Some big news on ‘small pot’ pensions: up to £1,500 is up for grabs

This year’s budget included a few eye-catching announcements, including the decision to increase the ‘small pot’ pension fund from £2,000 to £10,000. Part of the government’s drive to make pensions more flexible, the new rule also had the effect of creating an interesting opportunity for shrewd investors. Although we’re talking about a loophole that has actually been acknowledged by HMRC, it won’t be formally addressed until April 2015. And that means you have a perfectly legitimate window in which to act, if you’re currently employed and aged between 60 and 75. Let’s take a scenario in which you open a personal cash stakeholder pension and pay £8,000 into it. HMRC will top this up to £10,000, accounting for the automatic base tax relief of 20%. It’s possible – after a cooling-off period – to take the balance as cash under the small-pot rules. Previously, you were allowed to draw it as a lump sum on two occasions, but under the new rules, you’re able to do it three times.

Now for the maths. Because only 75% of the £10,000 is taxable, £2,500 remains tax free. And after you’ve paid £1,500 on the remaining £7,500 (at the 20% basic rate), you’re entitled to the £6,000 that’s left.

Your total pot is therefore worth £8,500, giving you a profit of £500. So if you go through the process on two further occasions, you’ll be £1,500 wealthier before provider charges. (If you pay tax at the highest rate, you would actually have a potential gain of £3,375, although there’s a delay in tax relief as it would be processed via your next return.)

The truth is that this loophole always existed, but with the £2k cap on the small pot, pension investors were unlikely to see any significant benefit. Now the figure is five times as high, people are paying attention for the first time.

One word of caution. If you approach a pensions adviser about this arrangement, it’s likely their fees would eat substantially into any potential profit. A more sensible course of action might therefore beto speak to your accountant. Although we’re not authorised to advise on specific products, we’re always happy to give you general advice and talk you through the tax implications.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

£30k in tax-free income for married pensioners? It’s not a pipedream.

When we think about tax planning, it’s tempting to see it as the preserve of the wealthy. The reality, however, is that the process can be just as important – if not more so, in fact – for people on lower incomes. After all, a relatively small saving in tax can make a big difference to someone on a budget. £1,000 might be a well-deserved holiday, for instance. And there are perfectly legitimate ways of minimising your tax burden if you take some good advice at an early stage. Recent government announcements on the Personal Allowance and Starting Rate Band spell good news for many people, particularly pensioners. In tax year 2014/15, the personal allowance has finally reached the magical £10k threshold and is set to increase in April 2015 by another £500. To put the figures in context, this represents more than a 100% increase over the amount allowed just a decade ago. Of course, the amount we can all save in tax-free ISAs has increased to £15k per annum as well.

The current basic state pension is approximately £5,800 pa, which potentially leaves a married couple with £5,000 each of unused Personal Allowance to set against other income. It’s important to ensure that you divide your income where possible to make the best use of each spouse’s allowance and rate band.

Imagine a scenario, for instance, in which there’s a modest amount of bank interest each year and a gross annuity payment of, say, £400 each month. The two pensions wouldn’t attract tax, as they would broadly fall within the level of the Personal Allowance. The interest is usually paid net of 20% tax and with a 10% Starting Rate Band of £2,880 to set against investment income, tax on £3,000 worth of interest would work out at approx £300 rather than £600.

From April 2015, the news gets even better. At that point, the Starting Rate Band will increase to £5,000 and the tax reduces from 10% to zero. By managing tax affairs sensibly, each partner in the marriage could receive pensions to the value of around £10,500 and another £5,000 in gross bank interest without paying tax.

If you’ve saved throughout your working life and have a modest income now, you might not necessarily see the need to retain an accountant on an ongoing basis. But it’s certainly worth having an initial consultation to look at your particular circumstances and discuss the options. That small investment could produce a considerable return, allowing you to get even more enjoyment out of your retirement years.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Are you sure your financial adviser is thinking long term?

