Recently, a key research finding using data from the Office for National Statistics was so compelling it featured as a news story across the national media.
The finding was that over a lifetime, the average household in the UK will pay more than £1.1m in direct and indirect taxes. Or, to look at it another way, it will pay the equivalent of 18 years’ work in tax.
The news stories included the fact that for the top 20 per cent of UK households, the lifetime tax bill will be just over £2.5m or, if those households want to look at it another way, it will take 19 years to pay off.
However you look at it of course, these are astonishing figures.
We all know tax is the price we pay to live in a decent society where we can collectively benefit. But at the same time, I don’t think there’s anyone who wants to pay more tax than they need to.
With the escalating cost of living crisis, inflation at a 30-year high and, for those in work, a rise in national insurance contributions coming, good tax planning has probably never been more important than it is now.
And why, for advisers, encouraging clients to make full use of the available tax allowances and exemptions throughout the tax year, and not just at Tax Year End (TYE), is core to helping them meet life’s challenges as part of their holistic financial plan.
Good tax planning for good client outcomes
Although many advisers have found effective ways to remind clients about good tax planning throughout the year, human behaviour being what it is, most are only galvanised into taking action as TYE looms. It’s when they realise that if they don’t take advantage of the many generous tax saving opportunities, then they’ll lose them.
The one exception being the carry forward rule for pensions. If clients don’t make full use of the £40,000 annual allowance - dependent on them having sufficient income during the tax year for tax relief to be claimed - they can carry any unused amount forward for another three years. However, if they’re still carrying an allowance from three years ago, it will disappear at midnight on 5 April.
As we approach the TYE deadline, the most important thing clients should be doing now is reviewing how life’s current challenges may affect their finances and making adjustments as necessary. In an inflationary environment, holding significant amounts of cash in a deposit account for example is effectively losing money, so 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.
The point about good tax planning is that it can make a huge difference to client outcomes for the better. Take crystallizing capital gains as another example. Gains above the annual capital gains tax (CGT) allowance are taxed which, for a higher rate taxpayer, could be 20 per cent 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 they’re not making use of available CGT allowances on a regular basis.
The core tax planning tools for good outcomes
A client’s holistic financial plan is about a plan for the future where flexibility and good tax planning has been built in. As well as making full use of ISA allowances, there are additional tax advantageous options clients can choose from - depending on their level of wealth and longer-term tax outlook, such as if they’ll always need to be a higher rate tax payer. Clients can put money into a pension scheme, a collective portfolio, an onshore bond or an offshore bond.
What’s really interesting about all these options is that, outside of cash, they’re the same core tax planning tools that, remarkably, have not changed over the past 25 years.
To give an example of the effectiveness of these tools in practise, if a client in work is looking for £100,000 net income per annum, they would need to earn around £167,000 before tax. On the other hand, if a client in the decumulation phase wants a £100,000 net income per annum, 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.
That’s what a good client outcome looks like through good tax planning.
A wide range of tax-friendly options available to clients
Although many clients are facing increasing day-to-day challenges, there’s a huge positive in that financial planning has probably never been in such a good place. These days, there are so many tax-friendly options available to clients that they actually benefit from value-added advice.
There’s tax wrapper flexibility that’s never been so flexible and a range of investment options that 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. And at the age of 55, they can flexibly access their pension whenever they need it, or continue to put money into it, benefitting from generous tax allowances and exemptions that are so flexible their income streams can be fine-tuned as required.
It still has to be said that the tax regime in the UK is one of the most complex in the world. It can be so complicated, with ever-changing rules, that advisers have to fully understand it in order to protect their clients and to continue to deliver good outcomes for them. Take the Chancellor’s announcement at the last Spring Budget where he froze the threshold for the higher rate of income tax until 2026, effectively bringing one and a half million people in the UK into the higher rate tax band over the five years of the freeze.
Technical support available throughout the year
Tax and its complexity is the reason why my colleagues in our Techzone team are such a brilliant support for advisers. They’re true experts in pensions, trusts, wealth transfer and of course tax and are an invaluable source for technical help.
Our own adviser solutions also offer fantastic tax planning support for advisers. The platform can do all the hard work in terms of managing clients’ money in efficient tax wrappers for good outcomes, while the client benefits from an income stream into their bank account on the same day every month from one source.
With the quality of support available, in these challenging times, good tax planning throughout the year as part of an holistic financial plan for good client outcomes has probably never been more important.
The value of investments can go down as well as up and your clients could get back less than they paid in
Any reference to legislation and tax is based on abrdn’s understanding of UK law and HMR practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
The views expressed in this blog should not be regarded as financial advice.