This week, the new Chancellor, Rachel Reeves, announced that Labour would be scrapping the planned cap on Care Fees.

On Monday, Reeves announced a series of spending cuts, which she argued were a result of the £21.9bn Government overspend hidden by the Conservatives when they were in government. These involved scrapping the planned reforms to adult social care in England that were due to come into effect in October 2025, but for which funding had yet to be allocated.

Sir Andrew Dilnot, the man who originally authored the proposals back in 2011, said that this was yet another example of social care “being given too little attention, being ignored, being tossed aside. We’ve failed another generation of families,” he told the BBC. 

Defending her cuts, the Chancellor said: “There are a lot of things this new Labour Government would like to do but unless you can say where the money is going to come from you can't do them."

What this means in real terms

The social care plan would have introduced an £86,000 cap on the amount an older or disabled person would have to pay towards their support at home or in care homes from next October.

Once individuals with significant care needs have spent £86,000 on their care, local authorities would cover any additional costs.
The asset limit for receiving partial council support before reaching this cap would be raised, allowing those with up to £100,000 in assets to qualify, compared to the current limit of £23,250.

The care system is facing increasing demand from an ageing population and because people are living longer with more complex conditions.

David Sturrock, Senior Research Economist at the Institute for Fiscal Studies (IFS), said:
“These reforms would have capped the costs people have to pay towards their care over their lifetime, and increased the generosity of means-tests that determine who qualifies for support with care costs from local councils (for those yet to reach the cap). The decision not to go ahead with this expansion of the welfare state will save £1 billion next financial year, and around £4–5 billion a year by the end of the parliament”.

If you’re interested in how to manage your finances to ensure the best possible wealth outcomes in later life for you and your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

On the run up to retirement, many over 55s are opting to manage their finances without professional guidance, a decision that carries significant risks. According to research by Canada Life, a staggering 79% of individuals in this age group are navigating their retirement plans independently, without seeking financial advice. This DIY (Do-it-Yourself) approach contributes to nearly 29% of retirees finding their reality falling short of their dreams.

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Common pitfalls in planning for retirement: 

Many retirees are finding themselves unprepared for the financial realities of retirement. 

Factors contributing to this gap between their expectations and reality involve a failure to account for several critical aspects:

1. Health issues: The Canada Life study found that 36% of retirees reported experiencing unexpected health issues disrupted their retirement plans.
2. Inflation: About 21% of respondents did not factor in inflation, leading to a decline in purchasing power over time
3. Unforeseen expenses: Unexpected bills and expenses caught 13% of retirees off guard, indicating a shortfall in financial preparation.
4. Underestimating financial needs: A significant 11% of retirees underestimated the amount of money needed for a comfortable retirement.

This study underscores the critical importance of thorough and pragmatic financial planning before retirement. Tom Evans, Managing Director of Retirement at Canada Life, emphasises that through consulting a qualified financial adviser, retirees can address these factors proactively, ensuring more secure and fulfilling retirement.

Hurdles faced during retirement:

While understanding the pitfalls before retirement is essential, navigating the hurdles during retirement—such as managing your expenditure, income strategy, and adapting to legislative changes—requires ongoing attention.

Expenditure:

During retirement your needs will evolve, influenced by factors like inflation, healthcare costs, and lifestyle changes. The Pension and Lifetime Savings Association’s Retirement Living Standards study offers a helpful guide, showing that a couple aiming for a comfortable retirement might need an annual income of around £59,000, while a moderate lifestyle requires about £43,100 per year. Whilst this provides a good benchmark, your spending and goals are unique. As a result, it is essential to identify your specific expenditure needs and assess if they are sustainable throughout your retirement.

Income:

Strategising how to draw upon your assets to support your retirement is equally important. Ensuring that your assets work hard for you and that your funds are used in a tax-efficient manner is crucial. Retirees may have multiple income sources, across cash, pensions, ISAs, bonds and rental properties. Effective planning not only ensures tax efficiency but also can helps maintain or increase income potential during retirement. Seeking advice on how to take an income from your pensions and other assets is critical, as planning for the next two or three decades leaves little room for mistakes. 

Legislative Changes:

Recent and potential future changes to pension legislation, can profoundly affect retirement planning. Staying informed about these updates is crucial, however navigating these changes within the complex retirement planning landscape can be challenging. In these cases, working with an adviser can be hugely beneficial to provide guidance on how to adjust your plans to mitigate any negative impacts from legislative shifts and take advantage of any new opportunities that arise. 

A recent example of a significant change is the removal of the lifetime allowance. This legislation introduced two new allowances that affect the amount of tax-free lump sums or tax-free death benefits available from a pension. With the new Labour Government expected to release a budget this Autumn, it will be crucial to consider how these changes impact your retirement planning and to strategically respond accordingly.

A successful retirement plan isn't just about reaching a financial goal before you retire—it's about maintaining that security and adapting to changes throughout your retirement years. Regularly reviewing your expenditure, income strategies, and staying informed about legislative changes ensures that your plan remains robust and effective. 

