Issue 131

RETIREMENT

What might we expect from the new Government?

tax bracket. For capital gains tax, there is now an annual tax exemption of £3,000. If you move into the higher rate band, you’ll pay 20% on gains, double that for a basic rate taxpayer. And it’s worse for dividend tax. From April 2024 the dividend tax allowance is just £500. Above that, basic rate taxpayers pay 8.75%, but higher and additional rate taxpayers pay 33.75% and 39.35% respectively. If part of your income is from dividends from non-ISA investments, moving the investments that pay the highest dividends into an ISA, as you still have an annual ISA allowance in retirement, will move those dividends into a tax free wrapper. Likewise, for gains from assets subject to capital gains tax, it is possible to sell the assets up to the tax-free allowance and buy them back into an ISA, using your ISA allowance. This moves the asset into a tax-free wrapper, so any future gains will not incur CGT. This has been termed ‘Bed and ISA’. Both these tactics are limited by the annual ISA allowance of course, currently £20,000 per annum. For anyone approaching retirement, transferring pension income into a drawdown arrangement, where you control how much pension payment you receive, is another option to be considered. Your Lowes adviser can tell you more about all these options. Where we may see change, come the autumn, is around inheritance tax and capital gains tax. Business Relief has also been highlighted as possibly coming under scrutiny, as well as pension tax relief. Labour has pledged to carry out a wide ranging pensions review. An area that requires urgent attention is the cost of long term care funding. This is a can that successive governments have kicked down the road. As we are still well within Labour’s first 100 days, in which new Governments traditionally lay out their policies, we will have to wait for further clarification and then for the Autumn Statement to find out more. There have been no knee jerk reactions to the new Government and that is the strategy we would recommend. Until we see what policy changes come in and if and how they may then affect clients’ financial plans, we will be sticking to the strategies we have in place.

While the state pension is not subject to income tax, it does count towards an individual’s tax-free allowance. At the current rate, that leaves just £1,067.60 outside of the state pension payment before tax is due. With the income tax allowance frozen at least until April 2028, for anyone receiving set pension payment(s) on top of this, typically from personal and/or final salary pensions, this state pension increase could move them from the ordinary rate tax band into paying higher rate tax. What can you do about it? When accessing your pension, taking the tax-free cash in tranches, rather than as a lump sum, means it can be used to supplement your income tax-free, thereby reducing the amount of taxed income you need to take in a year. Likewise, drawing down on investments in tax free wrappers such as ISAs for income, again can be used to reduce your taxed income. Something to watch for is how much capital gains tax and/or or dividend tax you pay, as this is dependent on your income After 14 years of Conservative Government, the election on 4th July saw the Labour Party achieve a landslide result and form the new Government. Markets had already priced in a Labour victory, on the back of the strong pre-election polling in the party’s favour, so there was little effect on the stock market. When campaigning, Labour had focused on economic growth and stability as being at the heart of everything they wanted to do, messaging which received the backing of business as well as the City of London. There will be no post-election emergency Budget and Labour has pledged not make changes to key taxes such as Income Tax, National Insurance and VAT (with the exception of charging VAT on public school fees). In addition, the triple lock will be retained, meaning the State Pension will continue to rise.

Pensioners’ tax trap and what to do about it The latest triple lock increase to the state pension of 8.5% means the State Pension is now £11,502.40 per annum. This is very close to the £12,570 p.a. tax-free personal allowance, the point at which pension income payments move from tax-free to taxed.

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