With the cost of living crisis escalating, inflation at a 30-year high and an increase in national insurance contributions coming, good tax planning to help clients deal with these economic challenges has never been more important.
Of course, putting a good tax strategy in place for clients can have its challenges. Our tax regime is one of the most complex in the world. Advisers have to understand an ever-changing set of rules in order to protect their clients and to keep delivering good outcomes for them.
Take for example the Spring Budget last year, when the chancellor froze the threshold for the higher rate of income tax until 2026. This effectively brought one and a half million people in the UK into the higher rate tax band over the five years of the freeze .
Then there’s crystallizing capital gains. Gains above the annual capital gains tax (CGT) allowance are taxed. For a higher rate tax payer, it could be 20 or 28 per cent. If a client’s looking at strong investment returns, they can be eroded if the capital gains are crystallized outside of a tax-friendly structure or if clients are not making use of available CGT allowances on a regular basis.
Better client outcomes
With Tax Year End (TYE) almost approaching, there’s a chance now for advisers to encourage clients to make full use of the tax allowances and exemptions available to them, and to remind them what a difference good tax planning can make to their long-term finances.
Although the sheer number of tax-friendly savings options available to clients can be wildering, a tax strategy can make a huge difference to client outcomes.
In the current inflationary environment, holding significant amounts of cash in a deposit account is effectively losing money. Investing in a Stocks and Shares ISA may provide a greater return if investing for the longer term. And with market volatility being a big concern for many, ‘pound cost averaging’, that most basic of tools, gives the ability to drip money into the markets over a period of time to help reduce risk, regardless of whether funding is coming from income or a lump sum.
In general terms when it comes to tax, depending on the client’s level of wealth and their longer-term tax outlook, eg if they’ll always need to be a higher rate tax payer, , the options are to put money into a pension scheme , a collective portfolio, an onshore bond or an offshore bond. What’s really interesting about these options is that, outside of cash, they’re the same core tax planning tools we’ve used for the past 25 years.
As an example of good tax planning over a lifetime using these tools, if a client at the accumulation stage is looking to earn £100,000 net per annum, they would need to earn around £167,000 before tax. At the decumulation phase however, just by using their tax allowances and structuring their investments across the range of tax planning tools at accumulation, they could only need a gross income of £100,187 before tax.
Financial planning has never been in such a good place
Clients may be dealing with an increasing number of day-to-day challenges, but at least financial planning is in a good place. There are so many tax-friendly options available. And although tax can be testing, clients can benefit from value-added advice.
Tax wrappers have never been so flexible and the range of investment options has never been so wide. Clients can seamlessly take money out of an ISA and put it back in again within the same tax year. At the age of 55, they can access their pension flexibly whenever they need it, or they can continue to put money in, benefitting from tax allowances and exemptions that mean their income streams can be fine-tuned as required.
Human behavior being what it is, most clients will only now be galvanized into taking action around their finances, as TYE looms. Although many advisers find effective ways to remind clients about good tax planning throughout the year, TYE planning is an opportunity to show their clients how it can support good future outcomes.
Steve Owen is solution delivery director at Abrdn