Tax planning

Everyone has their own financial goals and objectives; 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.

The example below applies to the 2019/2020 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 2019/2020 tax year is £12,500 and allows those eligible to pay no income tax on the first £12,500 of their earnings. For example, if you earn £15,000 a year, you would deduct £12,500 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 2019/2020 due to the loss of £7,500 of personal allowance.

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 2020 from her savings to her group personal pension plan. How would this impact her position?

    • The £12,000 net paid would attract tax relief at source of 20%, increasing the amount invested to £15,000.

    • Gill's adjusted net income would reduce by £15,000, and would allow her to reclaim her full personal allowance, reducing her self-assessment balancing payment by £3,000.

    • Gill would be able to reclaim a further £3,000 tax relief, as the payment to the pension would qualify for tax relief at her highest rate paid (40%), of which she only received 20% relief at source.

  • Another way of looking at it would be that Gill would get a £15,000 investment in her pension for a net cost to her of £6,000.
  • 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.

If Gill had a philanthropic nature and was motivated to help others whilst reducing her own tax liability, she could consider a donation to a nominated charity. If she made a gift of £12,000 the charity would claim the basic rate relief as Gift Aid of £3,000 providing a £15,000 gift. This would also reduce Gill’s net adjusted income to £100,000 allowing her to avoid loss of any personal allowance, saving £3,000. In addition, she would be able to claim a further £3,000 tax reclaim on the excess at the higher rate. The upshot would be the charity benefits from a £15,000 donation at a net cost to Gill of £6,000.

There are relatively few items that are treated as a deduction to adjusted net income but the effect of this deduction can be a powerful one in certain circumstances.

Any of the above recommendations above could result in a significant tax saving. 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 if using the pension option, the investment principles imparted will stay with her for life.

Tax planning is a complex area and is subject to change. Advice should always be tailored to your specific circumstances, and 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.

Tax planning is crucial to building a sound financial plan. Whether it be income tax, capital gains tax or inheritance tax, we can help to ensure you don’t pay more tax than you need to.

— Gurdeep Sangha, Financial Planning Technician