Hero background
Business Tax, HMRC, IHT, Personal tax, Probate and Inheritance Tax, Tax Planning, Tax Relief

5 ideas for tax efficient retirement planning

RJP LLP By RJP LLP
5 ideas for tax efficient retirement planning

Whether you run your own company or are an employee, a care free retirement is something we all look forward to. You’ve worked hard for many years and want to ensure that when you do eventually retire, you can enjoy a good quality of life, with maximum levels of disposable income. Carefully managing your financial affairs sooner rather than later is essential to achieve this, and this includes avoiding any unexpected tax traps.

This article outlines some of the most commonly encountered retirement tax traps and how to avoid them.

1. Paying tax for exceeding the lifetime pensions allowance

Currently, the maximum amount that can be held in a pension is £1.03 m and anyone who exceeds this level is hit with a tax penalty of up to 55%. This is affecting ever increasing numbers of people and in the last tax year, 2,410 taxpayers paid a combined £110 m in penalties.

WHAT CAN YOU DO ABOUT IT? To mitigate the impact, it may be necessary to stop making contributions, but this needs careful evaluation. For instance, if your employer is making the contributions and you will exceed the lifetime allowance level it may still be beneficial to continue growing the pension. After all, even if you did incur a 55% tax penalty, the remaining 45% of the extra income is likely to be still worth having!

 

2. Paying tax on pension contributions

Whilst the standard annual pension contribution allowance remains at £40,000, this figure reduces for people with higher incomes, to a minimum level of £10,000 per year. For someone with a £150,000 total income or higher, the pension allowance is reduced by £1 for every £2 of earnings above the £150,000 level. Income is calculated from all sources – salary, dividends, rental property income and any benefits in kind.

WHAT CAN YOU DO ABOUT IT? It is complex but possible to maximise contributions using the ‘carry forward’ rules. This allows someone to make increased contributions during one year using unused allowances from earlier periods, for up to three years. Professional advice is needed to pursue this option.

 

3. Consider other investment vehicles

Pensions are the obvious choice when it comes to financing retirement, but there are some other tax efficient avenues, albeit some of them come at a slightly higher risk. Firstly, there are ISAs and other tax efficient savings bonds which are relatively low risk. Once these options have been exhausted, consider other investments that are tax advantaged, such as EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trust) investments. The EIS in particular offers generous tax advantages and investors can obtain 30% income tax relief on amounts invested. Gains can also be rolled over and re-invested, to defer capital gains tax payable.

HOW CAN YOU BENEFIT? EIS can be a very worthwhile investment strategy under the right circumstances. It’s important to seek advice before investing in EIS companies and to understand the qualifying rules. There are strict processes that must be followed in order to benefit from the tax relief available, which we highlight in another recent article.

 

4. Minimise inheritance tax on your estate

If you have a pension, it can usually be passed onto your next of kin or another named beneficiary tax efficiently. In cases where an individual should die before reaching the age of 75, the pension can be inherited free of tax. After this time, the beneficiary pays income tax on income from the pension, as and when it is drawn down.

WHAT CAN YOU DO ABOUT IT? It’s important to seek advice but since the investment in, and the transfer of, a pension are tax efficient, this tends to be the first area of focus for many individuals, followed by the use of other tax advantaged strategies.

 

5. Minimise surplus funds in a taxable estate

One of the best ways to minimise tax during your retirement is to give away assets where possible, to reduce the size of your taxable estate. The government is currently reviewing the inheritance tax and gifting rules, but currently it is possible to gift £3,000 a year (this allowance can also be carried forward one year) plus make other small tax free gifts. For example, a couple who have not used their previous year’s entitlement can gift £12,000 in a single year (3,000 each per year, using one year’s unused allowance).

It is also possible to gift higher value assets tax efficiently, using the potentially exempt transfer rules (PETs) provided that you do not need the asset and no longer derive any benefit from it. However, you must also consider the impact of capital gains tax if you are gifting assets such as property or shares.

WHAT CAN I DO? As this is under consultation, it is highly likely the inheritance tax rules will change in the medium-term future. Currently the PET rules are relatively accessible and provided an individual survives for 7 years after making a PET, no inheritance tax liability is likely to arise. This timeframe could increase, and other restrictions may also be introduced, so it’s worth seeking advice on earlier rather than later.

 

For more information about retirement tax planning, please contact Lesley Stalker by emailing partners@rjp.co.uk.

 

How to get onboard with RJP
1
Talk to us
Have an initial discussion with a member of the RJP team to identify ways we can enhance your business's growth with our comprehensive support and strategic advice.
2
Hassle-free migration
Choose RJP and we'll smoothly manage all transitions, handling paperwork, coordinating with your current accountant, and ensuring no deadlines are missed for a worry-free experience.
3
A pathway to growth
Finally, we will send you the required documents to sign and return, leaving you to continue leading your business, backed by our abundant, responsive advice and support.
Here’s what our clients have to say
Hear directly from our clients about how RJP's personal, straightforward approach has made all the difference in their business and personal success.
"I just wanted to drop you a short note to say how grateful I am for the support that RJP has provided over the past 4 weeks while our Financial Controller was away. I struggle to comprehend how much work your staff get through during their weekly visits and they are always a pleasure to have around the office."
"I wanted to write and express our gratitude for your help and hard work in getting Probate through and settling all the taxes. I am so pleased that we selected RJP, as your professional help and updates throughout this process have been invaluable. If at any time in the future Probate assessment may be needed, you will be our first port of call. Once again, many thanks to the whole team."
"I would like to take this opportunity to thank you very much for the amazing job you have done navigating us through this whole process. My family and I also really appreciate the care and compassion demonstrated by you and your team in every dealing. Our thanks to everyone."
"Just a quick e-mail from me to thank you for achieving the target for producing the draft accounts – it is very much appreciated and gives a first class impression of your firm. Many thanks."
"RJP provide our company with a complete service which takes the stress and strain away from the day to day running of our accounts! Their understanding of our business and their patience and advice is invaluable."
cta background
Get the latest tax tips to your inbox every month


    faq background
    FAQs
    What services can RJP offer to help me understand how my business is truly performing?
    At RJP, we understand that keeping a finger on the pulse of your business's health is crucial. That's why we offer management reporting services—think of them as a regular health check for your company. These insights show you the real-time performance of your business, helping you make informed decisions to nurture and grow your enterprise.
    I'm keen to expand my business. How can RJP help me with that?
    We love seeing your business flourish! Growth and improvement are at the heart of our practical advice. From the ins and outs of everyday operations to big-picture strategic moves, we're here to offer clear, actionable steps that can propel your business forward.
    Audits and compliance can be a headache. How does RJP ease this process for business owners?
    We know dealing with the issue of compliance and auditing can be less than thrilling. That's exactly why we're here—to handle the complex stuff so you don't have to. We offer comprehensive compliance services, ensuring everything is up-to-date without you having to wade through a sea of regulations.
    I've heard about tax relief schemes but don’t know where to start - can RJP guide me?
    Absolutely! There's a world of opportunity out there to support your business financially, and we're well-equipped to be your guide. We can help you understand and access HMRC’s tax relief schemes that are relevant to you and your business, making sure you're not missing out on any potential benefits.
    If I have a question or need support, how responsive is RJP to my needs?
    When you need us, we're just a call or an email away—no question is too small or too large. We're known for our quick responses and our fixed fees mean you can reach out without worrying about unexpected costs. Plus, we always keep things simple and straight to the point. We're not just your accountants; we're part of your team, ready to support both your business and personal needs.