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UK Resident Non-Domiciled Individuals: Helping you traverse reforms

Reforms to the Non-Dom regime from April 2025

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This guide will outline the key changes and actions you can consider.

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Key planning actions

Inheritance Tax (IHT)

As of April 2025, Inheritance Tax (IHT) rules will undergo significant changes, affecting non-domiciled individuals who live in the UK. Here’s an overview to help you understand how the new rules may impact your estate and any trusts you have.

Current Rules vs. New Rules from April 2025

Current System

  • IHT liability is based on domicile status
  • Non-UK domiciled individuals only pay UK IHT on UK-based assets
  • Long-term UK residents (15 out of the last 20 years) are considered “deemed domiciled” and are subject to UK IHT on worldwide assets

Changes from April 2025

  • Domicile will no longer determine IHT. Instead, residency status will dictate IHT obligations.
  • Long-Term Residents (LTRs): Anyone who has been UK-resident for 10 of the last 20 years will be considered a “long-term resident” (LTR) and liable for IHT on worldwide assets, similar to UK domiciled individuals.

Key Points for Trusts and Excluded Property

  1. Trusts Set Up by Non-Domiciles Before April 2025
    Non-UK assets placed in trusts before April 2025 are considered “excluded property,” meaning they remain outside the UK IHT scope. However, this benefit might change if the trust creator becomes an LTR.
  2. Trusts Set Up by LTRs Post-2025
    If an LTR establishes a trust, the trust assets (even if held overseas) may fall under UK IHT rules. Trust assets may incur charges:
    • At the trust’s tenth anniversary: If the settlor is an LTR, periodic charges may apply.
    • Upon the settlor’s death: Assets in the trust could be taxed as part of the estate if the settlor is a potential beneficiary.
  3. Shifting Residence Status
    Assets may enter and leave the IHT net depending on whether the settlor remains an LTR. For example, if you retire abroad and lose LTR status, your trust assets may move outside the IHT net again, possibly triggering exit charges.
  4. Exceptions
    • Trusts set up by non-domiciles before April 2025 may retain “excluded property” status if the settlor passes away before April 2025.
    • If the settlor was an LTR at death, the trust may still be subject to periodic charges.

Other IHT Considerations

  • Lifetime Transfers: Gifts or transfers of foreign assets made by a non-LTR are generally exempt from UK IHT. However, if the transferor later becomes an LTR, some assets may fall back within the scope.
  • Spouse Exemption: A non-domiciled spouse may choose to be treated as UK domiciled to benefit from an unrestricted spouse exemption. This election remains but with a longer exit period (10 years) post-2025.

Summary

The upcoming IHT changes aim to simplify rules but may complicate trust management for LTRs. Non-domiciled individuals should review estate plans and discuss any trusts with advisors to mitigate unexpected tax implications as their residence status shifts.

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Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Adapting to the new Capital Gains Tax climate

Capital Gains Tax UK rates rise

The rates of Capital Gains Tax (CGT) have increased, with the changes coming into immediate effect as of the Autumn Statement on 30 October 2024.

This guide will outline the key changes and actions you can consider.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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What’s changing?

Capital Gains Tax UK rates rise from 10% to 18% for lower rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers.

The rates for residential property will remain at 18% and 24% respectively.

Previously, CGT was charged at a lower 10% rate and a higher 20% rate, so these changes will result in increased tax on disposals.

Each UK adult continues to benefit from an annual CGT allowance of £3,000.

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Key planning actions

Revisit any Carried Forward Losses

A capital loss must be claimed within four years of the end of the tax year in which the loss arose. If you have any previous losses you should ensure you notify HMRC within the stated timescale. Claiming these losses could potentially be used to offset capital gains in the current, higher-rate Capital Gains Tax (CGT) UK environment.

Utilise a spouse’s allowance

Each individual has an annual Capital Gains Tax (CGT) allowance of £3,000, so couples can reduce their tax liability by fully utilising both allowances. Transferring assets between spouses does not give rise to either a gain or a loss, enabling the recipient spouse to sell the asset and apply their own CGT allowance.

This strategy is also useful if one spouse is a lower rate tax payer than the other, so that gains are taxed at the lower rate. By splitting gains between spouses, you can double the tax-free amount available, making it a valuable strategy to consider before any planned disposal. This approach requires careful coordination and alignment with each spouse’s overall financial strategy and tax profile.

In-Specie Gifting

Philanthropic investors might consider asset-based (in-specie) gifting, as gains on assets gifted to charity are not subject to Capital Gains Tax (CGT).