If you’re looking to maximise the value of your investments, a financial adviser is an obvious port of call. It’s important to be aware, however, that once a stockbroker or IFA is helping you to manage your portfolio, you’re going to be incurring charges. And when you take these fees into account, you may end up achieving a below average financial performance. Research shows, in fact, that over time, you might be as much as 2% below the average. Some canny financial advisers are, of course, able to buck this trend by picking investments that perform well enough to outweigh the costs. But they’ll tend to be the exception rather than the rule. And while there will always be investors who relish the ups and downs of the market and thrive on the sense of excitement that volatility brings, how often do they stop to consider the price of the advice they’re receiving? Not to mention the stamp duty and transaction charges that may well apply.

Before you engage an IFA, it’s important to ensure they have a clear investment strategy. Can they demonstrate that they’ve actually out-performed the market consistently over a number of years? And are they declaring their ‘turnover’ – the costs incurred in the process of buying and selling?

Remember, you can sometimes achieve the best results by simply holding your nerve. Spending time in the market – investing for the long-term and seeing a steady return – is a good approach for many. Astute financial advisers will recognise this and use the strategy to help bridge the ‘performance gap’ that often emerges when people try to predict market peaks and troughs.

Naturally, there can be great returns available if you’re able to buy when investments are cheap and sell when they’re at a high. But a 2010 study by Clare & Motson at Cass Business School’s Centre for Asset Management Research showed that the average UK equity fund investor lost 1.2% a year between 1992 and 2009 by trying to ‘time’ the market in this way.

So look for an adviser who won’t be swayed by the lure of short-term profit, but one who’s capable of seeing the bigger picture. They should also be able to help you rebalance your portfolio, identify appropriate tax ‘wrappers’ and advise on the best way of making withdrawals for your portfolio. Patience can potentially bring significant rewards.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

There’s a downside to every upturn, which is why it pays to think ahead.

After a turbulent few years, there are now plenty of signs of recovery in the British economy. Inflation and unemployment are falling and business confidence has picked up markedly. In theory, this paints a rosy picture for small and medium-sized enterprises, but the reality may be rather more complex. In fact, there can be a number of hidden dangers at the start of any upturn. And it’s only by working closely with your professional advisers that you can be sure of avoiding the pitfalls. The first and perhaps most obvious thing to say is that many businesses have stretched themselves to the limit during the downturn. Weathering a recession often means living on reserves and relying on the goodwill of creditors and HMRC.

Banks – although much criticised in recent years for their reluctance to lend – have often been reticent about pulling the plug on long-standing clients who have been struggling to survive. Now that the climate is changing for the better, there’s a tendency for decisions to become more hard-headed.

Debt can start to spiral during the economic hard times too. How many small business owners have over-extended themselves, perhaps taking on personal liabilities by extending their mortgages or even maxing out their credit cards? With interest rates likely to rise from their historic low in the medium-term, pressure will soon be mounting.

So the irony of an upturn is that it can actually signal a potential rise in insolvencies. That’s why forward-thinking businesses need to plan ahead – working closely with their accountants to draw up a strategy for survival and ultimate growth. Honesty is definitely the best policy. There’s always a danger that you can stick your head in the sand and pretend that everything will work out.

With the help of your professional adviser, you can look objectively at critical issues such as your product range, margins and terms of business. You can also examine capital expenditure and staff resources. This can result in the kind of robust cash-flow predictions that are able to withstand scrutiny and stress-testing.

A good approach might be to go to your bank with a revised business plan, providing a ‘state-of-the-nation’ report. Even if it’s just an honest recognition of problems and a statement of how you intend to survive the next couple of years, it will be a welcome sign that you’re addressing the issues that need to be tackled. And the fact that you’ve involved your accountant to provide a holistic overview will undoubtedly give the exercise much more credibility.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Thinking of becoming a limited company? Time to go goodwill hunting...

