January heralds the start of tax-year-end planning. Alongside the well-established ideas, advisers should explore some new areas this year:
The money purchase annual allowance: The MPAA falls from £10,000 to (a proposed) £4,000 from 6 April. Clients who want to pay in the higher amount before the tax-year end should do so now, as carry forward of unused MPPA is not allowed.
Reduce income tax: Once someone earns more than £50,000 they begin to lose child benefit. By the time their income reaches £60,000 they lose it altogether. A pension contribution can reduce adjusted net income, allowing reclamation of child benefit. This can amount to thousands of pounds a year on top of normal pension tax relief.
The same principle applies to those who lose their personal allowance on income above £100,000. Using a pension contribution to reduce income below £122,000 allows an extra 20 per cent tax to be reclaimed, on top of the normal 40 per cent tax relief for someone in that earnings bracket.
Carry forward: Clients carrying forward unused annual allowances from previous years can pay in more than the standard £40,000. To do so, the client must use this year’s allowance first and carry forward the oldest unused relief. Clients not a member of a registered pension scheme in any given year cannot carry forward unused allowance from that year.
Remember also that the maximum personal contribution cannot exceed 100 per cent of pensionable earnings, although employer contributions would allow this limit to be exceeded.
Use or lose the Isa allowance: Unused Isa allowances cannot be carried forward, so use it by 5 April. The Isa limit for 2016/17 is £15,240 and a married couple can utilise twice that amount.
Clients should make full use of their capital gains tax allowance when encashing investments to transfer into their Isa. They could also consider gifting assets between spouses to fully use both annual CGT allowances.
New flexible Isa rules allow savers to take money out of an Isa and replace it within the same tax year without the replacement payment counting as a new contribution.
IHT planning: While the IHT nil-rate band remains frozen at £325,000 until 6 April 2021, lifetime gifts remain an effective way of reducing future liability.
Gifts from grandparents into a bare trust are a great way to finance education costs for a child under 18. If the gift comes from the grandparents, the income and gains from the trust belong to the child. Using the child’s personal allowance and annual CGT allowance is tax efficient, as these usually go unused.
Consider using other available IHT exemptions and IHT-efficient trusts such as discounted gift and loan trusts. The new residence nil-rate band takes effect from 6 April, and this may help reduce the taxable estate of some clients.
Lifetime allowance: The lifetime allowance reduced from £1.25m to £1m on 6 April 2016. There are two new protections available: Fixed Protection 2016 or Individual Protection 2016. In addition, it is still possible to apply for Individual Protection 2014 if the application is made before 6 April.
John Lawson is head of financial research at Aviva