International Bonds

International Bonds remain CGT- and Income Tax- exempt on internal bond assets, making them more attractive under the new rates. In addition, generally, individuals do not pay CGT when cashing in their international bond.

Deferral of Gains

Investors may consider deferring asset disposals, hoping for a future reduction in Capital Gains Tax (CGT) rates.

Collective Investment Vehicles

Unit Trusts and Open-Ended Investment Companies are not liable to Capital Gains Tax (CGT) within the fund. This means that individuals holding these investments have the ability to control if and when a personal CGT liability will arise by deciding when the holdings are disposed of – e.g. waiting until the following tax year to make effective use of that year’s CGT exemption (assuming there are no legislative changes which reduce or abolish the exemption).

However, they come with added costs and require alignment with investment goals. Some alternative investments, suitable only for sophisticated investors, also offer deferral opportunities through reinvesting gains.

Corporate Holding Structures

For those using Family Investment Companies or Personal Investment Companies, the marginal difference between Corporation Tax (up to 25%) and Capital Gains Tax (CGT) (up to 24%) has narrowed. Still, these structures remain useful for succession planning and efficient income growth.

Utilise Individual Savings Account (ISA) Allowances

Every UK adult benefits from a £20,000 a year Individual Savings Account (ISA) Allowance.

Children under 18 also have a £9,000 a year Junior ISA Allowance.

Consider transferring assets into ISAs, utilising your allowance as well as any allowances that your partner/ children may have.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Autumn Statement Impact Assessment

The biggest set of tax increases in modern history.

On 30 October 2024, the UK’s first female chancellor made history with the biggest set of tax increases in living memory. Rachel Reeves’ Budget means that the tax burden in relation to GDP is now the highest on record, surpassing even post-war levels in 1948.1

After months of speculation surrounding a proposed ‘tax on wealth’, Labour’s first budget in well over decade has brought about sweeping changes to the UK tax landscape.

Arguably the most significant impact will be felt by;

  • Income Taxpayers
  • Private Schoolparents
  • Employers and Business Owners
  • Private Equity Professionals
  • Capital Gains Taxpayers
  • Estates on which Inheritance Tax (IHT) is due (soon to include Pensions)
  • Non-Domiciled Individuals
  • Farmers
  • Purchasers of Additional Property

In the following sections, we outline the order of changes, now and in the coming few tax years.

1 Office for Budget Responsibility data from 1970 to 2024, estimates that the changes announced in 2024’s Autumn Statement will seize an additional £40bn in tax revenues, which is higher than any previous amount on record.

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Immediate consequences

Income Tax thresholds frozen

Although there were no changes to the headline Income Tax rates and thresholds, the thresholds remain frozen until April 2028. This stealth tax enables wage inflation to drag a higher proportion of UK taxpayers into paying increased amounts of income tax.

The OBR has forecast that 7.8 million UK taxpayers are likely to be dragged into higher tax bands during the freeze; 4.2 million will start paying Income Tax, with 3 million more pushed into paying the Higher Rate, and an extra 600,000 forced to pay the Additional Rate by 2027-28.

Employees generally pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Employees continue to see their Personal Allowance tapered at a rate of £1 for every £2 of income between £100,000 and £125,140, resulting in an effective 60% rate of income tax on this portion of their income.

Employees generally pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

  • Personal Allowance frozen at £12,570 per year
  • Higher Rate Threshold frozen at £50,270 per year
  • Additional Rate Threshold frozen at £125,140 per year
  • NIC Primary Threshold frozen at £242 per week
  • NIC Lower Earnings Limit frozen at £123 per week
  • NIC Upper Earnings Limit frozen at £967 per week
  • NIC Lower Profits Limit frozen at £12,570 per year
  • NIC Upper Profits Limit frozen at £50,270 per year

The last government introduced a plan to assess the threshold at which Child Benefit gets clawed back to be based on household income, rather than at the individual level. Labour are scrapping this plan.

Different rates and thresholds of Income Tax apply to Scottish residents.

Capital Gains Tax (CGT) rates increased

Effective immediately, from 30 October 2024, the rates of Capital Gains Tax (CGT) on shares and various other assets, are increased as follows;

  • CGT Lower Rate increases from 10% to 18% (a rise of almost double)
  • CGT Higher/Additional Rate increases from 20% to 24% (a rise of one fifth)

The CGT rates for residential property gains, which do not qualify for the private residence exemption, remain at 18% and 24% respectively.

A small, annual Capital Gains Tax (CGT) Allowance remains at £3,000.