It’s a conversation that many sole traders periodically have with their accountants. Is it a good idea for me to incorporate as a limited company? Although the answer isn’t always clear cut and can depend very much on individual circumstances, there are clearly a number of potential advantages. The rate of corporation tax for small companies is attractive, of course. There are savings on national insurance. And by finding the optimum balance between salary payments and dividends, you can manage your tax affairs more efficiently.

Often accountants will present the transition as being very straightforward, which at many levels is exactly right. The paperwork is fairly minimal and you can simply transfer the assets of your sole proprietor business and move on. But this might turn out to be a missed opportunity.

Forward-thinking advisers will take advantage of the change in status to undertake a tax planning exercise. By making use of existing rules, it’s sometimes possible to save substantial sums in personal tax by capitalising the future earnings of the business. This idea of accounting for ‘goodwill’ on incorporation can often be missed, but it’s a simple idea. Your business is actually worth more than its tangible assets and this should be taken into account in any valuation.

You should always feel confident your accountant has a good, current understanding of the tax regime and recognises the opportunities that potentially exist. With the correct adjuster clause in a legal agreement, you’re protected even in the unlikely event of there being a dispute over the figures. The valuation can simply be readjusted and reflected in the records of the business.

So although it’s important not to let the tax tail wag the commercial dog, if you decide that incorporation is the right route for your business, make sure you look at all the possibilities. We even managed to save one client enough money to help him invest in a new house. It’s just a question of thinking that little bit bigger.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

When assets need replacing, there’s no need to sweat.

In many businesses, the key asset might be the knowledge and experience of the staff or possibly a valuable piece of intellectual property. Other companies, however, depend heavily on very specific capital assets. The presses used by a printer, for instance. The limousines of a wedding-hire firm. Or perhaps the fixtures and fittings of a gym. But what happens when these vital pieces of equipment or property start to deteriorate? The investment required to replace them can often seem daunting to a small or medium-sized business, particularly if they are already trying to manage existing financial repayments.

One option is to replace assets piecemeal, but very often that’s not the best solution. If you’re a hotel, for instance, your reputation might depend on a rating from the AA or RAC. Doing up your rooms on an ad-hoc basis over the next five years isn’t going to impress any inspector. And it’s a recipe for ongoing disruption and inconvenience for your guests.

Another solution is to work closely with your professional advisers to renegotiate and consolidate the terms of any finance. Draw up a wish list of everything you hope to do but are currently putting off. Then arrange a meeting with your bank at which you put forward a clear proposition.

While individual circumstances clearly vary hugely, it may well be possible to refinance over a sensible timeframe, meaning that there’s no obvious hit to the business on a month-by-month basis. There may also be a chance of negotiating a flexible loan which you can draw down over a period of, say, six or nine months as you require it – allowing you to keep careful control over costs and spend only what you need.

Of course, if you already have a qualified professional on your board, they may be able to provide valuable input. But don’t exclude the idea of involving your accountancy firm. By working in tandem, you’ll be able to make a more credible case to your bank. In many instances, it may be that your advisers will be happy to attend a meeting and answer some of the trickier questions that are likely to crop up during the discussion. It’s an added reassurance for the bankers. And it may be the start of a bright new period of business investment.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

The automatic solution: talking to your accountant about pensions

Back at the beginning of the 20^th century, when the first old-age pension was introduced in the UK, there were 10 people of working age for every person drawing their retirement income. Today, that ratio is 3:1 and it’s set to drop still further to 2:1 by 2050. Given that our pensions are covered by the current working population, it’s hardly surprising that government has – for many years – been worrying about the long-term sustainability of state provision and urging us all to supplement our pension with private plans.

In 2012, we moved from gentle cajoling to a more formal system, with the implementation of the terms of the Pension Act 2008. Auto-enrolment requires every organisation to set up and contribute to a pension for their employees and has been trailed heavily through TV commercials. The three millionth worker was signed up in March 2014 at West Ham United football club.

