Keeping more of what you earn: does your financial strategy fit well within our tax system?

17 October 2016

The Office for Budget Responsibility have recently published an analytical paper considering how recent tax policy changes on pensions and other forms of saving might impact the Government’s finances in the medium term. It’s a fairly heavy document, but the conclusions are interesting, if not altogether surprising – that the policies are likely to trigger a short term cash boost to the coffers at the cost of a longer term drain.

The main comparison is between the lowering of annual and lifetime pensions limits, particularly in the context of higher earners, with policies like increasing ISA allowances, Lifetime ISAs, and the savings allowance for Income Tax. Some form of pension saving is likely to continue to be attractive for the majority of people, but the document prompts thoughts about how it might form part of a taxpayer’s overall financial strategy.

Earlier this year we published a summary of nine topical issues in the UK tax system and it strikes us that the dividend allowance and the progressive system of measures designed to make buy-to-let properties less attractive might also merit comparison; when considering how tax policy might influence taxpayer investment behaviour. And with Capital Gains Tax (CGT) rates at almost as low a level as they’ve been in the last 20 years or so, there may well be investors out there willing to accept a small CGT hit in order to re-appraise their investment approach.

In this changing tax landscape it would make sense for taxpayers, and savers in particular, to review their position and consider whether the tax treatment of their current approach continues to be the best available to them. How many taxpayers have so far, for example, considered the new CGT relief for investors in unquoted trading companies?

Many of the reliefs and exemptions are measured annually, including;

  • pensions – dealt with in the tax year paid, and annual allowance computed by tax years;
  • ISA – subscription levels capped with reference to tax years;
  • savings allowance – fixed level per tax year;
  • dividend allowance – fixed level per tax year;
  • means tested measures computed with reference to each tax year’s income:
    • high income child benefit charge;
    • higher and additional rates of tax;
    • loss of personal allowance for higher earners; and
    • restricted level of pension contribution limit for higher earners.

This makes keeping your strategy under rolling review a necessity to ensure that reliefs and savings are maximised.

If you would like to discuss any of the above in detail, please contact Graham Boar or your local UHY adviser.