HLFS Spring Newsletter 2019


In this Newsletter…

  • Investment markets and the benefits of holding a diversified portfolio and regularly reviewing your financial position
  • Tax year planning
  • An update on Auto Enrolment and the final phasing of contributions

Investment Market

The 2018 calendar year was difficult for financial markets, and although many individuals may have experienced a drop in the value of their investments the early months of 2019 have proven to be more positive. Some of the financial losses experienced last year have already been recouped, despite several factors still causing concerns. For example: The impact of Brexit, the strength and resilience of the Chinese economy and ongoing issues with the USA.

These aren’t questions we can easily answer, but what we can do is help manage your expectations.  Remember investment markets are unpredictable (particularly in the short term) and it’s important to understand that volatility is part and parcel of investing over the long term.  When it comes to investing, slow and steady tends to win the race.

When markets fall a natural reaction could be to panic and exit, but this is almost always likely to be the wrong action to take.   Acting on fear and impulsively selling investments effectively “locks in” losses.  Consider the fact that the markets can rise again, therefore its normally best to remain patient, composed and keep in mind your longer-term objectives.

On the contrary, if markets are performing well, an understandable response could be to invest further. However, this could result in buying investments at a much higher price and the value could fall soon after.  Trying to time markets can be a dangerous strategy and our view is that “time in the market is more import than timing the market “.

Periods of market volatility highlight the importance of Investing in a globally diversified portfolio spread over a variety of asset classes. This helps mitigate risks whilst offering the potential to generate returns.  Our core investment proposition is designed for this purpose, combining both passive and actively managed risk-based funds.  These portfolios now have a six-year track record, and many of our clients have benefited from growth in asset values without exposing their capital to unnecessary risk.

Our key messages are to remember the benefits of long-term investment, remain calm when markets fall and focus on what you can control.   Review your objectives and long-term goals regularly, and consider that over longer periods of time, there will be ups and downs in investment markets.   Our ongoing advice and support is always available and we are happy to work with you to manage your expectations and to help you achieve your goals.

Please note that past performance is not necessarily a guide to the future and investments can fall in value as well as rise.  

Tax Year Planning

With the tax year end just around the corner, it is important to make the most of available tax reliefs and allowances, so we have created a checklist for you to consider.

1. Pension saving: maximise tax relief

Tax relief of 20% is allowed at source so you only pay £8,000 to invest £10,000 in your pension fund.  Therefore, it’s always worth paying into your pension even if you are not paying tax at the higher rates.

However, if you are an additional or higher rate taxpayer you could make a pension contribution to maximise tax relief at 40%, 45% or even 60% (where personal allowance is reinstated as explained below).

Those with enough earnings can use what’s commonly known as “carry forward” to make contributions in excess of the current annual allowance (£40,000 but higher earners need to be aware of the tapering rules) by bringing forward previously unused annual allowances up to three years.

It is also possible to top-up pensions for your spouse or partner – and not just by £3,600, but up to their level of earnings, with tax relief on top.  You can even make third party payments on behalf of children or grandchildren which is an ideal way of passing on savings and removing value from your taxable estate.

2.Recover personal allowances and child benefit payments

Child Benefit is clawed back by a tax charge if an individual in the household has income of more than £50,000 and is cancelled altogether once their income exceeds £60,000.

Making a pension contribution could help reduce your income and reverse the tax charge, wiping it out altogether once income falls back down below £50,000.  Pension contributions also reduce an individual’s taxable income. In turn, this can have a positive effect on both the personal allowance and child benefit for higher earners resulting in a lower tax bill.

For example, if you earn over £100,000 your personal allowance (currently £11,850) is reduced and “you can get this back” by making a pension contribution.  If you are earning £123,700, a pension net contribution of £18,960 would result in tax relief of 60% as you have restored your full tax-free personal allowance.

3. Business owners: take profits as pension contributions

Directors and company owners generally withdraw profits from their company on a PAYE and Dividend basis. The income drawn from the company can increase the director’s tax payable. The first £2,000 of dividends is tax free, thereafter 7.5% up to the basic rate tax threshold (£43,430) and then 32.5% on anything above.

An alternative way to extract significant profits from a business is to make a pension contribution. Employer contributions made in the current financial year will get corporation tax relief at 19%, but the rate is set to drop to 17% in 2020 and will save on National Insurance Contributions. Therefore, making an employer’s contribution can boost a director’s pension fund and it may be worth considering sooner rather than later in light of the reduction in corporation tax.

4.Use ISA allowances

ISAs offer you a valuable protection from income tax and CGT and, for those who hold all their savings in this wrapper, it’s can help avoid the chore of completing self-assessment returns.

Your annual allowance in the current tax year is £20,000.  Savings delayed until after 6 April 2019 will count against next year’s allowance, so use it before 5 April or lose it!

5. Use Capital Gains Tax (CGT) Allowances

If you are looking to supplement your income tax-efficiently you could withdraw funds from an investment portfolio and keep the gains within their annual exemption.     Even if cash isn’t needed, taking profits within the £11,700 CGT allowance and re-investing the proceeds means there will be less tax to pay when you ultimately need to access these funds to meet spending plans.

Proceeds cannot be re-invested in the same mutual funds for at least 30 days, otherwise the expected ‘gain’ will not materialise. But they could be re-invested in a similar fund or through their pension or ISA. Alternatively the proceeds could be immediately re-invested in the same investments, but in the name of the client’s partner.

If there is tax to pay on gains at the higher 20% rate, a pension contribution could be enough to reduce this rate to the basic rate of 10%.

This list is not exhaustive, and others to mention would be making use of annual Inheritance Tax (IHT) exemptions to pass on assets to your family.  If you would like any more information on our top five tips or other last-minute tax planning ideas, please get in touch.

Auto Enrolment

All employers are now covered by the Auto Enrolment legislation and the final phasing of pension contributions up to the minimum contribution levels will commence in April 2019.

In April 2019, if your pension scheme was set up using minimum contributions, and qualifying earnings, you’ll see an increase to the employer contribution by a further 1%, up to 3%.  Members will now pay 5% gross (and receive tax relief from HMRC so the net amount deducted from salary will be the equivalent of 4%).

Following the April 2018 increases, we’ve not witnessed a great deal of additional opt outs from members, but as always, when budgets are tight, we may see an increase. What we do see more of is employers being more proactive in ensuring that their workforce is aware of their pension, and the value of the employer contribution being paid to help workers save for when they stop work.

Therefore, if you operate a payroll and have members enrolled, make sure you have budgeted for 2019.  Also ensure you are informing your workforce of the increased contributions and the assistance you are giving them in saving towards their retirement?

Henderson Loggie Financial Services provides professional advice on workplace pensions, together with other areas such as arranging Business Protection policies to suit each individual business’s needs and requirements. If this is an area of advice that you require, please contact us.