Following on from our recent summary, entitled ‘How the budget will affect you’, we have complied our top 10 tips for making the most of the 2016 Budget. With the all-important date of 6 April fast approaching, there are a number of things that you can action now before the changes come into place.
The team at Acumen Financial are on hand to support you through all 10, please contact us today with any questions.
1. Top up your pension
Top up before 6 April, when higher earners start to lose the benefit of the tax relief. From then on if you earn more than £150,000 your annual allowance of £40,000 will reduced by £1 for every £2 of additional income over the limit. In the worst cases there will be a £30,000 reduction in the annual allowance, meaning that those earning £210,000 a year or more can only put £10,000 a year into their pension.
This might affect anybody earning over £110,000 a year because the rules take into account bonuses and pension contributions. If you earn £110,000, receive a bonus of £10,000, and make pension contributions of £40,000, you will be caught too.
2. Protect your pensions Lifetime Allowance (LTA)
From 6 April 2016 the total amount you are allowed to build up in your pension will drop to £1m. When you start to draw from your pension there will be a lifetime allowance charge of 55% of the excess if you take it as a lump sum and 25% if you take it as income and you will pay income tax at your marginal rate on the remaining income. Furthermore, 40% taxpayers will pay 55% and 45% taxpayers will pay an effective tax rate of 58.75%. The lifetime cap applies to all your pensions you have except the State Pension.
‘Fixed Protection 2016’ allows you to keep the £1.25m lifetime cap, so long as you stop making contributions before 5 April 2016. This will mean taking urgent action with your pension provider or employer if you have not done so already because if you make any further contributions after that date, you lose the protection and your LTA drops down to £1M.
If you are in a final salary scheme and apply for fixed protection you will have to monitor the amount of benefits you build up each year, and benefit accrual from April must be limited to the ‘relevant percentage.’ To make it more difficult, the ‘relevant percentage’ has yet to be defined but it is likely to mean an annual increase in your pension of no more than the increase in the Consumer Price Index (CPI) in the year ending in September of the previous year.
This may be hard to guarantee, so is likely to mean that you will need to opt-out of a defined benefit scheme if you want to retain fixed protection. No future benefits will build up in your scheme. If you join a new employer, you need to point out that you have Fixed Protection and do not want to be enrolled into the company’s pension scheme. Try to negotiate an adjustment to your pay or benefits package to compensate, as you should if you opt out of an existing scheme.
Pension contributions are like extra pay – if your employer cuts your benefits you deserve something in return. If the standard lifetime allowance increases in the future to more than £1.5m, fixed protection will cease and your benefits will become subject to the higher standard lifetime allowance. At that point you could start making contributions again.
3. Individual protection
If your fund value on 5 April 2016 is £1m or more it should be possible to apply for Individual Protection. This will give you a personalised lifetime allowance equal to the value of your pension savings on 5 April 2016, subject to an overall maximum allowance of £1.25m. For example, if your pension is worth £1.2m at 5 April, your lifetime allowance will be set at this amount.
You do not have to stop contributions but you will pay a 55% charge on benefits in excess of this amount when you draw your pension. Once again, if the standard lifetime allowance exceeds your personalised allowance in the future, you will revert to the standard allowance. It is likely to make sense to apply for both types of protection but, again, this is a highly complex area and expert advice is needed.
4. Top up your ISA
It’s not too late to take out a 2015/16 ISA, so if you have not done so already, take advantage of this year’s allowance of £15,240 before 6 April or it will be gone for good.
5. Open a Help-To-Buy ISA
The new Lifetime ISA (LISA) is launched in April 2017 bringing generous tax breaks for those saving to buy their first home or investing for retirement. Any aspiring homeowners with a Help-to-Buy ISA can roll their savings into a LISA when it is launched. The Help-to-Buy ISA therefore provides an early entrance into the LISA scheme.
Help-to-Buy ISAs allow a maximum initial deposit of £1,200 then monthly contributions of up to £200. Like the LISA, there will be a 25% boost from the government, up to a maximum of £3,000. So if you save a total of £12,000 in a Help-to-Buy ISA, the government top it up by £3,000. The LISA is only open to savers under aged 40 next April, so if you are older this won’t work but young savers can open a Help-to-Buy ISA and start earning government tax top-ups as soon as possible.
6. Capital gains tax
Higher rate taxpayers will see their capital gains tax (CGT) rate fall from 28% to 20% and basic-rate taxpayers will have their CGT rate reduced from 18% to 10% on disposals made on or after 6 April 2016. Everybody has a CGT allowance of £11,100 for the 2016/17 tax year, so if you have not made gains in excess of this there will be no additional tax to pay. Please note that these new rates will not apply to chargeable gains on the sale of residential property.
7. Use the annual CGT exemption
Married couples and registered civil partners can roll their personal allowances together, so that they can have an annual allowance of £22,200 a year. Assets can usually be transferred between spouses to make use of both allowances without any immediate tax charge.
8. Be patient
If you have shares to sell and the profits are greater than your annual CGT allowance of £11,100 it may be worth waiting till after 6 April to sell as the new, lower rates of CGT could give you quite a saving. Make use of lower tax bands because if your spouse or registered civil partner pays tax at a lower rate than you, it may make sense to transfer assets into their name.
9. Personal Savings Allowance.
20% Tax payers can earn interest up to £1000 pa tax free – could you save your ISA allowance for Stocks and Shares ISAs and let the cash deposits stay in a high street deposit?
10. Entrepreneurs’ relief
This tax break applies to business assets, usually a shareholding in a company that you work for but only applies where the individual owns at least 5% of the company when the CGT rate is reduced to 10% for the first £10m of profit. The Chancellor announced this will be extended to shareholdings in unlisted companies (including shares listed on the Alternative Investment Market (AIM), for any holdings purchased after 17 March, 2016.
So an extra £10m worth of gains will now be taxed at a lower CGT rate of 10%, so long as the investment is held for at least three years after 6 April 2016. This will make investing in unlisted equities much more attractive, but these are much higher-risk investments than larger stocks, so they should be approached with caution and specialist advice is needed.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, tax law is subject to frequent change. Tax treatment depends on your individual circumstances. Therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.
The value of investments can fall and you may get back less than you invested. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.