Pensions

Guide To Tax Matters

 560 315 Jess Easby
By:
0

2019/20 Key Changes You Need To Know

In this guide we set out the main tax changes that apply to the 2019/20 tax year, which commenced on 6 April 2019. Reviewing your tax affairs to ensure that available reliefs and exemptions have been utilised, together with future planning, can help to reduce your tax bill. Personal circumstances differ, so if you have any questions or if there is a particular area you are interested in, please do not hesitate to contact us.

Increases to the tax-free personal allowance announced in last year’s Budget have now also come into effect, alongside a number of other proposals. We’ve provided our summary of the key changes.

Income Tax

The tax-free personal allowance increased from £11,850 to £12,500, after Chancellor Philip Hammond announced in the 2018 Budget that he was bringing the rise forward by a year. The higher-rate tax band increased from £46,350 to £50,000 in England, Wales and Northern Ireland. But in Scotland, where Income Tax rates are devolved, the higher-rate tax band remains at £43,430 – £6,570 lower than the rest of the UK.

National Insurance contributions across the UK have also increased to 12% on earnings between £46,350 and £50,000. In line with the rest of the UK, someone in Scotland pays National Insurance at a rate of 12% on earnings up to £50,000, before this reduces to 2% on earnings above this level.

Inheritance

The threshold at which the 40% Inheritance Tax rate applies on an estate remains at £325,000. However, the Residence Nil-Rate Band increased to £150,000. This is an allowance that can be added to the basic tax-free £325,000 to allow people to leave property to direct descendants such as children and grandchildren, taking the combined tax-free allowance to £475,000 in the current tax year. However, the allowance is reduced by £1 for every £2 that the value of the estate exceeds £2 million.

When you pass on assets to your spouse, they are Inheritance Tax-free, and your spouse can then make use of both allowances. This means the amount that can be passed on by a married couple is currently £950,000.

Pensions

The State Pension increased by 2.6%, with the old basic State Pension rising to £129.20 a week, and the new State Pension rising to £168.60 a week.

The amount employees now pay into their pensions has increased to a minimum total of 8% under the Government’s auto-enrolment scheme. The increase means employers now pay in a minimum 3% of a saver’s salary, while the individual pays in a minimum 5%.

The level of the State Pension rises every year by the highest of 2.5%, growth in earnings or Consumer Price Index (CPI) inflation. This is due to the ‘triple lock’ guarantee, which was first introduced in 2010.

The pension lifetime allowance increased to £1,055,000 on pension contributions, in line with CPI inflation. This is the limit on the amount retirees can amass in a pension without incurring additional taxes. Anything above this level can be taxed at a rate of 55% upon withdrawal.

The overall annual allowance has remained the same at £40,000, along with the annual allowance taper which reduces pension relief for those with a yearly income above £150,000.

Student Loans

The earnings threshold before you start to repay a student loan for:

  • Plan 1 loans has increased to £18,935 (from £18,330)
  • Plan 2 loans has increased to £25,725 (from £25,000)

If you’re a director being paid salary and dividends from your company, and you’re paying back a student loan, you must remember the threshold for repayment is based on your total income. This will apply to all current and future student loans where employers make student loan deductions. So if you run a payroll for any employees who have student loan deductions, you need to ensure you have a record of what type of loan they have, so that the correct deductions are made.

Investors

The Junior Individual Savings Account (ISA) limit increased to £4,368. All other ISA limits remain the same. The annual amount that can be sheltered across adult ISAs stays at £20,000 for the 2019/20 tax year.

The Capital Gains Tax annual exemption, that everyone has, increased to £12,000. Above this amount, lower-rate taxpayers pay 10% on capital gains, while higher and additional- rate taxpayers pay 20%. However, people selling second properties, including buy-to-let landlords, pay Capital Gains Tax at 18% if they are a basic-rate taxpayer, or 28% if a higher or additional-rate taxpayer.

Capital Gains Tax for non-UK residents has been extended to include all disposals of UK property.

Entrepreneurs’ Relief gives a Capital Gains Tax break to those who sell shares in an unlisted company, provided they own at least 5% of the shares and up to a lifetime value of £10 million. The holding period to qualify for the relief is 24 months.

