Cara Herdman FPFS
- Chartered Financial Planner at Kreston Reeves Financial Planning Services Limited
- +44 (0)330 124 1399
- Email Cara[email protected]
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If you are approaching state pension age and haven’t checked whether you have a full National Insurance contribution history, now is a good time.
If you would benefit from filling any National Insurance gaps, there is a window of up until 5 April 2023 to make up any gaps in your contribution history for the tax years between April 2006 and April 2016.
From 6 April 2023 it will be only possible to pay voluntary NI contributions to plug gaps arising in the last 6 years. Gaps may arise if you were living or working outside the UK, were unemployed or had low incomes in a tax year.
Each additional qualifying year works out to be an extra £5.29 a week (or £275.08 a year) in State Pension, based on 2022/23 rates.
CGT is a tax on any profits you make when you sell an asset that has increased in value.
The current CGT allowance is £12,300 per individual for the current tax year and is reducing to £6,000 from 6th April 2023 down to £3,000 from 6th April 2024.
Gains on investments in excess of the allowance are charged at 10% in the basic rate band and 20% in the higher and additional rate bands.
It therefore makes sense to fully use any remaining allowance before the new tax year and take profits from taxable investments. Proceeds can be used to reinvest in different holdings, or used as a tax efficient ISA or pension contribution.
ISAS are tax efficient wrappers which do not attract income tax or CGT in the hands of the investor. Withdrawals can be made without needing to notify HMRC.
The annual allowance is £20,000 per ISA per adult individual in the current tax year and remains the same next tax year. It is therefore possible for a couple who have unused allowances to make ‘back to back’ contributions each immediately before 5th April and again immediately after 6th April to shield £80,000 of assets between them.
The ISA allowance is available on a use it or lose it basis, so unused allowances from previous tax years cannot be carried forward.
For many company directors of Limited companies, taking significant profits from their business as pension contributions could be the most efficient way of paying themselves and cutting their overall tax bill.
If there is sufficient cash available and profits within the business, an employer pension contribution can save both National Insurance contributions and Corporation tax (unlike taking dividends and salary).
The main rate of corporation tax is set to rise from 19% to 25% from 6th April 2023, and the dividend allowance remains static, making pension contributions extremely attractive.
Unlike personal contributions which are restricted by earnings, gross employer contributions can fully utilise an individuals available annual allowance.
The pensions annual allowance is £40,000 for the current year and each of the three previous ‘carry forward’ years. Potentially, giving a maximum contribution of £160,000. High earners may have a reduced allowance due to ‘tapering’, and those who have already started drawing taxable income will be limited to the £4,000 money purchase annual allowance (MPAA). Aside from the tax perks the pension itself brings (tax reclaim on net personal contributions at the highest rate, the pension funds growing free from income tax and gains within the pension wrapper, and usually outside of the individual’s estate for Inheritance Tax Planning), there are other wider planning opportunities available:
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Service Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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