Why taking your pension as a lump sum could leave you with a huge tax bill

Taking a lump sum out of your pension could provide you with more financial freedom. Yet, it could also land you with a large and unexpected tax bill.

Read on to find out what you need to know about tax and withdrawing lump sums from your pension.

Your pension withdrawals may be liable for Income Tax

You can take up to 25% (up to a maximum of £268,275 in 2024/25) of your pension tax-free. You can choose to access this tax-free portion as a single withdrawal, or spread this entitlement across multiple withdrawals throughout retirement, with a portion of each being tax-free.

However, the other 75% of your pension will usually be classed as income when you access it. So, if the total amount you withdraw in a single tax year exceeds the Personal Allowance, which is £12,570 in 2024/25, it could become liable for Income Tax.

Withdrawing large lump sums could mean you face an unforeseen tax bill or lead to you paying more in tax than you would if you spread out withdrawals.

You should note that pension withdrawals will be added to your other income when calculating your Income Tax bill. As a result, you might also need to consider the money you receive from employment, the State Pension, or interest on savings when working out how much tax you’ll pay.

Let’s say you hold £100,000 in your pension and you want to withdraw all the money from it as a single lump sum. Assuming you didn’t have any other sources of income in 2024/25, then:

· £25,000 would be tax-free

· £12,570 would fall into your Personal Allowance and wouldn’t be liable for Income Tax

· £37,700 would fall into the basic-rate tax bracket and be taxed at a rate of 20%

· £24,730 would fall into the higher-rate tax bracket and be taxed at a rate of 40%.

In this scenario, that could lead to an Income Tax bill of £17,432. That’s a sizeable portion of your pension that’s going to HMRC.

Research from Standard Life indicates that pension holders could be unwittingly making withdrawals that lead to large tax bills.

Indeed, between October 2022 and March 2023, 221 people fully withdrew a pension worth £250,000 or more, which could lead to a tax bill of at least £97,500 each. Similarly, more than 1,500 savers fully encashed pensions worth between £100,000 and £249,000 during the same period.

Further data published in FTAdviser suggests that half a million pensions were emptied the first time they were accessed in 2022/23. The general election campaign and Labour’s subsequent victory also reportedly led to more savers draining their pensions due to fears about proposed taxes.

While there might be good reasons to fully withdraw your pension, understanding the tax implications could help you decide if it’s the right decision for you.

Managing pension withdrawals across several tax years could reduce your overall tax bill. As your Personal Allowance resets each tax year, you’d access a greater portion of your pension tax-free, and it might help you avoid paying the higher or additional rate of Income Tax.

2 insightful questions to consider before taking a lump sum from your pension

1. What’s behind your decision to withdraw a lump sum from your pension?

Before you take a lump sum from your pension, consider what you’ll use the money for – could you use other assets to cover your plans that would result in a lower tax bill?

If you don’t have plans to use the money, examine the motivation behind your decision. In some cases, emotions and bias may be harming your decision-making.

For example, the FTAdviser research indicates that some savers have responded to concerns that the Labour Party could make changes that will affect their pension.

Fear might play a role in other ways too – you may be worried about the investment risk your pension is exposed to and feel that holding your money in cash is “safer”. However, as inflation is often higher than the rate of interest a savings account offers, taking your pension to hold in a cash account could erode its value in the long term.

2. How will withdrawing a lump sum affect your long-term financial security?

As well as understanding the tax bill, you may want to consider how withdrawing a large part of your pension could affect your retirement income in the future.

Reducing the value of your pension by taking a lump sum could mean you’re at risk of running out of money in your later years. In addition, withdrawing a lump sum could affect the expected returns your pension will deliver throughout retirement.

It could be sensible to take some time and calculate the potential long-term effects of taking a lump sum from your fund. This could highlight where you could be placing your long-term security at risk, or give you more confidence to proceed. A financial plan could help you visualise how taking a lump sum from your pension might affect your future so you can understand which option is right for you.

We could help you cut your tax bill

Working with us to create a holistic financial plan could help you identify ways to reduce your overall tax bill. We’ll work with you to understand your income needs and assets, and build a plan for accessing your pension that could minimise the amount of tax you pay.

