With a change of Westminster government last year and a tax-raising budget in the autumn, many investors and clients are looking more carefully at their tax positions for the year. Whilst the ‘use it or lose it’ ISA allowance is well understood, and most people realise that pension saving is still a very tax-efficient way of saving, what else might be available with these tools and others to optimise your tax year-end planning?
Andy Bolden, Financial Planning Director at 7IM Private Client lays out his thoughts.
- Many current ISAs, whether in cash or stocks & shares, are now ‘flexible ISAs’. Although they have been available since 2016, it took a while for many providers to catch up, and many clients (or potential clients) won’t realise they have one.
Put simply, if their ISA is a flexible ISA, and they have had to withdraw funds during the tax year for a temporary need, they can return the money back into the ISA and not impact the £20,000 annual allowance. A great way of maximising use of available ISA savings.
- Would your clients like a pay rise or a ‘pay rise plus’?
For many people this time of year will mean 1 of 2 things. Either frantically finishing a tax return or starting annual review & pay discussions, (or both 🤷♂️). So let’s loop them together.
If your clients are lucky enough to be offered a pay rise or bonus but don’t really need the cash just now, think about sacrificing all or some into a pension. That comes with tax relief* at a marginal rate, and employers may even offer contribution matching to some level. EXTRA MONEY!
Plus…the employer may be grateful for a saving on their NI bill. WIN-WIN.
Then, next January, you could find there is a better-than-expected tax bill to settle, plus a larger pension, all thanks to some forward thinking.
Taxation depends on individual circumstances and may be subject to change.
- A lot of investors in shares, funds and property elected to sell and take gains before the Budget and with only a limited £3,000 Capital Gains Tax allowance, most of them accepted there was a tax bill to follow, albeit at pre-budget rates. However, there is still time to adjust the scales.
For investors with a suitable risk appetite, and with appropriate advice, Enterprise Investment Schemes (EIS) offer the ability to roll forward gains, deferring the tax liability to a later date. Available for investments up to £2m per year generally, (although anything above £1m must be deemed as ‘knowledge intensive’), an EIS can potentially move a CGT liability to a future date when the CGT rates or rules may be more favourable, (although that’s not guaranteed). Thinking a little wider, because EIS reliefs don’t have to claimed in one go, you could split across more than one EIS qualifying investment, and then defer gains of any size made up to three years before and one year after the EIS investment. You can defer all or part of the gain and can do it even if you have already paid the tax.
PLUS…there is also the potential for up to 30% of the investment amount to be claimed as an income tax credit, (up to 50% for a Seed EIS), assuming that an investor would otherwise be due to pay at least as much in income tax for the year that the relief is claimed.
- Maybe the very early-stage nature of an EIS investment is a bit too far up the risk scale to consider, so what about the more mainstream Venture Capital Trusts (VCT)? As for EIS, these are only right for some investors within the right risk parameters, and who have the capacity for loss to consider them.
Now, there is no CGT deferral available here, but there is potential for the same 30% income tax credit. There is nothing wrong with using credits or allowances for one tax to offset a liability for different taxes. VCTs have been used for many years by higher-earners to offset income tax, (and many VCTs can deliver tax-free dividends from early on), but should be considered for lower earners too, where the circumstances fit.
- Often overlooked, but providing a great return on capital….gap-fill missing National Insurance contributions. Individuals can check their State Pension forecast to find out how much they could get when you reach State Pension age and see their National Insurance record.
Rules have changed as to when voluntary NICs can be paid. You can usually pay voluntary NICs for the previous six tax years only. For example, making voluntary contributions up until 5 April 2025 to make up gaps for the 2018-19 tax year. Gaps for prior years will drop-off each 5 April.
Currently, Class 3 NICs cost £17.45 per week or £907.40 per year. Each year represents 1/35 of the full State Pension, and one year’s additional top-up alone could boost weekly State Pension income by £6.32 a week or £328.64 a year (based on the 2024/25 State Pension). That is a return of the investment in less than three years, with a guaranteed and index-linked income stream as a result, from State Pension Age.
As always, these solutions will not be suitable in every case, and must be considered as part of an overall investment and risk approach.
