Lowes Magazine Issue 121

PLANNING

How we have helped clients Lowes Consultant Andrea Leask looks at ways we help clients navigate the changing tax landscape

To be noted here is that the pensions Lifetime Allowance was also frozen in the Budget at £1,073,100. Adding more money to a pension which will then take it above that threshold has to be carefully considered as it can incur a tax penalty. Dividends and ISA allowances The Chancellor has frozen the annual amount of gains you can make each year before paying CGT at £12,300 until 2026. This limits what investors can take from their portfolios in capital gains each year before paying tax, currently paid at 10% and 20%, basic and higher rate tax respectively. In a tax shelter like an ISA, investments grow free from Capital Gains Tax and Income Tax, making them key tax efficient investment vehicles. Dividends also are tax-free in an ISA. Outside of an ISA tax is paid on any dividends received in single tax year over £2,000. A basic rate taxpayer pays 7.5% tax on dividends above £2,000 annually, but a higher rate taxpayer pays 32.5%, and an additional rate taxpayer pays 38.1%. These rates are being increased by 1.25% from the 2022/23 tax year. A portfolio of £50,000 yielding 4% will produce £2,000 in dividends. So, paying into an ISA each tax year can be a useful way to accumulate and draw down dividends in a tax efficient way. Transfer of assets Married couples or people in a civil partnership can transfer assets between them without incurring capital gains. Where a large capital gain would be incurred for just one person, transferring the assets can mean two capital gains exemptions of £12,300 can be used saving on tax. These are just a few ways to help mitigate against the freezing of tax allowances this year. The best strat - egy will depend on the circumstances of the individual so if this is an issue for you, please call 0191 281 8811 and we will arrange for a consultation.

IN THE 2021 BUDGET THE Chancellor froze a number of tax allowances until 2025/26. Frozen tax thresholds mean taxation of all kinds will begin to affect more people over the next five years. According to the Office for Budget Responsibility (OBR), the tax burden is going to be the highest since the 1950s.

The main tax allowances that were frozen and so likely to have an effect on the tax people pay, are the personal tax-free allowance and the higher tax threshold. As rising inflation eats into people’s spending power, fuelling demand for pay rises, more people are likely to move from the ordinary to higher rate tax bracket. The CGT free allowance and IHT allowance were frozen too. Helping our clients to navigate their way through the tax changes which arise when Chancellors announce their Budgets is one way we help our clients maintain their wealth. Below are some ways to offset some of the tax rises resulting from the recent big freeze on tax allowances. Pension contributions For taxpayers a pension contribution is a good way to mitigate their overall tax bill. For each £800 contributed to a pension, the government adds £200. Higher rate taxpayers can benefit from a further £200 because of the higher income tax they pay, which they can claim via their tax return. For employees in a company’s workplace pension, often the employer can apply the extra tax relief automatically. Investment growth and income are tax-free inside the pension, and 25% of the total pot can be taken as a tax-free lump sum at retirement. The remainder is taken as income, which is taxable, but in retirement, higher rate tax payers are likely to be paying a lower overall tax rate than when working, while the pension will have benefitted from accumulated investments using the additional 20% available through the tax benefit.

14 Lowes.co.uk