Value of Advice:

Financial advice is of course not free so while many can see the benefits of receiving advice, the cost associated may be a driver behind why people are choosing to DIY (Do It Yourself) their plans. According to a report by the International Longevity Centre - ILC, individuals who receive professional financial advice are, on average over a decade, nearly £48,000 better off in pensions and financial assets than those who do not.  The study showed that the combined benefits of financial advice over a ten-year period are approximately 2,400% greater than the initial cost of the advice. This significant return on initial cost underscores the value of seeking professional guidance.

In summary, retirement involves many challenges, and the importance of robust financial planning cannot be overstated. Opting for professional guidance rather than navigating these waters alone could significantly improve your financial well-being during retirement and equip you with strategy to manage potential pitfalls effectively. Working with an adviser can ensure that as you transition away from work, you can feel confident in your future, providing you with peace of mind for a comfortable and fulfilling retirement.

If you’re thinking about your own future, we’re currently offering anyone with £100,000 or more in savings, pensions or investment a cash flow review worth £500. Why not get in a touch for a free initial consultation to see how we might help.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

The value of your investments can go down as well as up, so you could get back less than you invested.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

Are you planning on sending your children to private school? While everybody wants the best for their children, private education doesn’t come cheap, especially with Labour’s widely anticipated intention to remove the VAT exempt status. Therefore, we may expect that even households with higher incomes could struggle with the cost. So, if you’re wondering how to pay for private school education – you’re not alone.

When it comes to school fees planning you might have some questions. For example, can you claim tax relief on private school fees? Do private schools get government funding in the UK? Is a donation to a private school tax deductible? That’s where we can help. Keep reading to find out whether or not you can claim tax relief on private school fees, and how to reduce the costs.

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What is the average cost of private education?

Since the last Independent Schools Council (ISC) census, carried out in 2023, day school fees continued the steady upwards trend - rising by 5.8%. A day school costs on average £15,000 per year per child, depending on the area, while a boarding school is likely to cost over £39,000 per year. In comparison, the average yearly fee for a private day school in 2004 was just over £8,000. However, with the recent change in government, Labour have confirmed its intention to remove the VAT exempt status of private school fees. This could have far-reaching implications, with parents being required to pay VAT on fees, potentially increasing costs by 20%. Although this isn’t expected to take place until September 2025, it’s important to prepare early and evaluate your options.

Average fees per term in 2023 are as follows:

(Source: ISC Census and Annual Report 2023)

Do private schools get government funding in the UK?

Private schools do not get Government funding in the United Kingdom. While they have to be registered with the Government and get inspected on a regular basis, like any other school, they’re funded by school fees and gifts rather than the Government.

Most private schools in the UK have charitable status, allowing them to take advantage of various tax concessions – to be eligible, they must prove that they provide public benefit.

Is a donation to a private school tax deductible?

In short, no. However, there are ways to reduce private school fees while also paying less tax, easing the pressure. We’ve outlined some of them here, so that you can make the best decisions for your family.

Get grandparents involved

Grandparents might be willing to contribute as part of a broader effort towards intergenerational planning, particularly as doing so can reduce their estate’s value for inheritance tax purposes. If they give a gift, and survive for at least seven years after doing so, the gift will be free from inheritance tax. Meanwhile, grandparents can also make the most of their annual gift exemption of £3,000 or make regular gifts out of surplus income.

An alternative for grandparents who want to help out is to set up a Bare Trust. A Bare Trust is created when a gift is made into a savings or investment account, with the intention of creating a trust. In most cases, there are two adult trustees, while the child is the beneficiary. Of course, any gifts made to a Bare Trust will be exempt from inheritance tax if the gift giver survives for seven years, while the grandparents can also still contribute their annual gift exemption or regular gifts out of surplus income.
With a Bare Trust, any income or gains would be payable to the beneficiaries or children in this case, not the grandparents, which is likely to be within the child’s personal tax allowance.

Set up a family business

If you decide to go down this route, the grandparents will need to set up a family business and name the children as shareholders. You can then fund private school fees by paying out dividends to the children, which will be entirely tax free if it is within their tax allowance. If the children don’t have any additional income or earnings, they’ll be able to use their personal tax allowance, which stands at £12,570 per year for 2024/25 tax year.

Assets like property or investments, which generate income, can be allocated to the business by the grandparents. Remember, it needs to be the grandparents who create the business instead of the parents – when parents gift to children, it could incur a tax charge.

Use offshore bonds

Another option for parents or grandparents is to invest a lump sum in an offshore bond, naming themselves as the trustees and the children as the beneficiaries. It’s easy to split the bond into multiple policy segments, each one encashed to pay for private school fees each year or term. 

The policy segments can then be assigned to the children when they reach private school age via a Bare Trust. As a result – providing that the parents or grandparents have invested wisely and reviewed their investment on a regular basis – the tax on the gain would, in theory, be payable by the children. However, as it should be within their personal tax allowances, it ought to be tax free.

