September 2023

Sep 28

Graphic of a pad of paper with the words 'Tax Planning' written on it, alongside a pen, calculator, laptop, and pile of coins.

Tax Planning for Higher Earners

By FAS | Tax Planning

Amidst a landscape of rising costs, the amount of Income Tax collected by the Exchequer is increasing. Much of this is due to the Personal Allowance – which is the amount you can earn before paying any tax – and Income Tax bands being frozen. This freeze was introduced in 2021 and was expected to remain in place until 2026; however, Chancellor Jeremy Hunt extended the freeze for a further two years in last year’s Autumn Statement. Static tax bands create a so-called “fiscal drag” as increasing wages and earnings push individuals higher up the tax bands. Furthermore, the Additional Rate Tax threshold, which is the level where 45% Income Tax becomes payable, has been lowered from £150,000 to £125,140 from April. As a result, higher earners would be well advised to consider financial planning options that could potentially reduce the amount of tax they pay.

Make use of the ISA allowance

Those with higher earnings should look to make use of their annual Individual Savings Accounts (ISA) allowance, as ISAs enjoy a preferred tax treatment, whereby all income, interest or dividends generated from the assets held in the ISA are exempt from Income Tax, and any gains made on disposal are free from Capital Gains Tax. This is of particular benefit to higher earners, who may not benefit from any Personal Savings Allowance.

An ISA can hold Cash or Stocks and Shares and other investments, and irrespective of which ISA or ISAs are selected, the total contribution limit across all ISAs in the 2023/24 Tax Year is £20,000. Taking full advantage of the allowance is important for anyone who pays Income Tax on their savings or dividend income, or wants to avoid Capital Gains Tax on future gains.

The advantages of pension planning

The starting point for many higher earners is the ability to save into a pension. Qualifying contributions into a pension receive tax relief, which is paid at the highest rate of income tax that you pay. If you’re a basic rate taxpayer, you’ll get 20% tax relief, but higher rate taxpayers receive tax relief of 40% and additional rate taxpayers receive 45% relief.

For those that earn between £100,000 and £125,140, effective tax relief of 60% is available. When an individual’s taxable income reaches £100,000, their Personal Allowance is tapered, losing £1 of allowance for every £2 of additional income. Once taxable income reaches £125,140, the tax-free Personal Allowance is lost completely. As a result those with earnings between £100,000 and £125,140 pay an effective tax rate of 60% on this portion of their earnings.

Pension contributions have the effect of extending the tax bands, which can mean that those earning between £100,000 and £125,140 not only receive tax relief at 40%, but also reclaim part of their Personal Allowance, too.

When making pension contributions, careful consideration is needed as there are a number of tax traps to catch the unwary. Individuals can contribute up to 100% of their relevant earnings, although this is subject to an Annual Allowance of £60,000 in the current Tax Year. It is important to ensure that earnings qualify for pension contributions – property rental income from a buy to let property, for example, is not normally considered to be relevant earnings.

In addition, those receiving taxable income above £260,000 need to consider the taper that applies to the Annual Allowance, which reduces the amount you can contribute by £1 for every £2 of income above this level.

Given the complexity of the rules, we recommend higher earners seek advice before taking any action. Pension contributions need to be affordable to your circumstances, and the key to effective pension planning is to make sure the contributions work hard in terms of investment performance. This is where regularly reviewing your pension investments can make sure that the portfolio remains appropriately invested for the prevailing and expected conditions.

Venture beyond

Beyond ISAs and Pension contributions, there are other tax efficient investments that can reduce an individual’s tax liability, but also provide a helping hand to small businesses. Venture Capital Trusts (VCTs) were introduced in 1995 as a way of encouraging investment into Britain’s small and entrepreneurial businesses. As these investments tend to be of higher risk, and some smaller companies can fail, VCTs offer up-front tax relief of 30% on qualifying investments. This tax relief is retained as long as the investment remains qualifying and is held for at least 5 years. In addition to the tax relief, dividends paid by the investments within a VCT are tax-free and any gains on disposal are also free from Capital Gains Tax.

Whilst the tax advantages are attractive, it is important to recognise that VCTs are a high risk investment, and should only be considered by investors who are willing to accept a significant risk of capital loss. VCTs range from investing in companies that are already profitable, to those quoted on the Alternative Investment Market (AIM) and some that specialise in early stage investments, and as a result, the risks and potential returns can vary significantly. Many VCTs have produced strong returns over the long term, when factoring in the tax relief on investment and dividend income, but others have performed poorly. This is why we recommend seeking advice before considering these investments.

