We have all applauded those that work in the NHS to help reduce deaths and improve recovery of anyone suffering from COVID19 or frankly any other life-threatening condition. We have also become aware of our reliance on people, who are not terribly well paid, but ensure that our local food is picked, packed, stocked, stacked and delivered and or course countless other services.
We have marvelled at the amount of money raised by a man aged 99 who celebrated his 100th birthday and was honoured for his efforts. These are all good things, but it must surely leave you wondering why the extra money is needed to pay for the NHS. Blaming multinationals like Amazon is all too easy, perhaps we need to reflect on our own tax system.
Here is my problem – we know that taxes are required, but we also know that the State wastes money. We all have an opinion on who, what, why and how our taxes should be made available to. My job is to help you to ensure that your money outlasts you. I do this by using investments, getting you to think and plan ahead for all manner of possibilities and I use the prevailing legitimate tax system properly.
£2,500 A MONTH – THE NEW BASE LINE?
The Government seem to believe that most people can survive on £2,500 a month (taxable), that’s £30,000 a year. In practice excluding national insurance, that would be a net income of roughly £26,500 with basic rate tax paid of £3,500. I have also excluded any pension payments or charitable giving. You will recall that there is a personal allowance of £12,500 (0% income tax) for those with income below £100,000.
By way of simply showing how an adviser can achieve this level of income for you (tax free) here are some options. Doing them all would far exceed the target £26,500 income, but hopefully you will see my point.
If aged 55 but not yet drawing a State Pension. You could crystallise £16,665 of an investment-based pension. This would generate £4,166.25 as tax free cash and £12,498.75 as taxable income, but as it is within the £12,500 threshold there would be no income tax to pay. However you would then find yourself restricted to a maximum £4000pa of new contributions to pensions (called the Money Purchase Annual Allowance or MPAA).
Alternatively, you could simply crystallise £106,000 of an investment based pension, take 25% (£26,500) as tax free cash and leave the balance to grow.
An investment portfolio will regularly have gains (that’s the point after all). A growth of say 5% over a year on a fund of £234,000 can use £12,300 of the capital gains tax allowance – 0% tax. Trigger a larger gain and the gains above £12,300 are taxed at a lower rate of 10% or maybe 20% (but not if you do these other things).
Perhaps rent a room for a tax free £7,500 a year
Draw 5% of your capital back from an investment bond, so a Bond of £100,000 would provide £5,000
Any money drawn from ISAs would be tax free, but taking say £8,535 from an ISA would take the total “income” from all these to £50,000 and not a penny of income tax would be paid.
EARNED INCOME IS TAXED MORE
Yet if this was earned income in 2020/21 income tax of £7,498.20 would be due with a further £4,860 of National Insurance a total of £12,358.20 leaving a net income of £37,641.80. This is makes full use of the basic rate tax, any income above this would be taxed at 40% or 45%.
The point I am making is that how much tax is paid is very much dependent on where your money is and how it is generated. It’s certainly the case that not everyone has these sums of money (which are likely to have been taxed before). However, this is only the basic stuff and exposes the problem of a complex tax system that punishes those earning income far more than those with capital.
IF YOU ARE NOT A CLIENT
If you are reading this and not a client, do not conclude that the above is advice to you, it is not. The calculations that we do can be complex and relate to each individual situation, never rely on generic information about money, except for spend less than you earn.
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email email@example.com
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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT