Mattioli Woods PLC - Financial Planning Newsletter

*Please note the above pension contribution allowances are based on the 2021/22 tax year rules and can change in future years. Part one So what is threshold income? If an individual has a ‘threshold income’ of £200,000 or less they will not be subject to the tapered annual allowance. Threshold income is essentially taxable income and includes elements such as: · earned salary · employment bonuses · benefits in kind · any salary sacrifice arrangements made on or after 9 July 2015 · income from rental properties · trading profits · dividend income · onshore and offshore bond gains · interest on savings held in saving accounts with banks and building societies When calculating threshold income certain deductions will need to be taken into account such as pension contributions made via relief at source (RAS), any lump sum death benefits received in the tax year that were subject to tax at marginal rate and certain allowances and reliefs, i.e. excess tax relief under net pay pension schemes. However, if the threshold income exceeds £200,000, there will then be a requirement to calculate the adjusted income to work out the amount of tapered annual allowance available. What is adjusted income? As with threshold income the same rules apply in determining an individual’s taxable income, but employee contributions whether by RAS or net pay are included as well as employer contributions. As mentioned above, once an individual’s adjusted income exceeds £240,000 per annum their contribution capacity will start to reduce, unless the threshold income is below £200,000. Below is an example to demonstrate how it all works. Tara earns an annual salary, bonus and dividends of £205,000 per annummeaning she has exceeded the threshold limit. However, her employer makes a £100,000 pension contribution (using the available carry forward allowances of £60,000 from the three previous tax years plus £40,000 for the current tax year). As mentioned above, Tara’s employer contribution will need to be included in the calculation for adjusted income purposes. Therefore, Tara now has an adjusted income of £305,000 and her annual allowance for this tax year is reduced to £7,500, which means that an annual allowance charge will apply on £32,500. However, if Tara makes a personal contribution of £5,000 this will bring her under the threshold limit and tapering would not apply. It is important to note that Tara would have still paid £5,000 over the available annual allowance that we identified above as a total of £100,000 (including carry forward allowances); however, the annual allowances charges would have reduced. Tara will need to calculate whether this method works for her when comparing the cost of the annual allowance tax under the first option versus the cost of reduced tax but including the extra contribution into the pension. Building for the future Saving for your retirement over a longer period of time will inevitably put you under less financial strain later on in life when building up a ‘nest egg’. The advantage of making pension contributions is that tax relief is awarded at your highest marginal rate up to the allowances as described above. Alternatively, pension contributions made from a business will be eligible for corporation tax relief, subject to the wholly and exclusive rules, and specific tax advice will need to be obtained. While the concept of making pension contributions into a UK registered scheme is relatively straightforward, it does however require good financial planning for individuals once their earnings (from all sources) exceed £240,000. 08 09 Most parents will admit their main priority is to ensure their family and children are financially protected. But, far too often, the clients I speak to do not realise the opportunities they are missing out on. Something I frequently see is that people believe that their financial plan or assets will be enough to safeguard their family’s future, but the majority of the time this is not the case. I often ask clients, if the unexpected happened tomorrow and your income was lost either through an accident, ill health, or death, would your family have funds available to allow them to maintain their lifestyle for the next five, ten, or even 20 years? Also, have you set out how you wish your assets to pass to your loved ones? The hard facts: • 70 per cent of the UK adult population does not have a valid will in place (https://wills.org.uk/national-will-statistics June 2019) • only 50 per cent of households with mortgages currently have life insurance (FT Adviser, May 2020) Although only half of people with a mortgage have life insurance in place to cover their mortgage, what about the ongoing costs thereafter? If the mortgage is already repaid, and there is a life cover policy in place, it may give a lump sum which can be used to cover a couple of years’ worth of ongoing expenditure. However, it is not always enough to allow for your family to continue building up pensions or personal investment portfolios, nor is it often enough to cover school and/or university fees and so on. The same can be said for income protection or critical illness cover and is why sometimes a combination of different types of policies might be required. It is easy to ignore how important it is to have the right plan in place, as nobody expects the unexpected to happen to them, but this thinking unfortunately is common and families are left not only dealing with grief but trying to arrange a plan of how they can meet the shortfalls, which can create worry and stress. Therefore, having the right planning in place can give you and your family the peace of mind that should the unexpected happen, they are going to be okay. Protection can be for an individual or circumstances that occur to an individual or can be on a joint life basis to cover a couple. The right policy can provide a lump sum to compensate for a critical or debilitating illness, to meet liabilities (such as repaying a mortgage or settling an inheritance tax bill) upon death or be used to replace ongoing income. Often overlooked is the Family Income Benefit policy, which provides an annual income to the family of the insured upon death for a set number of years, or the Income Protection policy, which will provide replacement income in the event of you not being able to work following ill health or accident. There is no right amount of protection as every individual has different circumstances. Yet there is often a disconnect and a misunderstanding of how essential an individual is to their family, business and the livelihood of others all at the same time. This can lead to a difficult calculation of cost versus benefit. But the ultimate benefit of protecting families and businesses often outweighs the monthly funding of premiums. Whether you have or have not already put some protection in place, Mattioli Woods can provide a complete audit of your current plan or tailor new solutions for you. This will ensure you and your family are fully protected and you would be surprised, not everything is as expensive as you may think. Is you financial plan really enough to protect your children’s future? by Nathan Smith OF FACTS OF FACTS In the beginning there was only Ian and Bob with their first employee joining a month later. Today there are over 650 staff - and counting! It only took six years to reach a turnover of more than £1 million and 11 years to exceed £10 million!