Inheritance Tax (IHT) thresholds frozen

Despite the headline Inheritance Tax (IHT) rates and thresholds remaining unchanged, they have been frozen until 2030; an extension to the freeze of two further years. This stealth tax enables inflation to drag a higher proportion of Estates into paying IHT duties.

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which currently stands at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band is up to £175,000.

This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027.

Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

Finally, a person’s assets worldwide will be considered for IHT purposes in some circumstances, including for instance where they have lived in the UK for 10 of the last 20 years.

Private School Fees attract VAT at 20%

From January 2025, VAT will apply on Private School Fees at 20%. Schools will also be subject to business rates, where they had previously been exempt.

Many independent schools have already confirmed that they will pass some or all of the increased cost on to parents and fee payers.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil currently costs, on average, £23,925 per year, rising to £42,459 for pupils who board.2 The application of VAT could bring the average day fee to £28,710, and the average boarding fee to £50,951, overnight.

2 ISC Census and Annual Report, January 2024

Stamp Duty Land Tax (SDLT) additional dwelling surcharge increased

Effective the day after the Autumn Statement, from 31 October 2024, the Stamp Duty Land Tax (SDLT) Higher Rate for Additional Dwellings is increased by two thirds, from 3% to 5%.

This Higher Rate is applicable when you buy a residential property (or a part of one) for £40,000 or more, if it will not be the only residential property worth £40,000 or more that you own (or part own) anywhere in the world.

You may have to pay the Higher Rate even if you intend to live in the property you’re buying, and regardless of whether or not you already own a residential property. This is because the rules do not apply only to you (the buyer), but also to anyone you’re married to or buying with.

Investors’ Relief lifetime limit reduced

Effective immediately, the lifetime limit for Investors’ Relief is reduced, from £10 million to £1 million.

This will apply to qualifying disposals made on or after 30 October 2024, as well as to certain disposals made before 30 October 2024.

Non-domiciled individuals

With immediate effect, tax benefits are reduced for non-domiciled individuals who move money into Offshore Trusts.

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Further ramifications from April 2025

Employer National Insurance Contributions (NICs) increased

From April 2025, the rate of Employer National Insurance Contributions (NICs) will rise from 13.8% to 15%.

The threshold at which Employer NICs is due, will also be lowered, from £9,100 to £5,000 per year.

Together, these measures will result in additional costs to employers of at least £615 per year, per employee – and in many cases, significantly more.

Prior to the measures introduced in the Autumn Statement, earnings adjusted for inflation were due for a modest increase of 0.2pc in 2026 and 0.3pc in 2027. Now they are set to fall by -0.2 and -0.1pc respectively. The OBR has stated that it estimates approximately 76% of the additional Employer National Insurance cost will be passed on to employees.3

More than 700,000 UK workers ‘inside IR35’ will wear the whole uplift, owing both Employer and Employee NICs.

However, more than 865,000 small businesses will benefit from changes to the Employment Allowance, which increases from £5,000 to £10,500. Employment Allowance lets businesses, charities and sports clubs reduce their annual National Insurance (NI) liability, if their employers’ Class 1 NI liability fell below £100,000 in the previous tax year.

Furthermore, businesses can still offer salary sacrifice schemes to their employees, which may have the effect of reducing Employer NIC liabilities. And, as a business owner, you could utilise a Small Self-Administered (Pension) Scheme (SSAS) to build your own tax-efficient investment pot towards retirement.

3 Office for Budget Responsibility, October 2024

Business Rates Relief reduced

From April 2025, those qualifying for Business Rates Relief will see their discount fall, from 75% to 40%. It is estimated that this discount ‘replacement’ will see qualifying businesses’ rates bills rise by 140% as a result.

Business Asset Disposal Relief (BADR) increased

From April 2025, the rate of Business Asset Disposal Relief (BADR) increases from 10% to 14%.

It is due to increase again from April 2026, to 18%.

BADR is available on disposals of business assets. It had reduced the rate of Capital Gains Tax (CGT) on qualifying gains to 10%, but now the relief/reduction is less.

Capital Gains Tax (CGT) on Carried Interest increased

From April 2025, the rate of Capital Gains Tax (CGT) on Carried Interest will increase, from 18% for basic rate taxpayers and 28% for higher/additional rate taxpayers, into a single unified rate of 32%.

Further reforms to the way that Carried Interest is taxed, are mooted from April 2026.

Carried Interest (or ‘carry’ for short) is one of the main forms of compensation in the private equity industry, and continue to attract a lower rate of tax than traditional income.

Non-Domicile Tax Regime abolished

The Non-Domicile Tax Regime will be abolished from April 2025.

