Everyone has their own financial goals and objectives, and effective tax planning may allow you to reach them faster. Paying unnecessary tax can make a big hole in any retirement or investment plan, but an independent financial adviser may be able to help reduce an individual’s or company’s tax liabilities, meaning you get to keep more of what you earn.

There are many areas in which legitimate tax mitigation can be applied, and numerous vehicles with which this can be done. By assessing your specific financial circumstances, an adviser can recommend relevant action to maximise all available allowances and opportunities.

Tax planning will naturally be tied into any good financial plan, but our advisers can also offer a stand-alone service if you have a specific aim you would like to achieve.

To learn more about how an AFH adviser could help to ease your tax liabilities, see our example below, or simply get in touch with us.

(For clarity’s sake, the example below applies to the 2017/2018 tax year.)

The complex bit

Most people think that the highest rate of income tax is 45% for those earning more than £150,000 a year. However, consider Gill, who has a salary of £110,000 with additional interest from her savings of £5,000.

Her adjusted net income would be:

£110,000 + £5,000 = £115,000

Anyone with an adjusted net income of more than £100,000 loses their personal allowance (the amount of income you don't have to pay tax on) at a rate of £1 for each £2 of additional income over £100,000. 

The personal allowance for 2017/2018 tax year is £11,500 and allows those eligible to pay no income tax on the first £11,500 of their earnings. For example, if you earn £15,000 a year, you would deduct £11,500 from this before calculating how much income tax you owe.

For Gill, as she has an income of £15,000 in excess of £100,000, from her personal allowance she would lose £7,500. Here’s how this has been calculated:

£15,000/2 = £7,500 of her personal allowance. (£1 for every £2 of adjusted income in excess of £100,000)

In light of the above, Gill will pay additional income tax of £3,000 for the tax year 2017/2018.

Tax reliefs are dependent upon personal circumstances, and pension and tax rules are subject to change by the government.

How can AFH help?

  • Gill could make a pension contribution of £12,000 before 6 April 2018 from her savings to her group personal pension plan. This would reduce her adjusted net income by £15,000, as the contribution of £12,000 is considered a net contribution, and receives tax relief at the basic rate of 20%.
  • The effect would be to save Gill not only the £3,000 additional income tax, but she would also be able to claim a further tax credit of £3,000 as income tax relief on the £15,000 pension contribution at 40%.
  • Incidentally, Gill may already be paying contributions to her workplace pension but may be unaware that it’s her responsibility to claim the additional tax relief available on the pension contribution. This could allow her to reduce the single payment she makes to her pension, although she may feel the benefits are still worth it.

Alternatively, Gill may choose to invest in an Individual Savings Account (ISA), which could either be cash or stocks & shares, as this would make her income more tax efficient. She may also be prepared to consider another long-term investment that would further reduce the taxable interest and replace it with dividends that would fall within her allowance, whilst realising any capital gains annually (within an allowance that often goes unused). This approach would work to reduce Gill’s income tax liability.

The recommendations above could result in a significant tax saving, not only in the 2017/2018 tax year but also in future years. In addition, with the support and guidance from an independent financial adviser and the team at AFH, Gill will have started the valuable journey of education around financial planning and investment principles that will stay with her for life.

Tax planning is a complex area, and should always be tailored to your specific circumstances. If you’re not sure where to start, an AFH independent financial adviser will be able to create a plan centred on your needs and objectives, so you can enjoy the most of your income.

The most suitable course of action is dependent upon individual circumstances and professional advice should be sought. The value of investments and the income derived from them may go down as well as up. Tax reliefs are dependent upon personal circumstances, and pension and tax rules are subject to change by the government.

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