The system is being phased in up until 2018, giving smaller employers greater time to adapt. But the message from accountants is that even micro businesses now need to focus on the challenges that the legislation poses.

Owners and managers can’t afford to stick their heads in the sand and pretend that the transition to auto-enrolment will be plain sailing. It’s certainly considerably more complex than, say, HMRC’s Real Time Information scheme for reporting PAYE. The recommendation from experts is usually to allow a year of planning before your own ‘go-live’ date, known as the staging date. Registrations are expected to peak in the fourth quarter of tax year 2016/7, but you can check your own particular staging date very quickly by visiting The Pension Regulator’s website at www.thepensionsregulator.gov.uk

What are the complications for employers? Well, first of all, you’ll need to assess your employees to see who counts as an ‘eligible worker’ under the terms of the legislation. (This will probably be an ongoing process, as members of staff leave and others join.)

The next thing is to identify a qualifying pension scheme. The People’s Pension is one of the key players in the market, along with Danish firm NOW: Pensions. Some group deals might be available through other parties too. But the government – recognising that many providers may not be interested in a scheme with fixed criteria including a charge cap of 0.75% – has also created the National Employment Savings Trust (NEST) as a backstop. Even if you choose this option though, the onus is on you, as an employer, to sign up.

After that, there’s a process of communicating with your workforce, enrolling those who should be part of the scheme and registering with The Pensions Regulator. Naturally, there are records to keep as you manage auto enrolment and you’ll need to ensure that your contributions are made in a timely fashion. Penalties for non-compliance with the regulations range from £50 a day to £10,000, so there’s a strong incentive for businesses of all sizes to ensure they’re on board.

There’s a hidden twist to the new arrangements too. Some people may be eligible to be part of the new pension, but elect to opt out.

Software solutions may well play an important part in helping you to manage the auto-enrolment process, but they’re not the complete solution. It’s important you fully understand the implications, both in terms of the administration and also the employer contribution that you will be required to make. So talk to your professional accountancy advisers about exactly how the new system impacts on your business and the level of support they’re able to offer you. An early discussion may pay real dividends in the long term.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

In a partnership or LLP? New tax rules have big implications.

Partnerships have long been an attractive structure for people running small businesses. They’ve been particularly favoured by owners of professional practices – from solicitors and accountants through to architects and dentists. The fluidity of the arrangement allows partners to change with few tax implications – something that becomes more problematic within the confines of the traditional limited company. From 6th April 2014, new legislation came into  effect which has led many businesses to think again about their partnership status.

The first issue concerns the use of ‘corporate’ partners as a way of managing the tax affairs of the partnership. Given that the corporation tax rate is significantly lower than higher-rate income tax, it made sense to have a company around the boardroom table – helping to manage cashflow and allowing some profit to be taxed at 20%, until such time as it was taken by the individual partners. HMRC perceived this to be a loophole and it’s now no longer an option for either partnerships or LLPs.

The second new regulation applies to LLPs specifically and it concerns the status of the partners themselves. Since the LLP vehicle was first introduced back at the turn of the century, partners have tended to classify themselves as self-employed. Now, this is much more difficult for those with a fixed share of profit. The Revenue expects them to go on the payroll and account for tax under PAYE.

Unless you’re able to demonstrate clearly that you have sizeable influence in the business, have invested capital or there’s a significant variable element to your remuneration based on the overall profitability of the business, then it’s no longer possible to claim self-employment. Although the motives of HMRC are clear enough – to clamp down on more extreme cases of tax avoidance – many observers feel that a sledgehammer is being used to crack the proverbial nut.

The ‘double whammy’ of these two changes is serious enough to prompt a number of LLPs to consider whether they’d, in fact, be better placed as a limited company. If it’s an issue that’s concerning you right now, the first port of call should be your professional accountancy advisers. They’ll be able to give you more detailed advice, assess your options and come up with the solution that’s most appropriate to your particular circumstance.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk