you can.

Riding out the market ups and downs

Investments don’t always go in a straight line – they have the potential to react and recover from short-term market events. Rather than looking at short-term volatility, it pays to look at the bigger picture. Over the long term, investments will usually deliver returns that allow you to grow your wealth. Looking at a twelve-month snapshot of your investment portfolio may show that investments have underperformed but look back over the last five or ten years, and you’ll hopefully be on track.

TOLERANCE FOR RISK

One of the first steps in developing an investment strategy is to identify your tolerance for risk as an investor, referred to as your ‘risk profile’.

Every investor has a different risk tolerance with regard to their investment selections. Making investment decisions can depend on your personality as well as the goals you are investing towards. Weighing up the level of risk you’re willing to be exposed to can be challenging. Whether you’re reviewing your pension or building a personal investment portfolio, balancing risk is a crucial part of the process.

Well-allocated investment portfolio asset classes

During volatile times, asset classes such as stocks tend to fluctuate more, while lower-risk assets such as bonds or cash tend to be more stable. By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs. Portfolio diversification may reduce the amount of volatility you experience by simultaneously spreading market risk across many different asset classes. By investing in several asset classes, you may improve your chances of participating in market gains and lessen the impact of poorly performing asset categories on your overall portfolio returns.

Diversification to protect and grow investments

Diversify, diversify, diversify – in other words, ’don’t put all your eggs in one basket’ – is sage investing advice. In addition to diversifying your portfolio by asset class, you should also diversify by sector, size (market cap) and style (for example, growth versus value). Why? Because different sectors, sizes and styles take turns outperforming one another. By diversifying your holdings according to these parameters, you can smooth out short-term performance fluctuations and mitigate the impact of shifting economic conditions on your portfolio.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, AND YOU MAY NOT GET BACK THE FULL AMOUNT YOU INVESTED.

INVESTMENTS SHOULD BE CONSIDERED OVER THE LONGER TERM AND SHOULD FIT IN WITH YOUR OVERALL ATTITUDE TO RISK AND FINANCIAL CIRCUMSTANCES.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

5 healthy financial habits you shouldn’t ignore

How to get your finances in order to make more of your money.

Do you feel like your financial life has been turned upside down during the coronavirus (COVID-19) pandemic? Or, has the start of the new year focused you on getting your finances in order to make more of your money? Whatever the answer is, it’s important to adopt healthy financial habits.

But just as bad habits can get you into financial trouble, good habits can help keep you out of it – and help you spend wisely, save well and, most importantly, reach your biggest financial goals faster.

To help kick-start this process, we’ve put together five habits for you to consider.

1. Pay yourself first

Before you pay any bills, develop a habit of paying yourself first. That means saving and investing a portion of your earnings before you do anything else with your money. In the book The Richest Man in Babylon, written by George S. Clason, the parables are told by a fictional Babylonian character called Arkad, a poor scribe who became the richest man in Babylon. How did he achieve this? By following the first law of wealth: ‘Save at least 10% of everything you earn first and do not confuse your necessary expenses with your desires.’

It’s great to start somewhere – saving something is better than nothing. The important thing is that you’re building a new habit around making some of your hard-earned money work for you, as opposed to someone else. After you’ve paid yourself, the rest of your earnings can then be used to pay bills and purchase the things you need.

2. Spending less than you earn

The problem is that if you routinely spend more than you earn, you could be building up more and more debt. In many cases, that may mean turning to a credit card and not paying off the balance each month, leaving you with potentially exorbitant fees and interest rates that can take years to pay off. When considering spending on something you want – always ask yourself if you genuinely need it.

3. Emotions should not affect your financial decisions

For many people, money habits are tied to emotions and how we feel. It’s easy to fall into the trap of spending money when we’re disappointed, or angry, or even happy. While emotions are important, they aren’t helpful when it comes to making financial decisions. Develop a habit of taking your time and making level-headed, rational decisions about money rather than allowing spending, saving and investing habits to be dictated by the way you’re feeling at a moment in time.

4. Control your debt

Debt is not necessarily always a negative; in some cases debt can be a positive stepping stone to help get you closer to a more prosperous future. For example, although a mortgage is a form of debt, purchasing a home could be a necessity for you. Similarly, borrowing money to enhance your education could allow you to get a better paid job. You might even be borrowing money to set up a business.

On the other hand, using credit cards, for example, to cover extra spending is generally considered a bad use of debt, as the repayment terms and interest payments can often be onerous as well as expensive if it’s not paid back on time. It’s generally considered good practice to avoid carrying a credit card balance over from one month to the next, as over the longer term this can often become very expensive, very quickly.

5. Speak to your professional financial adviser

When it comes to managing your money, planning to build wealth, securing your future, and, above all else, drawing up an effective plan for fulfilling your objectives, talk to us. We will provide a wealth of knowledge, qualifications and experience that is difficult or impossible to achieve yourself.

Perhaps the main benefit, more so than any other, is the chance for relaxation. You can properly relax, safe in the knowledge that we are taking care of a wide range of challenges and questions that you would otherwise have to deal with. And if you do have any questions or concerns, you know you can easily contact us to get answers in a timely manner.

How to build new habits into your daily life

Know your why – what’s your reason for making the changes?
Set realistic, measurable goals that are achievable
Break up bigger goals into smaller actions
Don’t make too many changes at once
Use rewards as a motivator (within reason) to treat yourself once you meet your goalsSoon enough, these good habits will become hard to break.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, AND YOU MAY NOT GET BACK THE FULL AMOUNT YOU INVESTED.