I’m going to be talking about various tax wrappers in a series of articles over the next few days.
A Tax Wrapper is a beneficial structure provided by the UK Government which you can wrap around your savings and investments. These wrappers effectively shield your money from taxes that you would otherwise have to pay.
The most well-known tax wrapper is the humble Pension. Contributions into a Pension are still heavily subsidised by the government because they want us to save for retirement, so if you aren’t saving as much money as you can into one, you are missing out:
- Contributions up to the annual allowance entitle the investor to a 20% tax rebate (provided that his/her pensionable income matches the contributions) of up to £60,000 per year.
- Even if you or your partner have no pensionable income, you can still put in £2880 into a pension and this will be grossed up by the Inland Revenue to £3600. You can start a pension for a child or grandchild.
- Higher rate tax payers can claim an additional 20% x pension contributions off their Income Tax obligation.
- Additional rate tax payers can claim an additional 25% x pension contributions off their Income Tax obligation.
- The tax year for pensions runs from 6th April to 5th April in the following year.
- Growth within the wrapper is virtually tax free*, with no Capital Gains Tax to pay on encashment.
- You can use the pension to buy commercial property- if you do that, the pension will charge rental to the tenant, which goes into the pension tax free and is fantastically tax efficient.
- You can access the pension from 55 (rising to 57 in April 2028)
- There is no limit to how much you can put into a pension currently (although the tax breaks do have limits)
- A contribution into a pension by a Company or Business is a legitimate way of extracting profit from the business tax free, although the contribution must be proportionate to the role being played by the Pension Member and wholly and exclusively for the benefit of the Company or Business.
- If a Pension Member dies before 75 years of age the pension passes tax free to his/her Beneficiaries. If aged 75 or over the Pension will be subject to Income Tax at the Beneficiary’s marginal rate.
- Uncrystallised Pensions are usually exempt from Inheritance Tax and so outside of the value of the Estate for Inheritance Tax purposes.
- Using the tax free element skillfully and being able to control how much you withdraw in retirement enables you to minimise the tax you pay.
*The value of an investment can go down as well as up.
In conclusion, using tax wrappers with your investments can save you a significant amount of tax and really boost the growth of your capital.
If you would like to have a chat about any aspect of pensions, I’d be happy to help. Look out for episode 2 of my Tax Wrapper series in a few days time!
Russell Blackhurst Llb dip PFS
Lazenby’s Financial Services
