Pre-tax year end personal financial health check
With Covid-19 impacted business owners and their finances, Chartered Accountant Richard Bertin explores some of the financial planning matters that may crop up with your clients over the next couple of months, including ISA planning and unused pension relief.
February should be a time for the accounting profession to take a breather, after closing the Tax Return season at the end of January. However, that break was probably quite short lived with HMRC’s de-facto filing extension and some 1.8m returns outstanding.
Covid-19 has impacted not just businesses but also business owners and their finances. As such, it is worth perhaps taking a wider view of pre-tax year-end planning when talking to clients, given the impact the last 12 months will have had.
ISA planning with a difference
In the heady days of surplus cash, February and March were the target months for financial advisers and the asset management industry to hoover up money into ISAs pre 5 April.
There will be many, who have continued to earn well, avoided furlough, and continued to do their day job from home. This cohort will be in a strong position to use the current ISA entitlement of £20,000 this tax year.
Others may have had to raid their savings to live on last year (or pay a tax bill) and may be thinking that they have blown the ’tax efficient‘ nest egg they had created. If these clients are now sitting on cash, then all may not be lost.
In April 2016, the flexible ISA rules were introduced. If someone has a flexible ISA, they can withdraw and pay back up to the same amount withdrawn into the same ISA in the same tax year.
It is possible that some clients may be able to take advantage of this replacement rule before 5 April, and they can pay back any amounts already withdrawn this tax year as well as paying in a full £20,000 annual entitlement.
Similarly, other clients may be wondering where they can get access to capital, but do not believe it is sensible to touch their ISAs, or do not understand the flexibility their ISA can provide. Clients should be aware that the flexible ISA rules can provide an extra short-term facility from 6 April with up to a year to repay the amount borrowed.
Remember though, whilst there is no interest charge for the withdrawal there may be an opportunity cost (or gain!) depending on market movements whilst the money is borrowed and therefore not invested. And the ISA's withdrawal needs to be replaced within the 2021/22 tax year, to maintain its capital integrity.
Not all ISAs are flexible, and it is important that clients seek financial advice. That said, it is important that accountants have a basic understanding of what is possible, pre-, and post-tax year end.
Annual pension allowance
In short the annual pension allowance can get very complicated. Regular earners can contribute up to £40,000 gross into their pension each tax year. Simplistically high earners were defined as people with income more than £150,000 per annum. But, in March 2020, primarily after lobbying from the British Medical Association (BMA), the Chancellor changed the definition of a "high earner,” and it is pretty generous now.
From 6 April 2020 the definition of ’high earner‘ was increased from £150,000 to a lofty £240,000. Historically a client earning £200,000 per annum pre 6/4/2020 would have been limited to an annual pension contribution of £10,000. This Tax Year the same client could contribute £40,000 (which can be carried forward if not used). Clearly many clients will neither have the earnings nor the cashflow to make a pension contribution this year, but it is possible that this generous change in the tapering of annual allowances has not been headline news in recent months, and missed by you!
There are some horrible rules around the tapering of pension contributions if someone’s income exceeds £240,000. Similarly, the rules for those in Final Salary pension schemes are a nightmare, hence the lobbying from the BMA, as some medical practitioners, including nurses, were leaving because of the dry tax charges they were incurring on their NHS pension accrual.
Unused pension relief
It is possibly a moot point for those struggling with business and personal cashflow, but unused pension relief not used this tax year can be carried forward and utilised when income is higher. This may have significant benefits in the future given the changes made to the definition of a higher earner, as dealt with above. However, I don’t think there has been a single tax year that pension legislation has not been tinkered with over the last decade and higher rate pension tax relief always comes up in debates about a necessary relief. This debate will no doubt continue, given the level of government debt.
Certainly, if clients are selling or retiring from business this tax year or the next tax year, it feels prudent to consider the whole interaction of pension funding and the deductibility of employer pension contributions, together with the reduction of entrepreneurs' relief, alongside the IHT friendly nature of pension benefits, versus assets no longer protected by business relief. I don’t think there is a particular tax metric to apply, more a conversation to be had.
Given that pension benefits, in general, can be accessed from age 55 (changing to age 57 from 2028) they feel more like a personal trust fund now.
The content of the article is anchored around tax and legislation so it does feel like accountants giving ’remuneration planning‘ advice to their clients need to have a good working knowledge of financial matters, in order to spot opportunities or indeed bear traps.
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Richard Bertin is a Chartered Accountant, former chair of various committees and current ICAEW Personal Financial Planning Advisory Group member. He established and built up a successful fee-based wealth planning business, selling a stake in 2016 to Stonehage Fleming, the largest independent family office in EMEA.
He continued to further...