Even the best-laid plans need to be updated as time goes by.
Even if you started the year with your finances in order, chances are things will have changed over the year and it’s wise to take another look at them. It’s always an easier task if you make smaller adjustments from one year to the next – than have to face a radical overhaul if you leave it too long.
There are many benefits to preparing yourself for 2023.
If your finances have got into a bit of a tangle, why not make 2023 the year to sort them out?
The last few years has seen many families re-evaluate what is important to them, and lifestyle is usually a high priority. Understanding where you are ‘financially’ and whether your existing wealth is working hard for you is paramount to a brighter financial future. You may find the shorter days a useful time to pull out your current arrangements and make a fresh plan for your future.
To give you a helping hand, we take an in-depth look at how utilising a pension could offer tax advantages to you both now and during your retirement. And remember, the end of the current financial year is 5 April 2023, where many allowances will be lost if not taken advantage of in advance of the deadline.
Don’t overlook the value of personal pension contributions
The rules around how much you can pay into a pension have become more complex, but the standard annual allowance is £40,000 per person in the current tax year. The standard allowance can be reduced if you earn above a certain limit or previously taken pension benefits. You pay contributions net of basic-rate Income Tax, and your pension provider collects the tax relief from HM Revenue & Customs (HMRC).
The basic rate of tax relief is currently 20%. So, if you contribute £80 a month, £100 will be invested automatically in your pension – that’s an additional £20 at no extra cost to you.
Higher rate (40%) and additional rate (45%) tax-payers will be able to claim additional relief on their contributions up to their marginal tax rate in the usual way.
Please note that if you are a Scottish tax-payer then you may be eligible to claim an additional 1% tax relief from HMRC on personal pension contributions.
‘Carry forward’ allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme. This may be particularly useful if you are self-employed and your earnings change each year significantly or if you’re looking to make large pension contributions.
To use carry forward, you must make the maximum contribution in the current tax year (£40,000 in 2022/23), and you can then use unused annual allowances from the three previous tax years. You cannot receive tax relief on contributions in excess of your earnings in a tax year, and you only receive higher rate tax relief to the extent that you have paid it.
Want to pay less in income tax?
A common question we get asked is how to reduce the amount of tax payable to HMRC – this question is especially common from higher rate and additional rate taxpayers. Whilst tax evasion is a crime, tax planning is a sensible practice, and there are various ways in which we can advise you to help reduce your personal tax liability each year.
In most instances, contributing to a personal pension is going to be the most tax-efficient manner of saving tax now whilst funding your retirement. Where else can you receive tax relief at your marginal rate, i.e. as a higher rate taxpayer? If you contribute £10,000 to your personal pension, it will cost you £6,000 based on current UK tax legislation. The true cost is less if you are a Scottish income tax payer.
Even better, many higher/additional rate taxpayers during their working careers drop down to the basic rate income tax level in retirement. This offers an attractive way to accumulate wealth tax-efficiently whilst potentially mitigating income tax in later life.
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. So if you earn £125,140 or more, you won’t receive a tax-free personal allowance at all which is equivalent to paying 60% income tax. Personal pension contributions reduce ‘net adjusted income’ and could help preserve the tax-free personal allowance.
For every £2 of adjusted income over £240,000, your individual annual allowance is reduced by £1 until you reach a minimum annual allowance of £4,000. Should you be impacted by the tapered annual allowance or looking to reduce your tax liability more than a pension could offer, then you may want to invest in alternative investment vehicles offering 30% upfront tax relief.
You don’t have to go it alone
Whilst it can be daunting, help is on hand. Start talking to us today about your future plans, and we can help make them a reality. We take the time to understand your goals and objectives to ensure our advice is specific to your needs and aspirations – helping you build a brighter financial future. We have proven experience delivering financial plans for individuals, families, trusts and companies. To discuss your circumstances in confidence, please contact us on 0131 514 2770 or email wealthplanning@waverton.co.uk to arrange a no-obligation meeting.
At Waverton Wealth, we are focused on providing a straightforward and inclusive financial planning service for our clients. We help individuals and business owners plan for a better life. We have designed an approach to advice that is flexible enough to meet your changing needs and circumstances. Our practical solutions are designed to deliver consistent outcomes and meet your expectations. Whether you’re five years or 20 years from retirement, financially savvy or unsure where to begin, we’ll work closely with you to understand your objectives to create a bespoke plan that will best suit your needs.
Any expressions of opinion are those of the author and not necessarily those of the firm.
This article does not constitute advice, and a full assessment would need to be completed by one of our specialist advisers to understand an individual’s circumstances. Please remember that the value of investments can fluctuate, and you may get back less than you invested. Past performance is not necessarily an indicator of future returns.
Waverton Wealth Planning LLP is authorised and regulated by the Financial Conduct Authority (FCA).
Waverton Wealth Planning LLP is registered in Scotland (SO302894). Registered office – Exchange Tower, 19 Canning Street, Edinburgh, EH3 8EH.