To talk to us about your pension and tax liability, please get in touch.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

Research: Lifestyle changes could relieve the symptoms of Alzheimer’s

If you know anyone who has suffered from dementia, you will understand what a cruel illness it can be. From forgetting simple things to aspects of your loved one’s personality changing, dementia can completely transform a person you thought you knew.

However, as you might’ve seen in the news, new advancements in dementia treatments could help to diagnose and treat the illness more effectively than ever before.

Read on to discover more about these scientific breakthroughs and what they could mean for anyone who might struggle with dementia in the future.

What is dementia?

Dementia is a syndrome (a group of symptoms) associated with an ongoing decline of brain functioning, which means there are many different causes and types of dementia.

Two of the most common forms of dementia are Alzheimer’s disease and vascular dementia.

Although doctors are unsure what causes Alzheimer’s disease, they have identified a number of risk factors, including:

· Increasing age

· Untreated depression

· A family history of the condition.

Vascular dementia, on the other hand, is caused by reduced blood flow to the brain. This most commonly happens as a result of a stroke and affects around 180,000 people in the UK.

What are the advancements in diagnosing dementia?

Teams from Dementias Platform UK and UCL are working together to create the Blood Biomarker Challenge, a project which aims to revolutionise dementia diagnoses.

Currently, only 2% of people with dementia can access specialised tests (such as PET scans or lumbar punctures), which will confirm which type of dementia they have.

These researchers are recruiting participants from sites across the UK to trial new blood tests designed to diagnose a range of types of dementia.

The goal is for these teams to provide evidence that the blood tests are ready for use in the NHS, paving the way for them to be made widely available to anyone who might benefit in the next five years.

Quick and accurate diagnosis of dementia is crucial, as it would allow people to access vital care and support that could help them manage their symptoms.

How do you treat dementia?

Although there is no known cure for dementia, scientists are experimenting with new treatments that can help to relieve patients’ symptoms.

In a recent CNN documentary, The Last Alzheimer’s Patient, two Alzheimer’s sufferers claim to have beaten the deadly disease through healthy lifestyle changes.

Cici Zerbe claimed to experience a reversal in her symptoms after participating in a clinical trial in the US, which explored the effects of intensive lifestyle changes on early dementia.

These changes included switching to a plant-based diet, regular exercise, group support sessions, yoga and meditation.

BBC radio and comedy producer Simon Nicholls also took part in this trial as he carried two copies of the gene variant ApoE4, the greatest genetic risk factor for Alzheimer’s. One copy of the gene is associated with three to four times the risk of Alzheimer’s, but two copies increased his risk twelvefold.

After 14 months of drastically changing his lifestyle, Simon’s biomarkers for Alzheimer’s disappeared.

He cited a focus on physical activity – including strength training three times a week, walking 10,000 steps every day, and jogging or cycling every morning – and a healthy diet as the reason for the reversal of his symptoms.

What can I do to reduce my risk of dementia?

It’s important to remember that Cici and Simon are only two people in a larger study, so their experience may not be universal. However, cardiovascular disease is known to be a common cause of dementia, and it can be influenced by lifestyle changes.

So, what can you do to reduce your risk of dementia?

1. Eat healthily

Unhealthy foods can increase your cholesterol levels, which can build up hard plaque on your arteries and increase your risk of cardiovascular disease or heart attacks.

2. Exercise regularly

Exercising regularly can reduce your risk of a number of illnesses, including coronary heart disease, strokes, type 2 diabetes, and cancer.

The NHS recommends that adults take part in 150 minutes of moderate or 75 minutes of intense activity every week.

3. Quit smoking and enjoy alcohol responsibly

Smoking can increase your risk of cardiovascular disease and strokes, among other illnesses, which have been linked to dementia.

Drinking more than the recommended 14 units of alcohol a week can shrink the parts of the brain involved in memory, and long-term heavy drinking can lead to alcohol-related dementia.

Quitting smoking and drinking may be hard, but it is one of the best things you can do for your health. Speak to your doctor if you need advice or help with kicking these unhealthy habits.

4. Improve your sleep hygiene

Researchers found that sleep deprivation could be linked to Alzheimer’s disease.