The benefits of advice

Those who pay higher rate or additional rate tax – or indeed business owners or shareholders who receive a high level of dividend income – should take the time to consider the amount of tax they pay. By considering financial planning options, many will find that they can reduce their tax liability.

Speak to one of our experienced financial planners here for expert advice on the options open to you.

Sep 21

Graphic of a small handheld blackboard with 'Retirement Plan' written on it alongside points '1', '2', and '3'.

How to plan for retirement

By FAS | Financial Planning

Whatever your plans are for retirement, it pays to begin planning well in advance, to give you the best chance of meeting your goals in later life. We often meet clients who are beginning to consider the end of their working career, but find choosing the right path difficult, for fear of making the wrong choice. Financial decisions taken at retirement are one of the most important many people make. This is largely due to the fact that the path chosen can have lifelong implications.

When beginning to consider retirement plans, there are a number of fundamental questions that need to be answered.

When to retire?

Deciding on the right time to retire may be down to personal choice, or it may be as a result of changes in the workplace that push you to reach a decision. For some, decisions will need to be reached some time in advance of the retirement date, due to contractual obligations, or the need to train a new member of staff to fill the role. In other instances, the decision may sadly be reached due to ill-health or inability to continue in the role.

An increasingly common choice is to reduce working hours gradually over time and ease into retirement, and this is where financial planning can help in determining alternative income sources that could be accessed to fund the reduction in salary or self-employed income, and maintain your lifestyle. Tax planning is often vital at this stage, as individuals are juggling employment and retirement income at the same time.

What kind of lifestyle do I want?

The most important factor that often determines the point at which an individual retires is affordability. The ongoing costs of maintaining the home, paying utility and other bills, and covering necessary spending such as food and transportation need to be considered. In addition, some may need to clear any outstanding debt prior to retirement, such as a mortgage, whilst others may wish to undertake home improvements.

Retirement introduces significant change, and one important point to remember is that many will have more time on their hands, which may be filled with hobbies, pastimes or travel. These will all have costs attaching to them, which need to be taken into account.

Calculating a monthly budget is a useful first step to see what regular and discretionary expenditure is likely to arise. It is also a good idea to build in a contingency for unexpected outgoings.

What income can be generated?

It is important to start looking at existing pension arrangements well in advance of a planned retirement date, to begin to determine what income could be generated in retirement. As a result, any gaps can be identified and this will allow time to make further pension contributions, or other savings arrangements to help plug the gap.

State Pension provision is usually the starting point from which to build a retirement income, and obtaining a State Pension statement is a good idea. This will provide an estimate of how much State Pension you are likely to get, which will be based on your National Insurance contributions. It will also let you know the date at which State Pension becomes payable.

For those who wish to retire earlier than their State Pension age, thoughts turn to producing an income from elsewhere to fund ongoing living costs. It is important to note that State Pension alone is unlikely to provide a comfortable retirement, and making the most of existing pension arrangements built up through employment, or personal pensions, will be a key building block of your retirement income.

An important step to take is to understand what pension arrangements are held. Obtaining up-to-date valuations can assist; however it may well be necessary to undertake further research and analysis to get the full picture in respect of the options for drawing a pension income, and to discover if there are any special features within the pension contract that could affect the decision making process.

It may also be worth considering whether you have any additional pension plans that you have lost touch with during your working life. We often meet clients who provide documentation relating to an old pension, which turns out to provide additional retirement benefits that they were not expecting.

As part of the retirement planning service we offer, we write to a client’s existing pension providers, and obtain full details of their arrangements. We take the time to fully analyse the plan, which can often reveal features which may not necessarily be apparent. These can include guaranteed annuity rates, guaranteed plan values or protected levels of Tax Free Cash.

Retirement income can, of course, come from other sources, too, and at this point, we can review other savings and investments held to consider how best to generate an income. By making changes to an existing portfolio, we can look to generate a sustainable income, in a tax-efficient manner.

Financial advice can help define your plans

Once existing pension arrangements have been analysed, the question of when to retire has been answered and a target income identified, it is time to start to consider how these goals can be reached.

Taking financial planning advice can make a real difference to the decision-making process, as we can take a holistic and impartial view of existing pensions and other assets and begin to set out a plan to reach your goals and objectives. We can assess what income can be generated from existing pensions, in conjunction with other savings income or property income. Other important aspects, such as tax-efficiency can be considered, together with wider planning issues, such as Inheritance Tax concerns.