Use pension money

Under the current pension rules, at age 55 (57 from 6 April 2028), you’re able to take a quarter of your pension as a tax-free sum. As such, you may decide to use this sum to cover the cost of private school fees. In particular, this can make sense if you’re a higher or additional rate taxpayer, as you won’t have any additional tax to pay. Then, it’s possible to leave the rest of your pension invested so that you’re covered for income in retirement.

Of course, many people continue working past the age of 55, but you can take the lump sum even if you’re still working. By the time you’re 55, your children might be past school age too, but there’s even a way around this if you need to pay the fees while you are younger.

What you could do is increase your mortgage to pay for the school fees, and then, when you get to age 55, you can withdraw the lump sum from your pension, and pay it off. This is not a decision to take lightly however so it’s important to engage with a financial adviser before doing so, as it might not make financial sense.

Pay upfront

Another option for reducing the average cost of private education is to pay the fees upfront in a lump sum. It’s something many private schools will allow you to do, and it can save you money in the long run as private school fees can inflate relatively quickly.

Some schools will offer investment schemes, wherein parents pay a lump sum in advance which is then invested by the school into low-risk investments. Since private schools have charitable status, the returns on the investment will be tax-free. If you were to make the same investments yourself, you’d be in line for smaller returns because they wouldn’t be tax free. In fact, you might have to pay 40-45% tax.

In comparison, by paying private school fees upfront, you won’t have to pay any tax. Plus, not only will you benefit, but your child and their school will too. As you’ve paid upfront, you’ll be in line for a discount from the school, who will then keep what remains from the returns.

Summary

Dealing with tax relief on school fees – and keeping the costs down especially with the looming addition of VAT– can feel like a tricky task, but it doesn’t have to be. If you’re looking to make paying for private school fees a little easier, you can get in touch with The Private Office to arrange a free consultation.

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The details in this article are for information only and do not constitute individual advice.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The value of your investments can go down as well as up, so you could get back less than you invested.

The recent change of Government in the UK has naturally brought with it a number of speculations about what Labour will look to target when it lays out its fiscal policy for the term ahead. You will have heard about potential changes to Capital Gains Tax (CGT), or modifying Inheritance Tax (IHT), however there have been significant changes in recent years to many other areas, and one in particular is the dividend allowance. It has shrunk dramatically in recent years, from £5,000 per annum in 2017/18 to £500 per annum in 2024/25. It is important, then, that if you are getting income from dividends, you need to understand your tax implications. 

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What is a dividend?

Dividends are periodic payments made to shareholders by the companies they have invested in. It is a slice of the company’s post-tax profits that is ‘divided up’ among its shareholders. Clearly, the dividend amount is variable and is dependent on strong corporate performance in order for them to pay out to shareholders. 

Is there a tax free Allowance for dividends in the UK?

In the UK, HMRC allows individuals to receive a certain amount of dividend income before they start paying tax, known as the dividend tax free allowance.

This allowance was first introduced on 6 April 2016 to all UK residents, replacing the dividend tax credit at that time.

Although in the UK we can utilise the dividend allowance, recently the amount at which you can earn before paying tax was reduced, meaning more people will have started paying tax on their dividend income. 

What is tax free dividend allowance?

For the 2024/25 tax year, the dividend tax free allowance is £500. This means that you can receive income of up to £500 from shares and some equity-based collective investment funds without paying any tax.

Dividends that arise within ISA and pension wrappers are exempt from dividend tax due to the favourable tax-free growth nature of these investments. 

Understanding tax on dividends

Once the amount of dividend income an individual receives breaches the dividend allowance, the level of tax you pay on this income depends on what level of total income you receive in any given tax year.

The above table shows the level of tax you will pay if you receive more than £500 worth of dividend income in the current tax year. If your total income for the year is less than the Personal Allowance, which sits at £12,570 in the current tax year, you will also not pay tax on your dividend income.

As per the table above, dividend tax rates are less than income tax rates, making dividends a more favourable form of income. Individuals who own their own limited company can take dividends from the profits of their company instead of a salary in order to decrease their tax liability for a given tax year.

Can I transfer tax free allowance to share dividend allowance?

Although it is not possible to transfer your dividend allowance to your spouse, like it is with part of the Personal Allowance, transferring dividends to your spouse is an effective way to mitigate dividend tax if one member of the couple falls into a lower tax bracket than the other. As assets can be passed between spouses free of inheritance tax implications, assigning shares to the lower earner means that any dividend income they receive over the dividend allowance will be taxed in accordance with their relevant, lower rate of dividend tax. For this to be effective, the transfer of the shares/investment should be a genuine and unconditional transfer of ‘beneficial’ ownership, from which the transferor should receive no benefit.

Please keep in mind this is a complex area of taxation and such work should be undertaken with help of your accountant or financial adviser. 

How do I pay dividend tax?

Unlike a salary, dividends are not taxed at source. If you earn under the dividend allowance of £500, you do not need to do anything. If you earn above this, but below £10,000 in the current tax year, you must contact HMRC. HMRC will give you the option of either adjusting your tax code to pay your dividend tax liability or completing a self-assessment tax return. 

If you earn over £10,000 of dividend income in the current tax year, your only option for paying your dividend tax bill is by completing a self-assessment tax return.