Their study found that people in their 50s and 60s getting six hours of sleep or less were 30% more likely to be diagnosed with dementia than those who got a regular amount of sleep.

Adults are recommended to get seven to nine hours of sleep every night.

Inheritance Tax: The basics you need to know about the “death tax”

Often dubbed “death tax” or “Britain’s most-hated tax” in the media, Inheritance Tax (IHT) may seem complex, and you might be unsure if it’s something you should consider as part of your estate plan.

Over the next few months, you can read about the essentials you need to know, how to reduce a potential tax bill, and the importance of regular reviews.

IHT is a tax that’s levied on the estate of someone who has passed away if its value exceeds certain thresholds.

Around 4% of estates were liable for IHT in 2023/24 and it led to the Treasury receiving a record £7.5 billion, according to a Professional Adviser report. That’s an increase of £4 million when compared to the previous tax year.

With a standard tax rate of 40%, IHT could have a huge effect on the wealth you pass on to loved ones. According to HMRC, the average IHT bill in 2020/21 was £214,000. 

There are often ways you could reduce an IHT bill if you’re proactive. One of the first steps to take is to find out if your estate could be liable for IHT.

So, read on to find out how the IHT thresholds work.

Most estates can pass on up to £500,000 before Inheritance Tax is due in 2024/25

Your estate encompasses all your assets. So, you might need to consider savings, investments, property, and material items when you’re calculating its value.

The threshold for paying IHT is £325,000 in 2024/25; this is known as the “nil-rate band”. If the total value of your estate is below this amount, no IHT will be due.

Many estates can also make use of the residence nil-rate band. In 2024/25, this is £175,000. To use this allowance, you must pass on your main home to children, grandchildren, or other direct descendants.

As a result, the majority of estates can pass on up to £500,000 before they need to consider IHT.

If the net value of your estate (the value of assets less any liabilities) exceeds £2 million, you could be affected by the tapering of the residence nil-rate band. If you have any questions about your IHT allowances, please contact us.

Importantly, if you’re married or in a civil partnership, your partner can inherit your entire estate without having to pay an IHT bill. In addition, your partner could also inherit unused allowances when you pass away.

In effect, when you’re planning as a couple, this means you could pass on up to £1 million before IHT is due.  

Remember, the value of your assets may change

While the value of your estate could be under the IHT thresholds now, will that still be the case in the future?

Both the nil-rate band and residence nil-rate band are frozen until April 2028. This freeze is expected to pull more estates above the threshold. Indeed, the Institute for Fiscal Studies estimates that 7% of estates could be liable for the tax by 2032/33.

So, if the value of your assets increases, you might unexpectedly find that the value of your estate now exceeds the threshold for paying IHT. Regular reviews of your assets and estate plan could help you assess if IHT might be something you need to consider in the future.

Contact us to discuss if your estate could be affected by Inheritance Tax

If you’re worried that IHT could affect your estate, please contact us. We could help you formulate an estate plan that’s tailored to you and your wishes.

Read our blog next month to discover some of the ways you might be able to mitigate an IHT bill.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate Inheritance Tax planning or estate planning.  

Investment market update: July 2024

In July, the markets were affected by general elections taking place in the UK and France, and the ongoing presidential campaign in the US. Read on to find out what else affected investment markets in July 2024.

Uncertainty and numerous other factors may affect the value of your investment portfolio. However, for most investors, long-term trends are a better indicator of their strategy’s performance than short-term movements. Returns cannot be guaranteed, but, historically, markets have risen in value over longer time frames.

UK

The UK public took to the polls on the 4 July. The results of the general election ended 14 years of Conservative rule when the Labour Party secured a majority.

The following day saw the FTSE 100 – an index of the 100 largest companies listed on the London Stock Exchange – rise by 0.3% when trading opened.

Housebuilders saw some of the biggest gains as Labour made building 1.5 million new homes over the next five years a key manifesto pledge. According to the Guardian, Persimmon, Vistry Group, Taylor Wimpey and Barratt Developments all saw rises between 1.7% and 2.5%.

Mid-cap index FTSE 250 also benefited from a post-election bounce when its value increased by 1.8% and reached a two-year high.