Speak to one of our experienced advisers here to discuss the options and start to formulate your retirement plans.

Sep 15

Graphic of a hoodie covered with dark stormy skies being unzipped to reveal sunny blue skies, representing a brighter future.

The end of the cycle

By FAS | Investments

As traders head back to their desks after the summer break, thoughts turn to the prospects for markets over the remainder of the year. What is apparent is that the conditions this Autumn appear to be calmer than one year ago. It is perhaps easy to forget that almost 12 months ago, then Chancellor Kwasi Kwarteng had just delivered a controversial budget that spooked markets. At the same time, inflation was climbing month on month and Equities and Bond investors took flight to safety, amidst high levels of volatility.

Looking back, it is no understatement that 2022 will be remembered as a tough year for investors. It was also highly unusual, as the impact was felt across all asset classes. Indeed, according to a study carried out by Blackrock, last year was one of only three years in history where both Equities and Bond markets returned a negative performance in the same calendar year. It is important to remember that markets always look forward, and whilst we can ruminate on the difficult conditions of last year, the future prospects for corporate earnings and government and monetary policy will shape the performance of markets in the months ahead – and the prospects are certainly looking brighter.

The end of the cycle?

Much of the market’s attention since early last year has been focused on the actions of central banks in their attempts to curb inflation. As expected, inflation is now falling quite quickly in some parts of the World (i.e. the US) and a little more slowly in others (i.e. the UK). As inflationary pressure eases, so does the rationale for central banks to continue to raise rates. In addition to the fall in inflation, other important economic measures are adding weight to the suggestion that we are close to the peak of the cycle. Unemployment data, which has been resilient over the course of the last year, has softened over recent weeks in both the US and UK, and the outlook for the UK housing market is gloomy. These trends are likely to continue and as a result, economic growth may well slow in the next few months.

We have long argued that central banks may have been too aggressive in raising interest rates, given the lag between policy decisions being made, and the time taken for these decisions to impact on the economy. As a result, as inflationary pressure eases further, we feel markets will focus on the timing and speed of rate cuts as we head through 2024.

Both Bonds and Equities should benefit from easier monetary conditions. High inflation and rising interest rates work against Bonds and Fixed Income investments as they make the yield offered by the Bond less attractive when compared to cash rates. As expectations rise that monetary policy will pivot, Bonds should gain more attention, and many are currently priced attractively. Lower borrowing costs over time should also help ease the pressure on corporate borrowing, and help companies finance their operations.

As ever, risks remain. It is possible that inflation doesn’t fall as quickly as expected, which could lead to central banks delaying their expected pivot to lower rates. The recent jump in Crude Oil prices, for example, is one of a number of external shocks that could sway the course of interest rates. China’s debt-laden property market and slow recovery post-Covid could also have an impact. We do, however, feel markets have, to some extent, already priced in the “higher for longer” narrative.

Corporate Earnings remain positive

One of the key drivers of the improving outlook has been the strength of corporate earnings. The recent US reporting season saw over three quarters of companies announce profits ahead of expectations, confounding some predictions that earnings reports could be lower. Whilst there have been a handful of notable companies where earnings disappointed, many others have seen estimates for their future earnings increase.

Equities performance in the first half of 2023 was dominated by what we would identify as “growth” investments, which are often involved in technology and new industries. As the landscape changes, we would expect to see the focus shift in favour of companies with good levels of dividend yield and more value-based characteristics. Corporate balance sheets largely remain healthy and dividends are generally well covered. The contribution to overall investment returns achieved by dividends over time should not be underestimated.

Political risks and opportunities

As we move forward to next year, investors will need to consider the impact politics can have on market sentiment. There are, of course, key Elections in both the UK and US next year and the sitting administrations will be keen to see their economies in reasonable shape, as the electorate’s personal financial position is usually one of the key drivers of voter intention. History would suggest that election years tend to be broadly positive for markets; however, we need to be alert to the potential risks that a scenario such as that seen in the US in 2020/21, where no clear winner was apparent for some time, is not repeated, as this has the potential to cause a spike in volatility.

Brighter skies ahead?

Investors have had to negotiate rough seas over the last 18 months, but the end of the rate hiking cycle could well be in sight. A shift in monetary policy may well see calmer waters return over coming months, and evidence is building that 2024 will see us move to less volatile market conditions.