 Self-assessment tax returns must be completed for the previous tax year by 31st October if choosing to fill in a paper form or 31st January if you opt of an online form. For example, you must complete your online tax return for the 2023/24 tax year by 31st January 2025. 

How we can help

Whether you are a business owner who would like to efficiently draw an income from your business, or you are receiving income from your investments, we can build an effective, tax efficient income strategy that suits you and your family's needs. We make it a priority to stay on top of legislative changes to taxes applicable and work with a number of client accountants to ensure we have the most up to date tax information available for each client.

If you’d like to learn more about how we can help you, why not get in touch for free initial review with one of our expert advisers.

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The FCA does not regulate estate or tax planning. 

The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The new Chancellor, Rachel Reeves, has been urged to consider an inheritance tax (IHT) raid on pension pots that could raise up to £2 billion a year, following suggestions from The Institute for Fiscal Studies (IFS).

The IFS, a leading economic think-tank, has offered a solution to the pressure being put on the Chancellor to meet public spending targets. They suggested that unspent cash in defined contribution funds should no longer be exempt from the ‘death tax’. 

The recommendations from the IFS aligned with recent recommendations by the International Monetary Fund (IMF) urging the Government to stick to commitments to balance the books. However, they warned that the prospect of the continuing high interest rates in the UK could make the task harder to achieve.

What is IHT? 

Inheritance Tax (IHT) is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, and investments. 

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2024/25 tax year, the threshold is set at £325,000. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free. 

For more information on IHT, check out our complete IHT guide. 

An Inheritance Tax Raid 

Both Labour and the Conservatives were criticised during the campaign for not being upfront about the tough choices they would need to make to improve the economy. During the election campaign, economists criticised both parties for not being realistic about the tough choices required, either in the form of spending cuts or tax increases. An IHT raid could go a long way to help in this regard, but it comes with many tough considerations. 

For example, there are fears that the tax raid could leave some facing double taxation. Currently, if the pension pot owner dies under the age of 75, money can be withdrawn without being subject to inheritance tax or income tax. If they die after turning 75, withdrawals by the heir are taxed as income. The latter group could face a double tax hit if IHT is also applied. 

If you’re interested in how to manage your IHT to ensure the best possible wealth protection for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice.

It’s another record high for inheritance tax (IHT) receipts as HMRC’s figures reveal a staggering £1.4bn raked in just the first two months of the 2024-25 tax year, £200m higher than the same period last year. The Office for Budget Responsibility (OBR) has said that inheritance tax receipts show no signs of slowing and has predicted that IHT receipts will continue to rise, forecasting that the tax take will reach a staggering £9.7bn a year by 2028/29. With the newly appointed Labour Government allegedly considering an inheritance tax raid to ‘redistribute’ wealth, this predicted figure could climb even higher. 

The overall HMRC tax receipts for 2023/24 tax year amounted to approximately 7.5bn, an increase from £7.09bn the previous tax year. Meaning if receipts continue the expected trajectory, that is potentially more than £2bn extra in inheritance tax. 

What is IHT? 

Inheritance Tax is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, and investments. 

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2024/25 tax year, the threshold is set at £325,000 per person. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free. There is an additional allowance known as the residence nil rate band, which allows a further £175,000 per person to be passed down to direct descendants when passing down the main residence. 

Why are IHT receipts continuously on the rise? 

The number of estates across the UK that are being pulled into the IHT net are increasing each year. Total IHT receipts collected by the Government have been steadily on the rise as property prices have risen over the years, made worse given the nil rate band level hasn’t changed since 2009. Added to this the nil rate band threshold has since been frozen at its current level until 2028. This was initially announced by the then Chancellor, Rishi Sunak, in his 2021 Budget. The Budget outlined that the IHT threshold, (among many others) would be frozen for five years until 2026. However, after Chancellor Jeremy Hunt’s Autumn Statement in 2022, it was confirmed that the freeze would be extended for a further two years until April 2028. 

Due to the rising rate of inflation coupled with ever increasing property values across the UK, the freeze essentially means that a greater number of people will cross the inheritance tax threshold each year. Many have been calling this move an example of ‘shadow tax’, as the freeze ultimately means an increasing number of Britons will fall into the tax threshold each year whilst not explicitly increasing tax rates. With the freeze not due to end until April 2028, it’s predicted that the Government will have collected billions in extra inheritance tax. 

The inheritance tax allowance of £325,000 was increased from £312,000 on 6 April 2009 and with the freeze extended to April 2028, that’s a staggering 19 years! 

If you’re interested in how to manage your IHT to ensure the best possible wealth protection for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

With the arrival of a new Government, all eyes are focused on what we might expect from Sir Keir Starmer and his newly chosen cabinet. The new Chancellor, Rachel Reeves, has announced that there will be a Budget this year, although with the required ten weeks' notice it is unlikely we will see anything until at least mid-September at the very earliest. 

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It has been suggested that Labour, at this point, have been ‘light’ on the details of what we may expect and there continues to be some concerns around possible changes to pensions , although for now we can be assured that the Lifetime Allowance will not be reinstated as was confirmed earlier this year. However, Labour have confirmed they are planning a full ‘pension review’, so w e have to wait and see what may materialise. 