New prime minister Keir Starmer stepped into the top job and received welcome news when official statistics were released.

Data from the Office for National Statistics shows that after no growth in April, GDP increased by 0.4% in May. The figure suggests the UK economic recovery is gaining momentum after a technical recession at the end of 2023.

Inflation remained stable during July, as prices increased by 2%, which is the Bank of England’s (BoE) target. The data paved the way for the BoE’s Monetary Policy Committee to cut its base interest rate on 1 August from 5.25% to 5%.

According to S&P Global’s Purchasing Manager’s Index (PMI), the momentum in the service sector in May started to slow in June. However, the slowed pace was linked to the general election as some individuals and businesses opted to see the outcome before they placed orders. So, the sector could see an uptick in July.

Despite the positive signs, many businesses are still struggling. According to business recovery firm Begbies Traynor, the number of firms in “significant” financial distress jumped by 10% in the second quarter of 2024 compared to the first three months of the year.

The numbers are even more stark when you compare them to the same period in 2023 – with a 36.9% rise. Of the 22 sectors monitored, 20 saw an increase in the number of firms in difficulty.

Europe

Inflation across the eurozone fell slightly to 2.5% in the 12 months to June 2024, according to Eurostat. The figures show inflation varied significantly across the bloc. Finland recorded the lowest rate of inflation at 0.5%, while Belgium had the highest rate at 5.4%.

With the headline inflation figure still above the 2% target, the European Central Bank opted to hold interest rates.

PMI figures suggest the manufacturing sector is struggling in the eurozone. It was partly pulled down by Germany’s enormous manufacturing sector, which has been contracting for the last two years, according to the PMI. A PMI reading above 50 indicates growth, so Germany’s reading of 43.5 in June suggests the country has some way to go before it starts to grow again.

The parliamentary election in France and its unexpected twists led to market volatility. On 1 July, the CAC 40 index, which includes 40 of the most significant stocks on the Euronext Paris stock exchange, was up 1.5% as it became less likely a far-right party would secure a majority.

The final shock results saw the formation of a left-wing coalition. The uncertainty around whether the left could work with Emmanuel Macron’s centrist party led to the CAC 40 falling by 0.5% on 8 July when trading opened. Yet, it returned to positive territory later in the day.

The EU is reportedly planning to impose an import duty on cheap goods amid concerns from retailers in a move that could affect foreign businesses, such as Temu and Shein. The current limit for import duty is €150 (£126.13), which allows some retailers to ship products from overseas while avoiding a levy.

US

The US presidential election doesn’t take place until 5 November, but candidates have already been campaigning for months.

Following an assassination attempt on Republican candidate Donald Trump, Wall Street rose on the 15 July. Expectations of a victory for Trump led to the S&P 500 index rising 0.42%. The share price of Trump’s media company far outstripped the market when it rose by 70% at the opening and briefly led to the business being valued at $10 billion (£7.76 billion).

With Joe Biden stepping out of the presidential race, the results of the election are far from certain and it’s likely to continue affecting markets.

Inflation in the US continued to fall in the 12 months to June. However, at 3%, it’s still above the Federal Reserve’s 2% target.

Official statistics also show that the US trade deficit widened slightly as exports fell by 0.7% month-on-month in May while imports fell by 0.3%. The deficit now stands at around $75.1 billion (£58.3 billion) and could be a drag on growth in the second quarter of 2024.

American cybersecurity company Crowdstrike saw its share price plunge by more than 13% when a software bug crashed an estimated 8.5 million computers around the world on 19 July. The error led to services grinding to a halt as it affected banks, airlines, railways, GP surgeries, and many other businesses globally.

Meta, owner of Facebook and Instagram, also saw its share price fall after the EU ruled it breached a new digital law. Meta’s advertising model that charges users for ad-free versions of its social media platforms that don’t use personal data for advertising purposes was found to breach consumer protection rules. Meta could now face fines of up to 10% of its global revenue.

Asia

A growing interest in artificial intelligence led to Japan’s Nikkei 225 index reaching a record high on 9 July, when it increased by 0.6%.