If your portfolio is not regularly reviewed, now is an opportune moment to consider your existing assets to see whether they are well positioned for the expected market conditions. Speak to one of our experienced advisers here to start a conversation.

Sep 07

piggy bank next to blackboard detailing financial planning for education

Planning for the costs of education

By FAS | Financial Planning

The start of a new school year brings the cost of education into focus. As financial planners, we are regularly asked to assist clients when planning to fund University or further education costs. Some parents take the decision to privately educate children, and budgeting and saving for these expenses also need careful planning. It is often the case that older generations want to lend a helping hand, too, and there are a number of factors that need to be considered when providing gifts to help with the costs.

We take a detailed look at some of the factors parents – and possibly grandparents – need to consider when planning to fund the costs of further education, or private education.

Meeting University costs

When a child goes to University, financial assistance is available in the form of Tuition and Maintenance Loans. The Tuition Fee loan covers the cost of the course, and as University Tuition fees are capped at £9,250 per annum, a three year course will mean a debt of almost £28,000 will accrue (assuming the cap remains in place).

The actual cost of the course is only one aspect of the overall cost of further education. Accommodation, food, travel, study material, and entertainment all need to be covered whilst a student is at University. Whilst the Tuition Fee loan covers a fixed amount, the Maintenance loan is means tested and based on household income. The amount a student can borrow via the Maintenance Loan is highly unlikely to be sufficient to cover all of these living costs, and parents or grandparents will need to make up the shortfall. The maintenance support loan has only increased by 2.8% for the 2023/24 academic year, and given that increases in the cost of living far exceed the increase in the allowance, this may well mean parents need to help cover a larger proportion of living costs.

Around the time that a child goes to University, there are likely to be competing demands on parents’ finances. It may be the time when a parent is starting to plan ahead towards the end of their career, and this is the time when maximising pension contributions typically takes a higher priority.

By establishing a regular savings plan years in advance of a child’s education starting, you will have more time to build the value of the accumulated savings, and ease the financial pressure at the time a child is ready to attend University. Selecting the most appropriate method of saving depends on a number of factors, such as the time horizon for investment and tolerance of investment risk. Cash savings accounts may be an appropriate method for some, but investing in a broad range of assets, such as Global Equities and Bonds, could mean that greater returns are achieved over time.

Tax efficiency is another important consideration. An Individual Savings Account or ISA is often a good choice, as the investment held within the ISA can provide returns that are free from both Income Tax and Capital Gains Tax (CGT). Exemption from CGT may be particularly valuable, given the need to draw down lump sums from investments at regular intervals to fund ongoing costs.

Whilst students do not need to start paying back loans until their earnings exceed £25,725 per annum, the rate of interest charged by the Student Loan company now stands at a minimum of 6.25% per annum. This means that students may well be saddled with debt for an even longer period of time due to the interest charges.

Building a university fund from when a child is very young is an ideal way of looking to meet tuition costs and the costs of living during further education. By planning ahead early, parents could also potentially reduce the debt burden on their children, by reducing the amount of Student debt carried forward into their working life.

Funding private education

Parents – and grandparents – always want the best for their children or grandchildren, and for some this means choosing to give them a private school education. Evidence suggests that students from private schools outperform national and global academic averages, and the cost of private education can be seen as an investment in the child’s future.

Meeting the costs of private education can, however, look daunting, when you factor in not only the fees, but also the additional costs of school uniforms, and other activities such as trips, sports, and music lessons. For this reason, parents who wish to send their children to a private school need to start planning ahead, and build a strategy to save sufficient funds over time to cover the expected costs. In the same manner as saving for further education costs, ensuring that funds are appropriately invested, and in a tax-efficient manner, are key considerations.

Grandparents are often keen to help fund school fees as a way to invest in their grandchild’s future, while also making sure the parents don’t shoulder all the financial burden. It is, however, important to consider the Inheritance Tax implications of any gifts made. Annual gifts of up to £3,000 in total should be exempt, but additional gifts could be liable to Inheritance Tax unless the donor lives at least seven years from the point the gift is made. An alternative approach is to gift funds into a Discretionary Trust, with the grandchildren named as potential beneficiaries. The Trustees can then draw from the Trust to fund ongoing educational expenses.

If you are a parent or grandparent who wants to send their children or grandchildren to a private school, the best way to pay for it is to start the financial planning process as early as you can. Speak to one of our experienced financial planners here if you would like to discuss how best to plan for future education costs.