The current state of play sees us with an increasing tax burden. From a reduced Dividend allowance, falling to £500 - just 25% of the allowance from two tax years ago - to the Capital Gains Tax (CGT) allowance that has reduced from £12,300 to £3,000 over the same time period. We have also seen a freeze in the Savings and Inheritance Tax (IHT) allowances and no increase in the personal income tax bands in England and Wales for years. 

Following a prolonged period of strong wage growth, more and more individuals are pushed into a higher income tax bracket, wiping out much of the value of higher salaries. This is made worse with reduction in the level at which you fall into the additional rate tax band of 45%, falling from £150,000 to £125,140 in April 2023. 

It is suggested that the freeze on allowances is likely to remain, but with this increased tax burden, tax relief on pensions is still the one major perk which has not yet been raided. Will this all change later in the year following a Budget? We will have to wait and see. The advice so far is you can only work with the information you know today, so now is a good time to utilise this benefit, especially if we may see a change in the near future. 

Take advantage of the ‘tax giveaway’ 

The tax relief you gain from contributing to your pension is effectively a ‘tax giveaway’. The tax relief granted on pension contributions is relevant to the level of tax you pay on your income. In real terms, for every £1 a higher rate taxpayer puts into their pension, they effectively only pay 60 pence for that £1 contribution due to the 40% tax relief it would attract. Whereas, an additional rate taxpayer will pay 55 pence for every £1 contribution, as a 45% taxpayer. A basic rate taxpayer therefore pays 80 pence for a £1 contribution. 

For example, Sally is a higher rate taxpayer earning £95,000 per annum from her full-time employment. She currently makes no employee pension contributions but has surplus income at the end of each month and wants to ensure that she saves this money efficiently for her future. If Sally were to make a £20,000 net contribution into her pension, HMRC would top up her contribution by 20% at the outset (via a method called Tax Relief at Source) meaning a total of £25,000 is invested in her pension. As a higher rate taxpayer, paying 40% tax, Sally would be able to complete a self-assessment tax return to claim a further 20% tax relief. Meaning that her pension contribution of £25,000 gross would have only cost her £15,000. Bear in mind, if you do not apply for the additional tax relief, you will not receive it. Therefore, it is vital you remember to include it on your self-assessment tax return.

For those tipping into a higher tax band, there is an additional benefit as you can offset your income tax and avoid being dragged into a higher rate tax bracket. 

Under current legislation, any money invested within a pension can grow free of Capital Gains Tax, making a pension contribution the most profitable and the most tax efficient way of saving for your future. Furthermore, the annual pension allowance was increased this year from £40,000 to £60,000, allowing higher and additional rate taxpayers to save more per year to make the most of the tax relief available. 

What happens when you drawdown on your pension? 

Sadly though, it’s not all good news. As you begin to drawdown on your pension wealth, there are a few things to consider. Firstly, the money you invest within your pension is ‘locked away’ until age 55 (if you joined a scheme before 4th November 2021 and had an unqualified right to retire at 55) or age 57 (if you joined a scheme after 4th November 2021). Current pension legislation with most modern pension arrangements means you can draw up to the greater of 25% of your pension, or £268,275 tax free (the new cash lump sum allowance). When you draw upon the remaining amount of pension wealth, you will be taxed at your marginal rate of income tax. 

If you feel that you are not making the most of your tax allowances, get in touch with a member of our team at The Private Office to arrange a free initial financial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice or estate planning. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

As expected, Keir Starmer’s Labour party have won the 2024 General Election with a landslide victory, but what could this mean for your finances and when will any changes be implemented?

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Taxation

In terms of taxation, the introduction of VAT on Private School fees is expected, though there will likely be complexities around the implementation of this change.  Beyond this, the Labour Party have said they will not increase taxes on ‘working people’, indicating income tax, national insurance and VAT are unlikely to increase in the short term, though it is understood Labour will retain the Conservative Party’s plans to freeze income tax thresholds until at least 2028.  However, there has been no such pledges in respect of capital gains tax or inheritance tax, so these are areas Starmer’s new government may look at.

Pensions

Regarding pensions, the subject of reintroducing the Lifetime Allowance (LTA) for Pensions has been a hot topic since it was announced in the 2023 Spring Budget that the LTA was to be abolished.  At the time, Labour pledged to reintroduce the LTA, but it is difficult to see how this could be implemented in practical terms given the abolition has now taken place and additionally, Labour are keen not to disincentivise Doctors who have reached the limit from working.  Labour have now indicated they will in fact not reintroduce the LTA, but they have pledged to conduct a detailed review of pensions, so it will be interesting to see the outcome of this review, specifically whether there will be any changes to tax relief on pension contributions, the taxation of pension death benefits or the 25% tax free lump sum.

When might changes be implemented?