Over the last few months, statistics have suggested that China could face some challenges if it’s to maintain its pace of growth. However, data shows exports grew at their fastest rate in 15 months in June 2024 thanks to a boost in the sales of cars, household electronics, and semiconductors.

Year-on-year, Chinese exports grew by 8.6% to $307.8 billion (£258.8 billion). Over the first half of 2024, exports totalled a staggering $1.7 trillion (£1.43 trillion) – a 3.6% increase when compared to a year earlier. Coupled with weaker imports, it led to a record $99 billion (£83.25 billion) trade surplus.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Guide: How an Olympic mindset could help you manage your finances effectively

What makes an Olympian? Natural talent or the hours put into training might be the first things that come to mind. However, their approach and mindset play an important role in their achievements too.

An athlete’s mentality will have a huge effect on how they pursue goals and their ability to perform well when it matters most. Getting in the right frame of mind for success could mean the difference between making the Olympic team and missing out.

With Paris hosting the Olympics in 2024, now is the perfect time to look at what you could learn from Olympians when it comes to managing your finances effectively, such as:

· Being goal-oriented

· Breaking down your performance

· Keeping your emotions in check

· Working with professionals.

Download your copy of ‘How an Olympic mindset could help you manage your finances effectively’ to discover how you could benefit from adopting an Olympic mindset.   

If you’d like to talk to us about your financial plan, please get in touch.

15 delicious and unique afternoon teas to enjoy across the UK

Tearooms across the UK are preparing to take part in this year’s Afternoon Tea Week, which takes place between 12 and 18 August 2024.

The celebration of the fantastic British tradition is a brilliant excuse to organise a catch up with your friends or family over a cup of tea and some delicious food.

If you’re looking for somewhere to celebrate this wonderful event, read on to discover 15 unique afternoon teas to try across the UK.

1. The English Tea Bus, London

If you want to combine a sightseeing trip with some delightful sweet and savoury treats, hop on this double decker bus to enjoy a panoramic tour of the capital as well as a delicious afternoon tea.

2. The Ivy on the Square, Edinburgh

If you’re looking for a Gatsby-feeling experience for a reasonable price, try the Dream Afternoon Tea at The Ivy on the Square in Edinburgh.

The restaurant’s gorgeous décor and the nature-themed platters offer a whimsical experience for you and your loved ones to enjoy.

3. The Cauldron, London

Step into a magical world to enjoy this afternoon tea at The Cauldron, a wizard-themed cocktail bar which allow you to blend your own tea and dine from a dragon’s nest platter.

The Cauldron also have locations in Edinburgh and Brighton if you’d like to enjoy this magical experience elsewhere.

4. The Falcondale Hotel, Lampeter

This restaurant, located in a Victorian Grade II listed country house, has been awarded two AA Rosettes so you can be sure their food is delicious.

Enjoy a delectable afternoon tea made with local produce before enjoying a walk around the gorgeous surrounding gardens.

5. Sherlock’s Mind Palace Afternoon Tea and Mini Mystery, London

Run by the official Sherlock: The Live Game team, book this afternoon tea to put your puzzle solving skills to the test while snacking on their delicious sweet and savoury treats.

6. Holy Cow, Edinburgh

If you are vegan or vegetarian, head to the Holy Cow on Dundee Street to enjoy a delicious animal-friendly and gluten-free afternoon tea.

7. House of Books and Friends, Manchester

For an afternoon tea located in a picturesque bookshop in the heart of Manchester, visit the House of Books and Friends.

Not only do they serve incredible homemade treats, but they also spend every penny of their profit on addressing loneliness and creating opportunities to bring people together.

8. Cobbles Kitchen & Deli, Ogmore-by-Sea

Can’t get enough of afternoon tea? Why not try a bottomless one?

Just a short drive from Ogmore-by-Sea beach, this deli offers bottomless tea, coffee, or soft drinks. Or, if you wish, you can upgrade to bottomless prosecco, mimosas, Aperol spritzs, or gin fizzes.

9. The Ampersand Hotel’s Science Afternoon Tea, London

Drawing inspiration from the nearby Science Museum, this afternoon tea is out of this world!

Enjoy their selection of science-themed treats, such as dinosaur biscuits and planet-shaped cakes, before exploring the Science Museum for free afterwards.

