With the end of the tax year looming large and adviser charging finally here, Prudential's Les Cameron shows how you can demonstrate value with some timely pensions planning.
The Romans had many gods; one for just about everything. As we move into 2013, Janus is particularly relevant to the financial planning world. He was the god of doorways and new beginnings, which symbolise this month’s foray into the warm ambiance of the heavily anticipated adviser charging world.
Perhaps, fortuitously, through that doorway, tax year-end also awaits. What better way to show the value of advice than with some efficient planning?
Janus was also a two-faced god, with each face looking in opposite directions, signifying that he looked to the past as well to the future.
Tax titbits ahead of the first post-RDR tax year-end
Looking to the past
What has happened up to and including the 2012/2013 tax year will need to be considered when assessing what impact reliefs, allowances and taxes are having on a client’s wealth.
Using the reliefs and allowances available, protecting clients’ allowances and avoiding tax charges are the key to a client’s financial health.
Look to 2009/2010, if total pension inputs were less than £50,000 then there is unused annual allowance. If this is not used up before the end of 2012/2013, then it is gone forever.
The higher rate threshold was frozen in 2012/2013 at £42,475 so, all things being equal, many people will have become higher-rate taxpayers for the first time. A 40% relief is better than 20% relief, as it makes £100 of pension cost £60 instead of £80. This could well be the tipping point to encourage pension savings among the new higher-rate taxpayers. Existing clients already mitigating their higher-rate tax liabilities may need a top-up for any additional liabilities.
What about your small business owner clients? Some will have made profits and some may have more significant profits than they normally make. They may need help looking at extracting those profits where finding the correct blend of salary/bonus, dividend and employers pension contribution will be necessary. Where pensions are part of the solution, companies’ financial year-end on 31 March provides a time constraint for action.
Perhaps the most important point to note is what the client’s adjusted net income will be for 2012/2013 – broadly, taxable income less pension contributions and gift aid.
It is this measure of income which triggers the tax traps shown in the table below left.
Falling into the traps equals more tax, and a pension contribution is a simple way to get back out of them.
Meanwhile, beware bond gains. When calculating adjusted net income you must include the full amount of the gain rather than the ‘top sliced’ amount. This point is often missed and, as the slice is often significantly lower than the gain, it can give a wholly incorrect impression of the tax impact of the gain. Make sure to check for any bond gains taxable in 2012/2013. As well as considering the taxation of the actual gain, also consider whether the full gain will put the clients into or through any tax traps.
Looking to the future
So, why look to the future for tax year-end planning? Looming large is the reduction of the additional rate tax on income from 50% to 45%. For the very high earners maximising personal contributions in this tax year will be the key to maximising relief. This may involve looking at the 2013/2014 annual allowance and making use of it in this tax year.
Assuming a scheme allows the flexible use of pension input periods (some do not as they are aligned to the tax year), this simply requires making a contribution to an arrangement this tax year and nominating the period to end in 2013/2014 – an extra £50,000 while the ‘half-price sale’ is still on.
The tax traps should be here next year too. The child benefit trap will be four times more painful, as the charge will apply to a full year’s benefit.
Regular pension contributions to spread the cost of exiting the traps over the year may need to be arranged. For those with an element of fluctuating incomes, it may be a base regular premium to sort out the amount that will definitely be in the trap and a revisit this time next year to tidy things up with a single contribution.
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