In terms of a timeframe for any changes to be implemented, Labour have committed to including a forecast from the Office for Budget Responsibility (OBR) in their first budget, as they look to distance themselves from the approach taken by Liz Truss, who famously did not utilise the OBR’s analysis ahead of her disastrous “mini-budget” in September 2022. Given the OBR require 10 weeks’ notice to provide their forecast, the Budget is therefore unlikely to be delivered before mid-September 2024.

If you would like to discuss the implications of the new government for your finances, please get in touch to arrange a free consultation with one of our Independent Financial Advisers.

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The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.

Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The Financial Conduct Authority (FCA) does not regulate tax advice. Investment returns are not guaranteed, and you may get back less than you originally invested.

According to the Office for National Statistics, in 2023 to 2024 it has been estimated that almost 6.5 million people are paying higher or additional rate tax, a figure that has risen year on year and will likely continue in this fashion. This is mainly due to the 5-year freeze on allowances announced in the Budget 2021 and was extended for a further two years until April 2028 following the updates in the 2022 Autumn Statement.

Added to this, the Chancellor announced in the Spring Budget of 2023, that the amount you can earn before paying additional rate tax would be lowered, from £150,000 to £125,140 from April 2023, meaning even more people are dragged into the highest income tax bracket. Furthermore, the annual Capital Gains Tax exemption has fallen from £6,000 to £3,000 per person, per year and the tax-free Dividend allowance has fallen from £1,000 to £500. This creates a larger tax burden on all individuals and impacts the amount of tax planning each person should undertake.

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Tax can have a big impact on your ability to preserve the value of your savings and investments in retirement. As such, one of the main focuses when advising clients, is creating a plan that helps them achieve their objectives in the most tax efficient manner. There are several ways to reduce the tax you pay on your annual income, especially if you’re in the higher or additional rate tax bracket.

What are the main taxes?

Income tax

Income tax is a tax imposed directly on your personal income. In simple terms, income tax is the tax on your earnings and is paid at 0% - 45% dependent on which of the income tax brackets you fall into.

Once your earnings exceed your personal allowance, you are required to pay tax on the following sources of income:

1. Income from employment
2. Income from pension
3. Interest on savings
4. Rental income
5. Employment benefits
6. Income from a trust

Capital Gains Tax

Capital gains tax is a tax on the profit made when you dispose of an asset such as an investment in an unwrapped environment (for example a direct share or general investment account) or any properties (other than the main residence).

The amount of capital gains tax you would pay on stocks and shares depends on the tax bracket the gains fall into when added on top of the income with any gains being taxed at either 10% (basic rate) or 20% (higher/additional rate), after taking into account the newly reduced (tax year 2024/25) capital gains tax allowance of £3,000. For the sale of property outside the main residence, the gains are taxed either 18% (basic rate) or 24% (higher/additional rate).

Inheritance Tax

Inheritance tax is a tax levied on any possession that falls in the individual's estate upon death. This tax can also apply to gifts made while the individual was still alive.

Inheritance tax is typically set at 40%, but if at least 10% of your estate is left to charity, the tax rate reduces to 36%.

An individual can leave up to a total of £325,000 (comprising of money, property, and possessions) without incurring inheritance tax. Additionally, an extra £175,000 allowance may apply if the main residence is passed on to direct descendants.

Why is tax planning important?

Tax planning involves minimising tax liabilities by utilising allowances, exclusions, exemptions and deductions to reduce owed taxes, so it should be an essential part of an individual’s financial plan.

Effective tax planning can be instrumental in savings individuals' money, maximising wealth and attaining your financial goals. By proactively managing finances, optimising tax liabilities and enhancing your overall financial wellbeing, individuals can ensure they are on track to meet their objectives.

What is higher rate tax?

In the UK, we do not get taxed on the first £12,570 we earn from our salary, bonuses, rental income, pensions, and other various income types - this is called our Personal Allowance. Income exceeding the Personal Allowance is then subject to income tax. This is banded so:

• Your earnings between £12,570 and £50,270 are currently taxed at the basic rate of 20%.
• Earnings from £50,271 and £125,140 at the higher rate of 40%.
• Anything above £125,140 is taxed at an additional rate of 45%.

The personal allowance and the higher rate threshold (£50,270) have been frozen until 2028 following an announcement by the Chancellor in the Autumn Statement 2022.

Although the rate of inflation is decreasing month on month, currently standing at 2.30% in June 2024, we have seen rates over the past year far exceeding the Bank of England’s 2% target rate, resulting in an increase for wages for individuals across the UK. Therefore, more people are and will continue to join the population previously pulled into paying 40%-45% tax on their earnings, so it is increasingly important we utilise the tax planning opportunities available to us to minimise the impact of the frozen tax allowances and tax bands.

Ways to reduce your income tax bill

There are a few ways in which you can negate the impact that your income tax bill can have. Broadly, they are as follows:

Contribute to your pension

Contributions to a pension are usually made from taxed money (unless in a 'net pay' scheme). However, when you pay in, you will pay the “net” amount (80% for a basic rate taxpayer). The government will then make up the tax paid on the amount contributed, effectively making the contribution itself, tax-free.
For example, if you’re a basic rate taxpayer you can receive tax relief of 20% from the government, therefore it costs you 80p to make a £1 pension contribution.

