Throughout our lives we will pay a chunk of tax….Income Tax, National Insurance, VAT, Stamp Duty, Fuel Tax….the list is endless!
So it’s best to keep as much of your wealth away from the clutches of the taxman!
With some smart planning many people can significantly reduce the amount of tax they pay or avoid paying it altogether. A good tax planning strategy as part of an ongoing plan can make a real difference.
The approach to saving tax changes when the transition is made from working, to working less, to not working at all. This is the time when accumulated wealth may start to be withdrawn and spent.
So here are a few simple ways to plan to save tax when taking withdrawals from investments to replace or top up income from work.
If you hold investments outside of an ISA, pension or investment bond which have made capital gains you can “wash out” gains each year by cashing them in and pay no tax on gains up to £12,000 (this tax year).
Spending ISAs during your lifetime makes sense because they are subject to Inheritance Tax on death. Also, there is no tax to pay when money is withdrawn from them.
Plan pension withdrawals carefully!
Investment linked pensions are made up of two parts – one part can be withdrawn without paying tax which is usually 25% of the pension value; and the other part is subject to tax.
You don’t have to take out all of the tax free part in one go. The payments can be staggered to fund the current years spending requirement, for example.
For the taxable part of the pension the income tax personal allowance (£12,500 this tax year) can be used if not used elsewhere resulting in potentially no tax being paid on that slice of pension income.
On death any remaining pension fund is exempt from inheritance tax.
So it makes sense to use the tax free lump sum to fund annual expenditure and to keep the withdrawals from the taxable part as low as possible.
A combination of tax free lump sum and taxable part up to the personal allowance if unused (or not fully used) would deliver the best tax outcome.
However, if you are still making contributions into a pension and if the taxable part is withdrawn you would need to be mindful that the annual pension allowance would reduce to £4,000.
But this is all providing current rules continue to apply as politicians love to tinker with the tax rules!
So it is really important this is all closely monitored so course corrections can be taken if need be, so as to ensure the taxman gets less and you get to keep more and the opportunity to spend more on the good things in life!