Tax Year End Retirement Income Planning
At this time of year, we are bombarded by reminders that the end of the tax year is coming.
You can’t read a newspaper or go on a tube train, without being reminded to make a payment to an ISA or a pension.
Spotify was even telling me to “act before 6th April” between songs today!
But what if you are spending your money rather than saving up for retirement?
The end of the tax year is still pretty important; after all, if you give less money to the taxman, you will have more left over to spend on yourself!
So what actions should you be taking before 6th April if you are withdrawing money from your retirement savings?
Here are a few key suggestions:
Make use of your own and your spouse’s personal income tax allowances
Once you have retired, it is reasonably easy to reduce your taxable income to a low level, while still having plenty of money to spend – particularly if you haven’t started drawing your state pension or company pension.
And it’s not uncommon for one member of a household to have taxable income of less than the personal allowance of £11,850.
If you are in this position, you should consider drawing sufficient out of an investment-linked pension to use up the personal allowance. The effect of this is that you can withdraw taxable funds from your retirement pot now, without paying any tax.
This might not always be possible in the future, as your circumstances or tax rules could change.
Make use of the Starting Rate for Savings
If your taxable income from pensions and employment is less than £11,850, you can make full use of the Starting Rate for Savings. The tax rate which applies to this band of income is zero (yes, 0%!), and it applies to most types of savings.
It is especially useful if you own an Investment Bond (especially if the Bond is based offshore), as it allows you to cash in some or all of your bond, and pay no tax – without the Starting Rate for Savings, tax would otherwise be payable.
Give away £3,000 (or £6,000)
You can give away £3,000 in each tax year, free from inheritance tax. And if you didn’t make a gift in 2017/18, you can give away £6,000 in the current tax year, free from inheritance tax.
If you don’t make use of your 2017/18 allowance before 6th April, it is lost forever.
Use your capital gains tax allowance
If you hold taxable investments, you should be able to make use of your annual capital gains tax allowance of £11,700.
Tax is only payable on gains which you have made, and you can offset losses against gains, so you may be able to withdraw much more than the allowance from an investment without any tax being due.
While‘ bed and breakfasting’ of shares is, in general, not useful for tax purposes, it is still possible to sell your holdings in one fund, and reinvest in another, almost identical fund.
Transfer funds from a taxable General Investment Account to an ISA
If you do not have new money to invest, you may still have money invested in a taxable account.
The amount of tax you save in one tax year by moving the maximum into an ISA may not seem huge, but throughout retirement, the savings mount up.
The introduction of inheritable ISA allowances has increased the value of the ISA tax breaks substantially.
These are just some of the things retired investors can do to save tax – there are many more, which depend on your personal circumstances.
But if you are thinking now about how to save tax before 5th April, there is one thing you should be doing – and that is planning for the next tax year. You should be aiming to take action as soon as you can after 6th April, not just before the following 5th April.
In particular, you should try to identify how much you intend to spend in 2019/20, and work out how to do so, while paying as little tax as possible.
You should also work out if your income is likely to exceed your expenditure, as this gives you the opportunity to pass more money on to your family, free from inheritance tax.What actions should you be taking before 6th April if you are withdrawing money from your retirement savings? Click To Tweet