Efficient Wealth Update – March 2021

British Standards

At Efficient Portfolio we have always prided ourselves on being truly independent. In the world of finance, independence means that we are able to place our clients’ needs at the heart of everything we do, and offer an unlimited range of solutions from across the market. It also means that we’re not tied to certain products or providers, and have freedom to adapt your planning if we feel it’s not delivering the best outcomes.

However, like any private company, our independence has also provided some challenges over the years. We founded our company in 2006, and built it from the ground up. Having the freedom to build a business as we saw fit was liberating, but it meant that there was no corporation overseeing our inception; no guidebook to determine our processes; and no overriding ‘head office’ to approach with our problems. We shaped the business ourselves, and have had to adapt, innovate and refine everything we do over the years.

So, how can you be sure that our internal practices are up to scratch?

Everything we do has been crafted to deliver the best level of client service, and as an FCA regulated firm, we act in a compliant, ethical and legal fashion. We are confident in the business we have built, but we wanted to test our processes against the national benchmark, so in 2019 embarked on our British Standards journey.

British Standards, in this case the BS 8577, are designed to assess and award financial planning firms who can demonstrate that they have the operational framework in place to deliver a first-class service to their clients.

The service that we provide to our clients is of the upmost importance and in order to benchmark our service and internal processes against the British Standard of best practice the business entered into a rigorous process of assessment.

On 2^nd March 2021 we were officially awarded our BS 8577 certification, making us one of a small but growing group of financial planning firms in the UK to have achieved this prestigious award.

Our clients’ needs are at the heart of our business and this is why we are committed to a programme of ongoing assessment, ensuring that our processes and services will be continually assessed by an independent certification body on an annual basis.

We are incredibly proud to have been awarded this accolade, as it demonstrates that the business we have built operates at the highest possible level. We thrive on innovation, and the British Standards programme gives us constructive feedback and support, so that we can continue to grow and improve everything we do.

We are excited to be a part of this journey and look forward to continuing to grow a business that provides valuable services for our clients and provides an enriching home for our team.

Budget Update

It probably came as no surprise that this month’s Budget Announcement (3^rd March 2021) had a core focus on the pandemic and the Government’s plans for economic recovery. But what impact will the announcement have on your personal finances, and what opportunities could now be available for your financial planning strategy?

It is fair to say that Sunak’s tenure as Chancellor has certainly been testing, and one that most of us would certainly not relish! His second Budget has, understandably, been shaped by the Covid-crisis, so his pledges to do “whatever it takes” to support businesses and jobs were certainly welcomed and justified; however, the borrowing (£355bn) that has been required to sustain the country’s workforce will undoubtedly come at a cost.

The Treasury has announced the launch of tax consultations on 23^rd March 2021, which we will be reviewing in our next newsletter. It is unlikely that the outcomes will be easy reading, as these consultations are expected to roadmap significant tax rises to pay for the enormous cost of the pandemic.

However, until we receive that news, there are still some important factors to consider in your financial planning, and a few opportunities to maximise.

Income Tax and National Insurance

The Chancellor announced that although Personal Allowances and higher-rate tax thresholds will increase in April 2021, they will then be frozen until 2026. The National Insurance Contribution (NIC) threshold will rise to £9,568 for the 2021/22 tax year before being frozen.

The Personal Allowance, which is the amount you can earn each year before you start paying Income Tax, will increase from £12,500 to £12,570 from in April. 2021

The basic rate tax band will increase to £37,700. The higher-rate tax threshold will also rise from £50,000 to £50,270. .

The freezing of thresholds is projected to raise around £6bn to help plug the current deficit; however, many look at this tactic as a ‘stealth tax’, as more money will be silently taken as the cost of living rises.

There certainly could be some opportunities here: those who are employed, you might look to reduce your taxable income by making pension contributions, either through salary sacrifice or as a personal contribution.  Directors of limited companies could also look to divert funds to their pension rather draw it as salary.  Alternatively, you might look to defer drawing an income from your company until a time when you are earning less, ergo fall into a lower tax bracket (i.e., when you are retired).

Pension Lifetime Allowance

The Chancellor has also frozen the Pension Lifetime Allowance, which is the total amount you can save into your pension before incurring tax charges. Recently, the lifetime allowance has increased each tax year in line with inflation; however, for the 2021/22 tax year, it will remain at £1,073,100 until 2026.

Any lump sum withdrawals from your pension above the limit are likely to incur a 55% tax charge and any income taken will face a 25% charge, with the remainder subject to Income Tax at your marginal rate. Once again, this could be seen as ‘stealth tax’, as it is likely that more people will pay more tax on their pensions.

Careful consideration should be made on when you access your pension savings, as you may wish to draw upon other investments or savings to help support your income needs. Every situation will be different, so it may be worth discussing your options with your Financial Planner.

