Our selection of the latest stories in the news – April 2015 – that may be of interest to our clients.
Tax hit on pension withdrawals
Just days before the pension rules changed on 6th April, HMRC confirmed that people withdrawing sums above their 25% tax-free cash entitlement would pay emergency tax rates unless they provided a P45 form to their pension provider – which the vast majority of people won’t be able to do. In effect, HMRC rules require the providers to treat any such payment as the first of twelve monthly instalments, and levy the appropriate tax. In many cases, that will be emergency tax at a far higher rate than is actually due. The Telegraph cited the example of a £30,000 pension withdrawal by a retired person with no other earnings. The tax deducted would be £8,970 whereas the tax due would be £6,590 less. But the individual would have to put in a claim to HMRC to get back the tax that had been overpaid.
As people realise how much tax they will pay on withdrawal from their pension funds, we expect the vast majority to follow sensible strategies for managing their funds for the long term.
Use your pension fund to dodge IHT
Avoiding inheritance tax is easy if you use your pension fund, says the Telegraph. Pay in as much as you can to your pension fund while you’re working – and collect tax relief – and then withdraw as little as you can in retirement. Instead, spend capital you have in ISAs or other savings – because all the money you leave in your pension fund will go free of inheritance tax to whoever you choose to nominate. The Telegraph even suggests it could make sense for buy to let investors to sell their properties and put the money into pension funds to cut their tax bills.
The pension fund is now a great inheritance tax shelter. In fact, for technical reasons it’s even better than the Telegraph said. People may struggle with the idea that it makes sense to spend capital built up in ISAs while NOT spending money from their pension fund – but that’s certainly the most advantageous strategy for many people under the new rules.
A million will be hit by 60% income tax
Under a rule introduced in 2010, people earning over £100,000 lose their personal income tax allowance at a rate of £1 for every £2 of excess income. That means they pay a marginal tax rate of 60% on about £20,000 of income. Already, the FT says, there are nearly 800,000 people in this particular tax trap, and their numbers will rise to about a million in 2018-19.
Perhaps a future Chancellor will change the rule, but in doing so will he simply create other anomalies? For the time being, making bigger pension contributions is the most obvious way to dodge the 60% rate.
6 million children can jump into Jisas
The parents of 6 million children now have the opportunity to transfer their plans from Child Trust Funds to Junior ISAs, says the Times. While the rules are the same – a tax-free fund and full payout to the child at age 18 – the Jisa offers two extra advantages. One is a wider range of investment choices, and the other is that at age 18, the child can choose to convert some or all of the capital that has been accumulated into a normal ISA, thus keeping it tax-free. The maximum annual contributions are £4,080, with any number of people allowed to make one-off or regular contributions to a child’s plan.
Up to £15,600 tax free
A rather complicated tax law change from April 6th 2015 has delivered a very welcome result for many pensioners, says the Independent. Under the old rules, the first £2,880 of income from savings was taxed at 10%. Under the new rule, the rate of tax on savings income is zero on the first £5,000 of income. This means you can have up to £15,600 of income this year without paying a penny in tax, provided no more than £5,000 of it comes from savings. It’s estimated that about 1 million people will escape the tax net completely as a result, and a further 500,000 will pay much less tax on their savings income.
If your total annual income will be less than £15,600, you can use Form R85 to get banks and building societies to pay you interest without deducting any tax. Remember that for the purposes of your calculations, any ‘income’ you draw from investment bonds doesn’t count towards the £15,600.
This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.
Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.