10. Palm Court at the Balmoral, Edinburgh

For a luxurious afternoon tea experience, visit the 2022/23 Hotel of the Year Scotland for a selection of over 80 teas, impressive tea pouring ceremony, and gourmet food.

11. Charlie and the Chocolate Factory afternoon tea, London

If you’re a fan of Roald Dahl’s beloved book, head to One Aldwych to enjoy the likes of “blue as a blueberry” cake pops and scones with snozzberry jam.

12. Pettigrew Tea Rooms, Cardiff

Located in the Victorian gatehouse right next to Cardiff Castle, the Pettigrew Tea Rooms is a picturesque spot for a delicious afternoon tea.

They also cater for vegetarians, vegans, and those on a gluten- or dairy-free diet.

13. The Cookery School, London

Have a hands-on afternoon tea experience at The Cookery School at Little Portland Street to learn how to craft your own cakes, sandwiches, pastries, and scones.

At the end of your class, you will sit down to enjoy the rewards of your freshly cooked food with a glass of sparkling wine or a soft drink.

14. The Lemon Tree, Wrexham

If a selection of unusual but delicious cocktails in a beautiful Victorian Grade-II listed neo-gothic building sounds tempting, then head to The Lemon Tree, which sits just outside of Wrexham’s town centre.

15. The Bulkely Hotel, Beaumaris

The Bulkely Hotel offers a luxurious afternoon tea experience, with their resident pianist playing while you indulge in delicious finger sandwiches and cakes.

Even better, you can bring your dog along to their dedicated indoor and outdoor dog-friendly areas so you don’t have to leave any member of the family behind.

How “time travelling” as part of your financial plan could help you secure your goals

Imagine you could time travel to understand how your financial decisions today might affect your lifestyle in 10 or 20 years. You may be in a better position to turn your goals into a reality. Read on to find out how working with a financial planner could give you a glimpse into the future.

Time travel films and books offer plenty of warnings about the perils of changing the timeline – even a seemingly small change can have a huge impact. With this in mind, a “time travelling” financial plan could help you make better decisions as it could enable you to see the effect they might have on your long-term security and happiness.

The good news is that you don’t need a DeLorean or the help of an eccentric scientist to look at your financial future.

Cashflow modelling could let you see the impact of the decisions you’re making

Cashflow modelling might not sound as exciting as hopping into a time machine, but it can be an invaluable tool when you’re creating a long-term financial plan.

To start, you’ll need to input data into a cashflow model. This might include the value of your assets, like savings, investments, or property, your regular income, and your outgoings. You’ll also want to add the financial decisions you’ve already made. For instance, how much you’re contributing to your pension each month.

With the basic information added, you can make certain assumptions to predict how your assets might change over time. So, you might include your investment portfolio’s expected annual rate of return to understand how the value could change or consider how inflation may affect your expenses.

The results can then help you visualise your assets and financial security in the future. With this information, you can start to understand whether you’re on track to secure the future you want. 

In some cases, you might identify a potential gap, which could lead to you adjusting your plans or making changes to your finances now so you can reach your goals. Again, you can use cashflow modelling to assess changes.

Adjusting your cashflow model may help you understand alternative outcomes

One of the most useful benefits of cashflow modelling is that it doesn’t just allow you to see the outcome of the actions you’re already taking. You can also model other scenarios.

So, you could see how adjusting your decisions now might improve your ability to reach your goals or even make aspirations you previously thought were out of reach achievable.

For example, you could model how:

· Retiring early may affect how much you can withdraw from your pension sustainably

· Increasing your pension contributions might afford you a more comfortable retirement

· Using your savings to travel the world now may impact your long-term financial security

· Boosting your regular investment contributions could grow your wealth over a long-term time frame

· Gifting inheritances to your children and grandchildren now will affect the value of your estate in the future.

As a result, using a cashflow model to understand the long-term implications of alternative options could help you find the right approach for you. Understanding the various possible outcomes may give you the confidence to adjust your actions and stick to a long-term financial plan.

