Viewed in isolation, the small tax allowances each year seem to make little impact. However, by following PWM’s Tax Optimisation Strategy, a couple can build a portfolio that will see a marginal rate of tax as low at as 6% on their first £100,000 of retirement income. The steps to success need to be taken each year – so start now.
Don’t put your ISA on Ice
A £20,000 ISA allowance for 2018-19 seems insignificant. However, a couple both using the allowance for 15 years will build a tax-free portfolio of over £1 million with typical growth. That portfolio can then provide tax-free income or tax-free capital in retirement.
For children there’s a Junior ISA, where the annual tax-free allowance is £4,260. With pension contributions subject to annual and lifetime limits, ISAs can help boost retirement savings tax-efficiently.
Pep up your pension
For the tax year 2018-19 you can get tax relief on pension contributions of up to 100% of your earnings or £40,000, whichever is lower. (However, if in this tax year you start to take money from your defined contribution pension, then the annual allowance may reduce to £10,000.) You can carry forward any unused allowance from the previous three tax years. From April 2016, the £40,000 annual allowance was reduced for those with an income of over £150,000.
The Lifetime Allowance restricts the amount you can hold in your pension funds without incurring extra tax when you withdraw money. This limit is currently £1,030,000, increasing by £25,000 to £1,055,000 from 6th April 2019. If this all sounds complicated, don’t worry, we can advise you on how much you can contribute and help you maximise the benefit of your allowances.
You can also contribute up to £2,880 each year into a pension for a spouse or child, irrespective of their earnings, and this will be topped up to £3,600, thanks to 20% tax relief.
Ramp up your investments
For experienced investors looking to take a stake in new and emerging businesses, there are various schemes each offering a range of attractive tax incentives, including income tax and Capital Gains Tax relief.
- Venture Capital Trusts (VCTs) – have a maximum annual investment limit of £200,000
- Enterprise Investment Schemes (EISs) – you can invest £1m (or £2m as long as £1m is invested in knowledge-intensive companies) each year
- Seed Investment Schemes (SEISs) – have a maximum annual investment limit of £100,000.
Cut your Capital Gains Tax
Your 2018-19 exemption for Capital Gains Tax is £11,700. Married couples and civil partners who own assets jointly can claim a double allowance of £23,400. As assets can be transferred tax-free between spouses, you could consider transferring investments to ensure that both annual tax exemptions are fully utilised.
Drive your deposits
We all know that deposit rates have been parsimonious since 2008. However, the difference between the best and worst accounts would now have seen an interest difference of over £150,000 on £1 million of deposits. PWM’s new Deposits Service means that it is possible to always earn interest at leading rates – and diversify banking risk. Click here to learn more.
In addition, interest in the name of a basic rate or high rate individual has no income tax on the first £1000 or £500 earned, so it is often worth structuring deposits to a lower or non-earning spouse.
Here to help
Taken together, these five strands of our Tax Optimisation Strategy ensure you protect your assets from erosion by the state and maximise your return. If you’d like advice on making the most of your allowances before the end of the tax year, do get in touch by emailing firstname.lastname@example.org or calling us on 020 7444 4030.
The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.