Contribute to your pension via salary sacrifice

You can ask your employer to enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax (or various rates depending on the tax bands the income falls into after the sacrifice), along with also providing valuable National Insurance savings. This can become quite complicated, and more details can be found on the government website.

A notable additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

Make full use of your annual allowance

The great news is the Government have increased the amount that you can contribute into a pension each year, without suffering a tax charge. The maximum annual allowance has risen from £40,000 to £60,000, implemented at the beginning of the 2023/24 tax year. 
If you are not subject to tapering of your annual allowance and you have not utilised your full allowance of £60,000, then you could consider making use of the full allowance from a personal contribution, or carrying-forward unused annual allowance from previous years. Please note, however, this can only be done up to a maximum of the three previous tax years and personal tax-relievable contributions are capped at 100% relevant UK earnings regardless of the amount of unused annual allowance.

Up to 60% tax relief available when you invest in a Pension

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

For those earning between £100,000 and £125,140 you could be in the 60% tax trap. But this also presents an opportunity when it comes to saving for retirement. If you have taxable income in this range, you can effectively receive income tax relief of 60% on your pension contributions as this is the marginal rate of tax paid on earnings within this band. This is due to the impact of your personal tax allowance of £12,570 being reduced by £1 for every £2 you earn over £100,000 meaning the allowance is reduced to zero when your income reaches £125,140. A pension contribution within this band of earnings effectively reclaims part, or all, of your personal allowance thus increasing the rate of tax relief to 60%.

How to avoid the High Income Child Benefit Charge

An individual can receive Child Benefit if they are responsible for raising a child who is either under 16 or under 20 if they stay in approved education or training. There are two rates at which it is paid; for the first/eldest child, you will receive £25.60 per week and for any additional children, you will receive £16.95 per week per child.
If you are a couple claiming Child Benefit, where one or both individuals have an income above £60,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’.
The tax charge is calculated through the tax return on any partner whose income is more than £60,000 a year. In the event that both partners have incomes over £60,000, the charge will apply to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income, meaning that the Child Benefit is completely removed when income reaches £80,000.
One way you may avoid the tax charge is if a personal pension contribution is made, as the adjusted net income used by HMRC will reduce. If the contribution is enough to reduce this to below £60,000, the High Income Child Benefit tax charge will be avoided.

The benefits of charitable giving

Giving to charity is not only good for the cause receiving your donations but is also beneficial to your annual tax bill. If you keep a record of your donations, you will be entitled to report these on your tax return.

The most common way to donate to a UK registered charity or community amateur sport clubs (CASCs) is through Gift Aid. Gift Aid can only be claimed by UK taxpayers and is effectively the repayment of basic rate tax on the donation. This is not repaid to the donor but is given to the charity as they can claim an additional 25p for every £1 they receive.

If you are a higher (40%) or additional rate (45%) taxpayer, you are able to claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation. An example of this is shown below:

If you make a charitable gift of £100, the charity will be able to receive £25 from HMRC to reclaim the basic rate tax. As a higher/additional rate taxpayer, you can then claim a further £25 (higher) or £31.25 (additional) relief back via your self-assessment for the £125 (gross) contribution you originally made. To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question. More information can be found here.

And not forgetting, charitable giving is a great way to lower your loved one's inheritance tax bill.

Tax relief schemes and other allowances

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief on the amount you invest, for SEIS this increases to 50% relief. This 30% or 50% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.
These investments were created by the government, as an initiative designed to help small and medium sized companies raise finance by offering tax benefits to investors. Given the type of companies they invest in, they are perceived to be high-risk investments.
They can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher and additional rate tax band.

But, as higher risk investments they are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

How we can help

There are a number of actions that can be taken to reduce the amount of income tax you pay, which are especially beneficial if you fall into the higher or additional rate tax bands. These tax efficiencies are built into our financial plans, and we actively help clients maximise their allowances and income so they can achieve their goals throughout their lives. If you would like to find out more about how The Private Office can help you with personalised tax efficient financial plans, please enquire for a free initial consultation with one of our Independent Financial Advisers.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The content in this article is for information only and does not constitute individual financial advice.

A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. 

Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. 

The Financial Conduct Authority (FCA) does not regulate tax planning or advice.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

As the landscape of pensions continues to evolve, understanding the nuances of regulatory changes is paramount for maximising tax efficiency and optimising your financial plans.

One recent development is the introduction of Transitional Tax-Free Amount Certificates, which offer a bespoke approach to deductions from the Lump Sum Allowance and Lump Sum and Death Benefit Allowance.

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But if this all sounds like jargon and hard to wrap your head around, lets us better explain as we delve into the intricacies of these certificates, examining eligibility criteria, potential benefits, and potential drawbacks. Our primary focus will be on illustrating how these certificates can potentially benefit Defined Benefit pension holders (also known as a final salary scheme, but also include public sector schemes for example, Career Average Revalued Earnings or CARE) through a detailed calculation demonstrating the potential impact on their tax-free cash entitlement at retirement.

What are Transitional Tax-Free Amount Certificates?

Transitional tax-free amount certificates serve as tools to accurately reflect tax-free lump sums received before April 6, 2024, within the new pension framework. They are issued by registered pension schemes, allowing members to increase the level of tax-free cash available to them.

The Lump Sum Allowance sets the tax-free lump sum a pension holder can withdraw from their pension pot during their lifetime. This is currently standardised at £268,275; however, this can vary depending on individual protections. Pension Protections were introduced to protect pension savings from previous reductions in the Standard Lifetime Allowance.

The lump sum and death benefit allowance governs the tax-free lump sum payments beneficiaries can take following the pension holders passing and is currently set at £1,073,100. However, this may be reduced by tax free lump sums already taken by the member.

For individuals who accessed their benefits post-April 5, 2024, a standard transitional calculation is used to ensure adjustments are made to the lump sum allowance and lump sum and death benefit allowance. In most cases this standard calculation effectively reflects past benefits utilised and aligns correctly with the new regulatory framework. However, in certain circumstances, some individuals may qualify for a higher allowance by applying for a transitional tax-free amount certificate.

For Defined Benefit Pension Scheme members, two such circumstances are as follows:

• Members of Defined Benefit Pension Scheme where they opted to take a full scheme pension and did not receive a tax-free lump sum. 
• Members of a Defined Benefit Pension Scheme who received a tax-free lump sum which was less than 25% of the pension’s value for lifetime allowance purposes (calculated as 20x the pension, plus any tax-free lump sum).

In these circumstances transitional tax-free amount certificates may offer a bespoke adjustment to the lump sum allowance and lump sum and death benefit allowance, ensuring a more accurate representation of the individuals tax-free lump sum entitlement. By accounting for actual lump sum benefits received, before the regulatory shift, transitional tax-free amount certificates provide a tailored approach that may prove advantageous for some pension holders.

Impact for Defined Benefit Pension Holders:

Here we will provide an example situation to further clarify how transitional tax-free amount certificates could provide a benefit to an individual who has taken tax-free cash under the 25% from their Defined Benefit Scheme.

Scenario: 

Tom decided to begin drawing income from his Defined Benefit Pension t in 2020/2021. He took pension income of £27,500 per annum and chose to take tax free cash of £50,000.

If we assume Tom has Fixed Protection 2012 (giving him a Lifetime Allowance of £1,800,000) taking these benefits used up 33.33% of his Lifetime Allowance (£27,500 x 20, plus £50,000 = £600,000 which is 33.33% of £1,800,000).

As this example explores, if you have not taken your full tax-free cash entitlement, you could be entitled to a larger lump sum allowance and lump sum and death benefit allowance by applying for a transitional tax-free amount certificate. This could allow you to take more tax-free cash from any other pension schemes you may hold and the implications of this could be significant. In this example, c. £100,000 of additional tax-free cash could be available to the individual, though please note this is still based on 25% of the value of any pension funds from which tax free cash has not yet been taken (for defined contribution pensions). Therefore a £400,000+ pension pot would be required to take full advantage of the additional tax free cash which is now available.

How to apply for transitional tax-free amount certificates:

Eligible individuals must submit a transitional tax-free amount certificates application to the pension scheme before taking any tax-free cash post-April 5, 2024. The success of a transitional tax-free amount certificates application hinges on the provision of complete and accurate evidence verifying the individual's entitlement to a reduced deduction from lump sum allowance and lump sum and death benefit allowance. Applicants must thoroughly compile documentation demonstrating their actual tax-free lump sum entitlements before April 6, 2024, ensuring compliance with regulatory requirements.

Potential pitfalls of applying for transitional tax-free amount certificates

While transitional tax-free amount certificates offer tailored adjustments to allowances, individuals must carefully evaluate the potential impacts on their pension benefits. Notably, calculations can vary significantly from individual to individual. For example, not everyone who took less than their 25% tax-free cash will benefit from applying for transitional tax-free amount certificates. In some cases, the issuance of a certificate may result in a reduction of allowances. If the outcome proves to be unfavourable creating less tax-free cash entitlement after applying for the certificate, this decision cannot be reversed.

How we can help

In this article we delved into the potential benefits offered to individuals with Defined Benefit pensions by the new Transitional Tax-Free Amount Certificates. If you believe this could be advantageous to you, it is important to seek financial advice before proceeding further. The possibility of this decision weakening your future pension position underlines the need for a comprehensive analysis of your previous benefits taken across your pension schemes.

At The Private Office we offer the guidance required to navigate these complex changes to pension legislation, ensuring that you are positioned optimally for your future and that you maximise the tax efficiency of the benefits you are entitled to. We can provide tailored financial advice to aid you in establishing the impact of transitional tax-free amount certificates on your specific situation, and we can assist you by preparing your application for potential submissions to your pension scheme providers, should these prove advantageous.

If you would like to schedule a call with one of our advisers, please get in touch. We can arrange an initial meeting at no cost and with no obligation, to further explore your own personal situation together.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate tax advice.

A pension is a long-term investment. The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

The information in this article is based on current laws and regulations which are subject to change as at future legislations.