While we face unprecedented disruption to our daily lives, it is important not to lose sight of long-term goals. Here we summarise the changes in tax efficient savings allowances effective from 6 April 2020.
The annual allowance for pension savings, with the benefit of tax relief, remains at the lower of 100% of earned income or profits or £40,000, including employer contributions.
Exceptions to this include: -
Those without earned income or profits under age 75, who may invest up to £2,880 per year and will see this topped up with tax relief at 20% of up to £720 per year, if a non or basic rate taxpayer and double this for higher rate taxpayers.
Over 55s who have accessed their pension funds on a flexible basis and withdrawn more than the tax free lump sum have a pension savings allowance of £4,000, if saving in a money purchase pension (personal, stakeholder, SIPP or defined contribution workplace scheme) - £36,000 if an active member of a defined benefit pension scheme.
Many higher and top rate taxpayers will be able to save more in pensions with the benefit of tax relief in 2020-21. Those with income between £110,000 and £300,000 saw restrictions on savings allowances lifted substantially. But a flat allowance of £4,000 applies where income1 is in excess of £312,000.
Higher rate taxpayers (£50,000 plus income) 2 gets a taxpayer subsidy of £4 for every £10 saved and a top rate taxpayer (£150,000 plus income) £4.50 for every £10 saved. Pension funds incur no income tax or capital gains tax while invested. Up to 25% of the fund may be withdrawn tax free after age 55, the balance being subject to income tax at the rate payable when withdrawn.
To keep the cost of pension tax relief affordable to the taxpayer an overall lifetime allowance for pension savings applies to each individual. From 6 April 2020 this will be £1,073,100. Where cumulative pension funds withdrawn, held at age 75 or on earlier death exceed this, a tax charge applies to the excess. 25% if the excess is drawn as taxable income and 55% if drawn as a lump sum. Pension funds owned on death are usually outside of the deceased’s estate for inheritance tax
Individual Savings Accounts
The adult ISA allowance remains at £20,000 but under 18s can invest up to £9,000 in a Junior ISA or Child Trust Fund, more than double last years’ allowance. 16-17-year olds can use the under 18 allowance and can also invest up to £20,000 into a cash ISA, giving a total of £29,000 which may be tax sheltered.
The benefit of ISA saving is that the saver pays no income tax or capital gains tax on the income and growth from their savings. There are no minimum investment periods or stipulations on how the money is used, apart from the Lifetime ISA. (LISA)
LISA is the only ISA to which the taxpayer adds money, with 20% top up to the savings made. 18 to 39-year olds may open a LISA. Up to £4,000 per year can be saved until age 50, included in the £20,000 allowance. The fund remans tax free if it is used for the deposit on a first home purchase with a mortgage or accessed after age 60. Access for other purposes is subject to a 25% penalty of the withdrawn amount.
Investors may invest in cash ISAs which pay interest or in stocks and shares ISAs which invest in shares, fixed interest, property, infrastructure and commodities and may go up or down in value. Any combination of the two types may be used within the overall annual allowance of £20,000. Under 16s may only have one type or the other.
Timing of Investments
These allowances are available until 5 April 2021 but could be subject to change in the November Budget due to the impact of the Coronavirus emergency on public finances.
You may be uncertain about investing at this time, due to the extreme volatility displayed in the world’s stock markets. If so but you would still like to consider using your tax efficient savings allowances, a solution may be at hand. It is possible to invest in an ISA or pension wrapper to secure the tax efficient allowance for this tax year, but to delay the investment into assets, by placing the investment in a cash fund in the short term.
Cash funds are not likely to be suitable as a longer-term investment, unless you wish to take only a very low level of risk. Rates of return on cash investments are low and are unlikely to keep pace with inflation. However, they can be a useful temporary home for your money, enabling you to make use of the tax efficiency of pensions or ISAs, and then switching your investment into longer term investments such as shares, property, fixed interest or commodity funds later. The switch can either be as a lump sum, or regular drip feeding, to even out the peaks and troughs of asset prices.
Whether it is suitable for you to invest at this time and the amount you can afford to save will depend on your personal circumstances. Your usual LEBC contact will be able to help you assess this.
1. Income is defined as all gross income plus employer pension contributions.
2. England, Wales and Northern Ireland. Taxpayers resident in Scotland pay higher rate tax on income above £43,430 with 41% tax relief and top rate on income above £150,000 with 46% tax relief.
Director of Public Policy
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. A pension is a long-term investment. The fund value may fluctuate and can go down. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. If you are unsure of the suitability of any investment or product for your circumstances, please contact an adviser. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views
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