This is also the first tax year where claims can be made for Investors’ Relief which, in a similar way, gives Capital Gains Tax breaks to those who sell shares in unlisted firms. While the former is aimed at company directors, the latter is geared to encourage outside investment in firms.

There is no minimum shareholding to be eligible, but investors must have held the shares for at least three years. As the relief was introduced in 2016, this is the first tax year when it can be used.

Buy-to-let Landlords

On 6 April, the next stage of the phased removal of mortgage interest relief came into effect. Buy-to-let landlords used to be able to claim the interest paid on their mortgages as a business expense to reduce their tax bill. Now, they will only be able to claim a quarter of this amount as tax deductible ahead of the complete removal of the relief in the 2020/21 tax year.

Corporation Tax

Corporation Tax is payable on business profits and remains at 19%. The Government is planning to reduce this to 17% for the 2020/21 tax year (on 6 April 2020).

Would you like help with tax planning?

The UK tax system is very complex, but the benefits of structuring your finances tax- efficiently can be significant. Ellis Bates are here to ensure that you have made the best use of the reliefs and allowances available for your particular situation. There are a variety of planning ideas available for individuals, entrepreneurs and business owners. Should you need to discuss or require advice on tax planning ideas, please do not hesitate to contact us.

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.

Millennials Get Real With The Numbers

 560 315 Jess Easby
By:
0

Making Sacrifices For Home Ownership Over Retirement

Millennials are chasing the home ownership dream at the potential cost of a lower income in retirement, new research[1] shows.

Over a third (35%) of millennials say they prioritise saving for a deposit on a home instead of their retirement. Nearly a fifth (19%) say buying a house is the main reason they don’t save more into their pension, while 10% say student debt stops them saving into a pension. One in 11 (9%) admits that frequently changing jobs affects their ability to make regular pension contributions.

Millennials seem willing to make sacrifices for home ownership, with one in ten (10%) living with parents instead of renting to help save more money for a home. The study found men are almost twice as likely (20%) to be heading home compared to women (11%).

Bank Of Mum And Dad

Despite worries about graduate debt and the squeeze on wages, on average, nearly a third (31%) expect to buy their first property by the age of 30, with men (39%) more confident than women (26%) they’ll achieve their ambition. However, the research shows they won’t all have to save hard – an optimistic 20% expect to receive financial aid from the Bank of Mum and Dad.

Industry data[2] shows millennials are right to be hopeful about home ownership – around 365,600 first-time buyers completed mortgages in the year to July 2018, borrowing a total of £59.9 billion. The average age of the first-time buyer during the year was 30, borrowing an average £145,000 on a gross household income of £42,000.

But pensions are feeling the strain. The research found around 21% say they have not started saving for retirement yet, while 15% say pension saving does not motivate them, and 12% believe pensions are irrelevant to millennials.

Focused On Home Ownership

Retirement can seem daunting for millennials and is, of course, a long way off when you are contending with student debts and high rents. However, it is crucial to start saving for your pension as early on as possible, putting away as much as you can each time.

It is easier if you start doing this as soon as you start working, so you get used to the money going straight into your pension pot. Many will, at least, be saving through the workplace, which is a good start, and contributions should be regularly reviewed to ensure a significant fund can be built up.

Not all millennials, however, are focused on home ownership. According to the survey, approximately 17% of under-35s say buying a house is a not a realistic option at present, while 11% say that saving for a house deposit is not a financial priority. And it is not just millennials, as the research shows that one in seven 35-54-year- olds have given up on the hope of ever owning a home.

Don’t Let Saving Become A Daunting Prospect

Juggling buying a house with saving for retirement is no doubt a challenge, and it is inevitable that something may get dropped, which unfortunately appears to be retirement saving. However, it is important to start saving for your pension as early on as possible. To find out how we can help, please contact us – we look forward to hearing from you.

