Zooming towards a plan

I had some Zoom calls with clients this week about personal financial planning.

I’m joined at the meetings by an Independent Financial Advisor (IFA). He’s the expert and runs the meetings and I observe and occasionally chip in if the conversation strays into my realm of a client’s business interests or tax matters.

My IFA buddy and I have been doing these meetings together for a few years now. What strikes me is that surprisingly few people plan their finances and align the management of these with the their personal life goals.

Stuff just tends to happen. 

We have various jobs and accumulate several pensions. Maybe we invest in a buy to let property because it seemed like a good opportunity at the time or we inherited mum and dad’s house and decided to let it out. We have a few ISAs and maybe some premium bonds. We were made redundant from our last job and started the consulting business. We still have a hefty mortgage on the family home. 

And we don’t have a plan.

This is a typical scenario for a reasonably ‘successful’ person in their 50s. They have a patchwork of assets, active and potential income streams but they are not joined together into a coherent strategy.

Often its at this stage that people will start to think they need a plan. 

Maybe they’d like to retire and they don’t know if they can afford it. Maybe they want to help the kids out now and leave them a reasonable inheritance. Maybe they just want to travel the world and enjoy life when they still can.

This is where a good IFA can really add value by pulling all the strands together and helping to construct a plan. I’ve seen cases where an advisor has been able to present options which individuals had not considered or thought would be unrealistic. 

In short, a good plan can be transformational. It can bring clarity, open up new horizons and turn possibilities into realities.

Not everyone is ready to commit to a plan of course and many people will leave our meetings still undecided and will carry on as before. 

An exploratory meeting can be a great way of unblocking the inertia. An external expert looking at your situation and putting forward some options you may not have considered can be a catalyst for change.

That change, in the context of a plan which can then be implemented, can be the difference between muddling through and living life as you really want to.

www.base52.co.uk

I, capitalist

Being a capitalist is not something one would normally shout about.

As a word it is sometimes followed by 'pig' and spat out as an insult. So capitalists tend not to brag about being one. It's just not good form.

But maybe some of us are capitalists without realising that we are?

A good place to start is with a definition.

Wikipedia defines a capitalist as:

'A person who uses their wealth to invest in trade and industry for profit in accordance with the principles of capitalism'

Ah, so that would be George Soros, Warren Buffet and co. The super rich who invest billions in the stock market. Not us ordinary Joes and Joannas who strive for our daily crust.

But what about the self employed and small business owners? Are we capitalists? Well, some self employed - 'the gig economy', who sell their own services are probably acting more like an employee. Employees with a little more choice and freedom, but 'employee-like' nonetheless. They are an essential part of the capitalist system but are not exhibiting capitalist behaviour themselves.

On other other hand, the business owner who has built his or her business to a reasonable scale and has employed people and resources to achieve this, is probably now a capitalist. The cafe owner, the chap with the small industrial unit, the boss of small professional services firm. They may have built the value in the the business with their own 'sweat' capital or their own modest savings but (going back to our definition) they have 'invested in trade and industry for profit'. So they make the cut as capitalists.

So that's the Buffets of this world, other wealthy investors and business owners. That's a small slice of the population who are described by the 'c' word.

But under a change by the government introduced from 2012 it could be argued that we are all (or most of us) capitalists now. Pensions auto enrolment means that all employees above a certain earnings threshold need to be enrolled into an employer pension scheme. The pension provider will on their behalf invest the employee's and employer's contributions in trade and industry, hopefully for profit.

We can of course opt out, or maybe choose our own pension scheme which invests in  government securities rather than the capitalist stock market. But the returns are likely to be much less. Do we really want to choose to be poorer?

Maybe we could insist our pension provider looks at ethical investments? Yes but that is still capitalist - softer and fluffier, but capitalist.

So don't say it too loudly, but most of us, knowingly or unknowingly, are capitalists.

And probably better off for being so.

www.base52.co.uk

8 things to do before the end of the tax year

It may not feel like it with the UK in the grip of snow and ice but we have already had the first day of Spring and the end of the tax year will soon be upon us. 

A little time spent planning in these last few weeks before the end of the tax year could provide useful savings. The tax year end for individuals is 5 April 2018.  Many self employed people also have their accounting year end as 5 April or 31 March to coincide with the tax year. For private limited companies, 31 March is also a common date for the year end. 

Here are some ideas: 

1) Buy business assets and bring forward business expenditure before the year end 

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one. 

Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow. Similarly if you are intending to carry out some repairs or maintenance work, doing this before the year end will reduce your next tax bill. 

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £45,000, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor. 

The £100,000 threshold is particularly unattractive from a tax perspective as the personal allowance is gradually withdrawn at a rate of £1 for every £2 of income. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £123,000. So best avoided if you don't need the income and can defer this to another year. 

3) Consider the effect of the dividend Tax 

A dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year – mainly business owners with their own limited companies. 

There is a £5,000 dividend allowance for 2017/18 where dividends are free of tax. The dividend allowance is reduced to only £2,000 per annum from 2018/19 onwards. It makes sense to use this allowance if you have scope to pay a dividend. Above this level new rates of dividend tax apply for varying levels of income. 

The dividend tax has a significant impact on business owners who may be used to drawing a relatively high proportion of their income as dividends. If possible the higher and additional dividend rates of 32.5% and 38.1% respectively are best avoided by capping gross income at the basic rate threshold of £45,000 if this is feasible. Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases. 

4) Contribute to a pension 

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill. This tax savings are particularly attractive for higher and additional rate taxpayers. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered. 

5) Use gift aid for donations 

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00. 

6) Use your tax free savings allowance 

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. You can save up to £20,000 for 2017/18. You can choose how you split this between stocks & shares and cash ISAs. There are also new ISAs such as the Lifetime ISA and ͚Help to Buy͛ ISA which are aimed at first time home buyers and offer additional incentives. 

7) Use your annual capital gains exemption 

If you have personal assets (shares, property etc) and are intending to sell them soon,  consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,300 annual exemption for 2017/18 effectively. 

For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance. 

8) Set money aside for your tax bill 

If you take some of the steps above you should be able to reduce your 2018 tax bill. It is unfortunate that however much we plan, many of us will still be faced with a tax bill for 2017/18, payable in the following January. Setting aside a percentage of your income to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics trying to find the funds. 

Another tip is to get your tax return completed as soon after the end of the tax year as possible. This gives you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January. 

If you would like Base52’s advice and assistance with any aspect of your tax planning, please contact us.

www.base52.co.uk