Pre-budget financial planning

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It is that time of year again when the government adds another layer of complexity to the nation’s finances and tries to raise a little extra tax in the process.

One of the problems this time around is that they really need to raise quite a lot of extra tax. So, in the days leading up to the budget, there will be the inevitable last minute flurry of financial manoeuvrings as investors seek to claim the most generous tax reliefs before they may be withdrawn for good.

Some of the most generous tax breaks that we have apply to our current pension system in the UK. With pensions, we have an incredibly generous system, whereby the fund grows free from capital gains tax. It can be passed down the generations tax free on death before age 75 with the use of an appropriate trust, and 25 per cent of the fund can be taken as a tax free lump sum at any age after 55.

The most generous tax break with pensions, however, is the tax relief that is granted up front with every contribution. This means that to get £100 into a pension fund, it only costs a basic rate tax payer £80, a 40 per cent taxpayer £60, a 50% tax payer £50 and a 60 per cent taxpayer £40. The maths starts to look really interesting, especially for 60 per cent tax payers, aged over 55, who are earning between £100,000 and £114,000. In this case £10,000 put into a pension fund only costs the 60% taxpayer £4,000. Tax free cash of £2,500 can then be taken straight away, resulting in a remaining pension fund of £7,500 that has only cost £1,500 to achieve.

It is this sort of clever planning that the government may seek to put an end to in the budget. So if you are in this bracket, you may want to consider acting quickly.

ISA accounts also offer some tax breaks which, although they are not as generous as pensions, they are still worth claiming. Up to £10,680 can be placed in an ISA account this year and there will be not capital gains tax on any gain made. All interest will also be tax free and dividends from ISAs are sheltered from higher rate and do not need to be recorded on a tax return. While experts are not predicting that ISAs will be under threat in the budget, investors have until 5th April to make use of this years allowance.

Finally, for those investors who are comfortable with some high risk investments in their portfolio, Venture Capital Trusts (VCTs) offer30% tax relief on contributions, exemption from capital gains, and tax free dividends. VCTs invest in start-up companies which come with higher risk of failure and so the old adage “don’t let the tax tail wag the investment dog” should be heeded. In other words don’t invest in something risky just because it comes with tax advantages.