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At a glance

  • As you move towards retirement, there will likely be options to consider and choices to make – and tax allowances are a big part of this.
  • Whatever your goal, planning ahead means assessing the assets you have in place and using them as tax efficiently as possible.
  • From ISAs and pensions to dividends and capital gains, the various allowances available can help you reach your retirement objectives and achieve peace of mind.

There comes a time in life when retirement looms increasingly large over the future. Whether you’re looking forward to it or never want it to happen, it’s something that needs to be planned for. These days, retirement is increasingly about giving yourself plenty of options, and that’s where it really pays to use your tax allowances and reliefs well.

“Saving enough in a tax-efficient way helps to buy you plenty of choices, whereas previous generations didn’t have to think about this,” says Tony Clark, Senior Propositions Manager at St. James’s Place Wealth Management.

Paving the way

Those options and choices can vary. When do you want to retire? What kind of retirement do you want? Can/should you keep working in retirement? Where will you get your retirement income from?

Whatever your goal, planning ahead involves assessing the assets you have in place and using them as tax efficiently as possible.

ISAs and pensions will likely be the foundation of your retirement plans, whether you want to retire early, extend your working life or embark on new ventures once retired. With both providing different forms of shelter against tax on dividends, interest and profits, using them well can help your money go much further.

As you get closer to retirement, you may want to pay closer attention to using your full pension annual allowance, which remains frozen at 100% of your salary or £40,000 – whichever is lower. If you don’t use it all, you can still carry forward any unused allowance from the previous three years.

“Look at what assets you have in place and invest in a tax-efficient manner across a broader range of assets,” says Clark. “You want to look at pensions and ISAs, of course, as well as other products with varying degrees of risk and tax efficiencies.”

The full tax toolkit

For example, if you make profits from selling assets outside your ISA or pension, the annual Capital Gains Tax (CGT) exemption allows you to make tax-free gains of up to £12,300 in the current tax year. As with ISAs, you can’t carry unused allowances over to the following tax year, so it’s important to use the full allowance each year if you can.

There’s also the Personal Savings Allowance, which can help if you’ve used up your ISA allowance. You can earn interest of up to £1,000 this tax year if you pay Income Tax at the basic rate (reducing to £500 for higher-rate taxpayers, with no allowance for additional-rate taxpayers).

Think about any dividends you earn, too, as the tax rules here are changing. You don’t have to pay tax on dividend income that falls within your personal allowance, while dividends earned from investments held in ISAs and pensions are tax free. You can also earn up to £2,000 in dividends tax free outside those wrappers.

However, the Dividend Tax charged above that allowance will rise in April 2022. For basic-rate taxpayers, it will go up from 7.5% to 8.75%, and for higher-rate taxpayers, it will increase from 32.5% to 33.75%. For additional-rate payers, it will jump from 38.1% to 39.35%.

Seizing the opportunities

Keeping on top of changes such as those to Dividend Tax is just one example of how an adviser can make a real difference as you approach retirement.

The turbulence of the past couple of years has prompted many people to reassess their retirement plans, and now may be the time to make changes, according to Clark.

“There are lots of ways to achieve what you want, and an adviser will help you understand the most tax-efficient way of getting there, such as the actions you need to take, the allowances to make the most of and the best order in which to use them,” he says.

Don’t let your tax allowances go to waste. Get in touch today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

There are a number of ways to legally reduce the amount of CGT that you pay. However, what works best for you will depend on your circumstances, and it may also need to be managed over time – which is why financial advice is so important.

  • Give assets to your spouse or partner. Most transfers of capital between spouses or

This is a great way of using up your ISA allowance and sheltering the investments from CGT. It can also be a practical option if you need to sell gains up to the CGT annual allowance but don’t actually want to sell the investment.

What happens if I make a loss on an asset?

Of course, assets don’t always go up in value.

If you make a profit when selling one item and a loss when selling another, you can deduct the loss from your gain when calculating how much tax you need to pay. You are also able to carry forward any losses that haven’t been used to offset gains for up to four years.

Even if you don’t owe any CGT, it’s still a good idea to declare any losses on your tax return. This will make it less of a headache if you want to offset gains against them in future years.

What would happen if I sold my business?

You may be able to qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you are a sole trader or business partner and you’ve owned the business for at least two years. The relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.

How do I declare capital gains?

When you sell assets, if you have made gains of more than £12,300, you must declare it to HMRC.

How and when you do this depends on the asset or assets you sold.

If you sell a property and it completed after 27 October 2021, you have just 60 days to report your gain and pay the tax due. To do this, you need to set up a Capital Gains Tax on Property account on the government website.

For other gains, you can report and pay the tax straight away using the real-time service on the government website, or you can report it in a self-assessment tax return in the tax year after you sold the assets.

HMRC will tell you how much CGT you owe, how to pay it and when the deadline is.

Need help understanding CGT? Get in touch.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

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