It’s not just your behaviours you can model either, but unexpected events or changes outside of your control. Understanding the effect of a market downturn or period of illness where you are unable to work might enable you to create a safety net that offers you peace of mind.

Of course, the results of a cashflow model cannot be guaranteed and factors outside of your control, such as investment volatility, might also affect the outcome. Even so, it can be a valuable way to identify potential shortfalls or opportunities.

Contact us to time travel and discover how you could reach your goals

If you’d like to take a look at your financial future and understand what it could mean for your lifestyle, please get in touch. We can help you assess how the decisions you make could affect your goals.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate cashflow planning.

Higher-rate taxpayers: Beware of the 60% tax trap

The tapering of the Personal Allowance means some higher-rate taxpayers effectively pay an Income Tax rate of 60%, sometimes without realising. Fortunately, if you’re affected, there could be ways to reduce your tax bill.

A report in the Telegraph suggests 1.35 million workers were affected by the 60% tax trap in 2023/24. Collectively, they paid an extra £4.7 billion to the Treasury. Read on to find out if you could unwittingly be paying a higher rate of Income Tax than you expect.

The tax trap affects those earning more than £100,000

You might think the highest rate of Income Tax is 45%, and officially you’d be correct. Most people pay the standard rates of Income Tax. In 2024/25, Income Tax rates and bands are:

Please note, that different Income Tax bands and rates apply in Scotland.

However, the Personal Allowance is reduced by £1 for every £2 you earn over £100,000. If you earn more than £125,140, you don’t have a Personal Allowance and pay tax on all your income.

For example, if you earn £101,000, on the £1,000 above the threshold, you’d pay £400 of Income Tax at the higher rate. In addition, you’d lose £500 of your Personal Allowance, so this portion of your income would also be subject to Income Tax at 40%, adding up to £200.

So, out of the £1,000 you’ve earned above the tapered Personal Allowance threshold, you’d only take home £400 – a 60% effective tax rate. It’s led to the tapering being dubbed a “stealth tax” in the media.

Further compounding the issue is the fact that the Personal Allowance and Income Tax bands are frozen until 2028.

While the thresholds are frozen, many people are likely to receive wage increases. As a result, more people are expected to be caught in the 60% tax trap in the coming years.

Don’t forget your salary might not be your only income that’s considered when calculating your Income Tax bill. For example, you could be liable for interest earned on savings that aren’t held in a tax-efficient wrapper.

Contact us if you’re unsure which of your assets could be liable for Income Tax.

3 legal ways to avoid falling into the 60% tax trap

If you’re affected by the tapered Personal Allowance, thinking about how you structure your earnings may provide an opportunity to reduce how much you’re giving to the taxman. Here are three excellent options you might want to consider.

1. Boost your pension contributions

One of the simplest ways to avoid paying 60% tax if you could be affected is to increase your pension contributions.

Your taxable income is calculated after pension contributions have been deducted. As a result, boosting pension contributions could be used to reduce your adjusted net income so you retain the full Personal Allowance or reduce the proportion you lose.

Increasing pension contributions could help you secure a more comfortable retirement too. However, keep in mind that you cannot usually access your pension savings until you’re 55 (rising to 57 in 2028).

2. Use a salary sacrifice scheme

If your workplace has a salary sacrifice scheme, it could also provide a useful way to reduce your overall tax liability.

Salary sacrifice enables you to exchange a part of your salary for non-cash benefits from your employer. This could include higher pension contributions, childcare vouchers, or the ability to lease a car.

By essentially giving up part of your income, you might be able to bring your taxable income below the threshold for the tapered Personal Allowance.

You should note that salary sacrifice options vary between employers, so it may be worthwhile to check your employee handbook to see if any options could suit you. 

3. Make charitable donations from your income

If you’d like to reduce your Income Tax bill and support good causes, you could make a charitable donation. Again, by deducting donations from your salary before tax is calculated, you could manage how much of the Personal Allowance you lose.

Contact us to talk about how to manage your tax bill effectively

There may be other steps you could take to reduce your overall tax bill. A tailored financial plan will consider your tax liabilities, including from other sources, such as your savings and investments, to highlight potential ways to cut the amount you pay to the taxman.

If you’d like to arrange a meeting, please get in touch. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.