Review your retirement plans
Planning is vital for those aiming to enjoy a comfortable retirement, and pensions provide a significant opportunity.
The annual allowance (AA) – the maximum you can contribute to a pension and still get tax relief – is £40,000. Exceeding this can result in an AA clawback charge.
The threshold income calculation helps to provide certainty for individuals with lower salaries who may have one off spikes in the value of their employer pension contributions and is broadly defined as an individual's net income for the year.
Those with both ‘threshold income’ over £200,000 and ‘adjusted income’ over £240,000 will see their AA tapered down. For every £2 of adjusted income over £240,000, a taxpayer’s AA is reduced by £1, down to a minimum of £4,000.
‘Unused relief’ is brought forward where pension savings in any of the last three years’ pension input periods were less than the AA. This can be used in 2021/22, providing the means of making a significant contribution without incurring a charge.
Meanwhile, the lifetime allowance for tax-advantaged pension savings is £1,073,100 in 2021/22. A tax charge arises where total pension savings exceed the lifetime allowance at retirement, provided that fixed, primary or enhanced protection is not available.
From advising you on the tax implications of the contributions you make to your pension scheme to exploring other ways of boosting your pension savings, we can help you to secure the comfortable retirement you deserve. Please get in touch with us for more information.
Make use of IHT exemptions
Inheritance tax (IHT) is payable where an individual’s wealth is in excess of £325,000 (the nil-rate band). Those who own property and have savings, business assets or life assurance policies could be liable to IHT.
It is vital that people plan ahead to minimise their exposure to IHT. Here, we consider ways in which individuals can reduce their IHT liability.
Outlining IHT
IHT is charged at 40% on the proportion of an individual’s taxable estate exceeding the nil-rate band. An estate includes both the value of chargeable assets held at death, plus the value of any chargeable lifetime gifts made within seven years of death.
The residence nil-rate band (RNRB) applies where a residence is passed on death to one or more direct descendants (including a child, stepchild, adopted child or foster child). The RNRB is set at £175,000 for 2021/22.
The additional band may only be used in respect of one residential property, which must have been, at some point, a residence of the deceased. In regard to estates with a value above £2 million, the RNRB is tapered at a withdrawal rate of £1 for every £2 over this threshold. Additionally, the RNRB is available when a person downsizes or ceases to own a home on or after 8 July 2015.
Making lifetime gifts
You can give away a total of £3,000 as gifts each tax year without them being added to the value of your estate. This is known as your annual exemption (AE). You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
You can also give as many small gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are also exempt from IHT.
Each tax year, you can also use an exemption for gifts made for weddings or the forming of a civil partnership.
You can give up to:
- £5,000 to your child
- £2,500 to your grandchild or great-grandchild
- £1,000 to any other person.
If you’re giving gifts to the same person, you can combine a wedding gift allowance with the annual exemption but not the small gift allowance.
For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
You may also significantly reduce your estate’s IHT liability by making a series of lifetime gifts. As long as you survive the gift by seven years and do not benefit from the gift yourself, it escapes IHT. Gifts allow your family to benefit during your lifetime.
Taper relief can also apply where lifetime gifts were made between three and seven years before death. Note, however, that the discount applies to the tax on the gift, as opposed to the gift itself.
Utilising IHT reliefs
A number of IHT reliefs are available, including relief on business and agricultural property. These effectively take such property outside the IHT net (although please note that detailed conditions apply).
Trusts and Wills
Trusts give individuals a degree of control over the assets being gifted. Life assurance policies can be written into trust, meaning that the proceeds will not form part of the estate on your death.
In regard to Wills, it is particularly important to review your own Will following changes to your personal or family circumstances, or the introduction of new tax rules.
As your accountants, we can assist you in minimising your IHT liability. Please contact us for more information.