Source data
[1]Consumer Intelligence conducted an independent online survey for Prudential between 20 and 21 June 2018 among 1,178 UK adults
[2]https://www.ukfinance.org.uk/house-purchase-activity-slows-in-june-but-remortgaging-activityremains-high/

Tax Relief and Pensions

 560 315 Jess Easby
By:
0

Annual and lifetime limits

When it comes to managing money, one of the things some people find most difficult to understand is the tax relief they receive on payments into their pension. Tax relief means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

Tax relief on your annual pension contributions

If you’re a UK taxpayer, in the tax year 2018/19 the standard rule is that you’ll receive tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

But, there is an exception to this standard rule. If you have a defined contribution pension and you start to draw money from it, the annual allowance is reduced by £1 for every £2 income where adjusted income exceeds £150,000.

The Money Purchase Annual Allowance (MPAA)

In the tax year 2018/19, if you start to take money from your defined contribution pension, this can trigger a lower annual allowance of £4,000. This is known as the ‘Money Purchase Annual Allowance’ (MPAA).

That means you’ll only receive tax relief on pension contributions of up to 100% of your earnings or £4,000, whichever is the lower.

Whether the lower £4,000 annual allowance applies depends on how you access your pension pot, and there are some complicated rules around this.

The main situations when you’ll trigger the MPAA are:

  • If you start to take ad-hoc lump sums from your pension pot
  • If you put your pension pot money into an income drawdown fund and start to take income

The MPAA will not be triggered if you take:

  • A tax-free cash lump sum and buy an annuity (an insurance product that gives you a guaranteed income for life)
  • A tax-free cash lump sum and put your pension pot into an income drawdown product but don’t take any income from it

You can’t carry over any unused MPAA to another tax year. The lower annual allowance of £4,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

Tax relief if you’re a non-taxpayer

If you’re not earning enough to pay Income Tax, you’ll still qualify to have tax relief added to your contributions up to a certain amount.

The maximum you can pay is £2,880 a year or 100% of your earnings – subject to your annual allowance.

Tax relief is added to your contribution, so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this.

How much can you build up in your pension?

A pension lifetime allowance puts a top limit on the value of pension benefits that you can receive without having to pay a tax charge.

The pension lifetime allowance is £1,030,000 for the tax year 2018/19. Any amount above this is subject to a tax charge of 25% if paid as pension, or 55% if paid as a lump sum.

Workplace pensions, automatic enrolment and tax relief

Since October 2012, a system has been gradually phased in requiring employers to automatically enrol all eligible workers into a workplace pension.

It requires a minimum total contribution, made up of the employer’s contribution, the worker’s contribution and the tax relief.

For more information please visit our pension page  or book a chat with our expert team now.

retirement planning

Start Planning Early

 560 315 Jess Easby
By:
0

retirement planningThings you can do to increase your chances of success

The future may seem far away, but you need to start planning early. Regardless of your goals, there are things you can do to increase your chances of success! It is important to look objectively at your plans and adapt them as your priorities change over the years and you go through different life events.

Many of us have got things in mind we’d like to do when we retire, whether it’s travelling the world or simply doing more of what you love. But how can you save enough for a decent retirement without having to give up what makes life good today?

Eagerness to retire

According to research[1], almost three quarters (73%) of people aged 45 or over are longing for the day when their life is no longer confined by their working routine. Yet, despite an eagerness to retire, the research shows that almost half (46%) of over-45s with a pension have no idea how much it is currently worth, and that more women (52%) than men (41%) don’t know the value of their own pension savings.

Shift in lifestyle

A fifth (19%) of those aged 45-plus don’t have a pension in place yet. Two thirds of those aged 45- plus (67%) are hoping for a shift in lifestyle, keen to retire early before the State Pension age kicks in. But only one in ten of them (12%) has proactively increased how much they are investing in their pension when they’ve been able to, in order to help make this happen.

Pension freedoms benefits

Once people reach the age of 55 (age 57 from 2028), they can benefit from pension freedoms which allow them to start withdrawing money from their pension savings if they need to. It’s a point at which some key decisions can be made, and the importance of knowing the value of their pension should come sharply into focus. But, even among this group of people aged 55–64, some 45% still have their eyes shut and don’t know what their pension savings are worth.

For more information please visit our pension page  or book a chat with our expert team now.

Source data [1] The research was carried out online for Standard Life by Opinium. Sample size was 2,001 adults. The figures have been weighted and are representative of all GB adults (aged 18+). Fieldwork was undertaken in November 2017