Capital Gains Tax

Finally, some marginally good news! Capital Gains Tax (CGT) walked away unscathed in this Budget announcement, and the rates remained the same. For 2021/22, the annual exemption will remain at £12,300 for individuals and £6,150 for trustees. Furthermore, the exemption will be frozen until 5 April 2026. However, it is predicted that CGT will be the next target in future Budget announcements.

ISA Allowance

Some even more positive news was that ISA allowances will also be unchanged for the 2021/22 Tax Year. This means that investors can still invest up to £20,000 per annum into a Cash or Stocks and Shares ISA, or combination of both; or £9,000 for Junior ISA savers. Whether or not this will be reduced in Budgets to come remains unseen, but for now, investors can still take advantage of this Government-backed incentive.

As always, our general guidance is that maximising your annual ISA allowance is a sensible way to save in a tax-efficient way. This will of course vary from client to client, so please speak to your Financial Planner to see if this is an appropriate strategy for your personal situation.

Pensions Tax Relief

Another feature to be left untouched in this month’s Budget was Pensions Tax Relief.

The current system benefits higher earners the most by providing them greater amounts of tax relief of up to 45%.  If only basic rate tax relief at 20% was for everyone, it would create substantial savings for the Chancellor, and therefore the chances of future reforms is reasonably high. However, the reassuring news is that changes will not be fast-moving, as pension schemes will need adequate time to adapt.

Inheritance Tax

Another frozen tax was Inheritance Tax (IHT), which will remain untouched until 2026. Under current rules, the personal allowance for each individual is £325,000 (or £650,000 for a married couple), which means that this amount can be passed to your beneficiaries IHT free. This amount can also be increased by utilising the residence nil-rate band, for passing on a property to a direct descendant, which remains at £175,000 per person for the 2021/22 tax year.

As a business we have seen an increase in the number of clients wishing to kickstart their Estate Planning during the pandemic. COVID-19 has meant that many of us now feel uncertain about the future, and many of us are concerned about the financial impact it could have on our family’s future security. Whilst life may feel rather precarious at the moment, it is in fact the perfect time to reflect upon what you have in place and look to implement a suitable strategy to ensure that your wishes are brought to life.

If you would like to know more, we will be hosting a free webinar in conjunction with Buckles Solicitors of Stamford in May. If you would like to attend or find out more, please contact us on [email protected].

Corporation Tax: Will Business Owners Pay for the Pandemic?

This month’s Budget announced a significant rise in Corporation Taxes, which were deemed to be ‘fair and necessary’ if we want to see an economic recovery.

Corporation Tax will rise from 19% to 25% from April 2023, and is expected to raise around £12bn to aid recovery. This 6% rise may seem steep, but it is in fact amongst the lowest in the G7. As an example, rates in the USA with hike from 21% to 28%.

This news may have some business owners alarmed, but the encouraging news is that companies with profits of up to £50,000 will continue to pay Corporation Tax at the current rate of 19% and a taper above £50,000 will be introduced. Sunak has indicated that only 10% of businesses will pay the new, higher rate of tax, so, on the whole, most of our business owner clients should be largely unaffected by this shift.

Some other slightly encouraging news is that there will also be an extension (from the exiting one year to three years) to the loss carry back for businesses to help historically profitable business which have been forced into  a loss-making position. This feature will be available for both incorporated and unincorporated businesses for up to £2 million of losses in each of 2020-21 and 2021-22.

If you are a business owner and are concerned about how tax changes could impact your business, or would like to know more about what opportunities are available to you, please get in touch and we will be able to recommend one of our tax experts to review your situation.

Charlie’s Mini Blog

I was chatting to a potential new client yesterday who has a somewhat unusual dilemma in one way, but perhaps less unusual in another. He is a successful business owner that has a keen interest in the markets and in investing. He has successfully managed his own investments for many years and also now manages a substantial amount for his family too. Why, you might ask, is he then coming to us for our assistance?

Three things were the core of our conversation; firstly, the admin involved in executing each decision across multiple platforms and multiple people takes up a huge amount of his time and secondly, he wants our guidance on reducing the Inheritance Tax exposure. However, it is the third point that is both common and uncommon. Not often do we see an individual managing this degree of wealth across so many family members, however we do frequently see people with the need to, as I call it, ‘pass the baton’.

We often see couples where one person takes care of all of the finances; historically this would have been the man, but in younger families this varies more. My question to him was, what happens if you are no longer here, or here but unable to carry out this work? No one in his family is in a position to organise all the admin, let alone select the underlying investments. There is currently no one that could pick up that baton.

Probably his most important role in the coming years is not to manage the investments and execute the transactions, but instead to ‘pass the baton’. This doesn’t mean teaching his family to be interested in the markets, as most people will not be comfortable taking on that level of responsibility, but rather in this example, to get the wealth into a simpler solution, and to have an investment solution that manages most of the money, so that if something were to happen, that management can continue. We can still create a ‘gambling pot’ to enable him to enjoy his passion for the markets, and to do so unconstrained by the responsibilities of holding the family’s financial future in his hands.