Better Business: All eyes on the tax year end

What should you tell clients as the end of the tax year approaches?

The tax year end presents many clients with a yearly reminder that it is once again time to examine their financial plans. As April approaches, advisers will not only be looking at the activity that must occur immediately, such as the topping up of ISAs, but may also be looking at the bigger picture and re-examining three key elements of an investor’s financial plans: retirement planning, investments and estate planning.

Last year saw a number of changes; perhaps the most significant being the changes to the tax relief on pension funding for high income individuals. These changes are an area many advisers who are carrying out ‘routine financial health checks’ for their clients in the run-up to tax year end will consider. A number of planning opportunities for clients building their retirement funds and those currently accessing their funds will be affected by these changes and advisers should be abreast of the new rules so they can use them to the advantage of their clients.

High earner opportunities

-- The Pre-Budget Report outlined that from 9 December 2009 the relevant income threshold above which a tax relief restriction will apply on contributions above the special annual allowance of £20,000, would decrease to £130,000 from £150,000. Clients potentially affected by this shift in the higher-earner threshold have a number of opportunities to consider.

Clients should ensure, where appropriate, they use their special annual allowance contribution of £20,000, or where applicable, pay a higher infrequent money purchase contribution limit (capped at £30,000) to their chosen registered pension scheme. Alternatively, clients who benefit from a higher protected pension input allowance from regular benefit accrual, should ensure this allowance is preserved either in their pre 22 April 2009 or pre 9 December 2009 registered pension scheme.

Payment of relievable personal contributions of up to £20,000, combined with gift aid payments, may reduce a client’s relevant income below the £130,000 threshold in the current tax year. The client may then be able to make full use of the annual allowance without any reduction in tax relief.

Advisers should also focus on ensuring clients are not caught by the relevant income threshold, which affects most of the UK tax-paying public. Clients not in the higher-earner bracket can still contribute up to 100% of their relevant earnings, to which they can add any employer contributions up to the annual allowance. This may be an important consideration for those with relevant income falling just below the current £130,000 threshold, especially if they feel the Government could reduce the relevant income threshold further in the future.

-- Increases in National Insurance (NI) contributions in 2011/2012 for both employer and employee highlight the efficiencies of salary sacrifice. An employer could redirect part or all of their NI contributions (currently 12.8%) to provide funding into private retirement provision. Freezing of the upper earnings accrual at £40,040 means clients will not lose state benefit provision if a sacrifice of earnings above that level takes place. When considering this, clients need to be sure any sacrifice does not result in a cut in other benefits, such as personal health insurance or group life cover. For clients caught by the relevant income threshold, any new salary sacrifice agreement set up from 22 April 2009 or 8 December 2009 (as applicable) will not reduce relevant income to avoid the threshold.

Remember, clients without relevant earnings can make (or receive from a third party) a pension contribution of up to £3,600 gross. This may be attractive when considering retirement provision for children or grandchildren from surplus income. The child will receive basic-rate relief of 20% in the current tax year, giving them an early start on building their retirement provision.

-- The beginning of the 2010/11 tax year sees the normal minimum pension age for taking benefits from a registered pension scheme increase from 50 to 55. There will be some in the 50-54 age bracket who may still wish to retire before the age of 55 and will benefit from accessing their existing pension fund and receiving their tax-free pension commencement lump sum (PCLS) before the changes come into effect.

By combining this with the use of income withdrawal it may be possible to defer taking income from the pension fund. Clients wishing to do this must remember they have to take action before the last working day of the tax year, and should consider early March as the last implementation date to complete such an exercise.

Many clients with income withdrawal may not require an income if they continue to work or are receiving income from other assets. They may benefit from recycling income as a new contribution to increase the tax efficiency of their pension fund. If they no longer have relevant
earnings the contribution limit is £3,600, but could be much higher if they are continuing to work.

Time to contribute

The last working day of this tax year is 1 April. Given the Budget will fall over the next few months, anyone who is concerned the Government will announce further controls on higher-rate tax relief should consider contributing beforehand. This will ensure as much protection as possible from any Budget announcements, enabling them to receive full tax relief on those contributions should future changes be made.

The run-up to the tax year end is always a busy time for advisers and this year is no exception. The changes occurring within the tax and financial planning arena offer a number of opportunities to review clients’ retirement planning strategies and add significant value.

Adrian Walker is head of retirement planning at Skandia