It is set to be replaced by a residence-based scheme, described during the Autumn Statement as “internationally competitive.” Tax relief will apply to Foreign Income and Gains (FIG), and a Temporary Repatriation Facility will be introduced.

State Pension increased

From April 2025, the State Pension will rise by 4.1%, meaning a gain of up to £470 per year for those in receipt of the Full New State Pension.

Future impact from April 2026

Inheritance Tax (IHT) relief on business and agricultural assets significantly reduced

From April 2026, a £1 million allowance will be introduced for Inheritance Tax (IHT) relief on business assets and agricultural assets.

A new effective 20% rate of IHT will apply on the value of relevant assets above £1 million.

Business Asset Disposal Relief increases further

From April 2026, once again the rate of Business Asset Disposal Relief is increased, from 14% to 18% (vs 10% currently).

Capital Gains Tax (CGT) on Carried Interest reformed

Whilst details are yet to be given, it is mooted that Capital Gains Tax (CGT) on Carried Interest will be reformed altogether from April 2026.

Air Passenger Duty (APD) increased

From April 2026, the Standard Rate of Air Passenger Duty (APD) will rise by 13% for long haul flights, reaching up to £253.

APD is chargeable per passenger, on flights departing the UK. The Standard Rate applies to most premium economy, business class and first class fares.

Meanwhile, the Higher Rate of APD, applicable to each passenger travelling by private jet, will increase by 50%, reaching up to £1,141. Generally used as capital assets by corporations, jets allow businesses to increase productivity, and this extortionate increase in APD may have the effect of harming growth, and ultimately tax receipts. It is estimated that 70% of private aviation passengers are “middle managers going about their working day,” according to Steve Varsano, who runs The Jet Business aircraft brokerage on Park Lane.

Eventual changes from April 2027

Inherited Pensions brought inside of Estate for Inheritance Tax (IHT) purposes

From April 2027, any inherited Pension will be considered as part of an Estate for Inheritance Tax (IHT) purposes, meaning that for the first time, IHT will be due at up to 40%, subject to existing IHT rates and allowances.

Agricultural and Business Property Reliefs reformed

From April 2027, Agricultural Property Relief, and Business Property Relief, are each set to be reformed, though little more has been announced.

Air Passenger Duty increases further

From April 2027, Air Passenger Duty (APD) will rise once again, according to forecast Retail Price Index (RPI) at that time.

The effect will be felt most severely by those travelling privately, and in premium economy, business class and first class.

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What remains largely unchanged for now?

Income Tax thresholds and rates

Employees continue to pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Employees continue to see their Personal Allowance tapered at a rate of £1 for every £2 of income between £100,000 and £125,140, resulting in an effective 60% rate of income tax on this portion of their income.

  • Personal Allowance frozen at £12,570 per year
  • Higher Rate Threshold frozen at £50,270 per year
  • Additional Rate Threshold frozen at £125,140 per year

The last government introduced a plan to assess the threshold at which Child Benefit gets clawed back to be based on household income, rather than at the individual level. Labour are scrapping this plan.

Different rates and thresholds of Income Tax apply to Scottish residents.

Income Tax Relief on Pension Contributions

Income Tax Relief continues to be made available on Pension Contributions made personally, up to 100% of earnings or £3,600, whichever is higher.

They are further limited by an Annual Allowance, usually £60,000 which includes not only personal contributions, but also employer contributions, and any tax relief received by the scheme. Exceeding the Annual Allowance may result in a tax charge.

Pension tax relief will be granted at one’s marginal rate of tax.

Employee National Insurance (NI) Contributions

Employees continue to pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

  • NIC Primary Threshold frozen at £242 per week
  • NIC Lower Earnings Limit frozen at £123 per week
  • NIC Upper Earnings Limit frozen at £967 per week
  • NIC Lower Profits Limit frozen at £12,570 per year
  • NIC Upper Profits Limit frozen at £50,270 per year
Capital Gains Tax (CGT) rate on residential and buy-to-let property assets

The rate of Capital Gains Tax (CGT) chargeable on gains from residential and buy-to-let property assets remains unchanged, at 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers.

Inheritance Tax (IHT) rates and allowances

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which remains at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band remains up to £175,000.

This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances also remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027. Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

In a further blow, the government will increase the interest rate HMRC can charge on unpaid tax, from 7.5% to 9%. Families have six months to pay inheritance tax after the death of a loved one before interest is added to the bill; but grants of probate currently take nine weeks on average to obtain, and in complex cases, the process can drag on for over a year.4

4 Probate Registry, October 2024

Stamp Duty Land Tax (SDLT) on primary residences

The current rates and thresholds for Stamp Duty Land Tax (SDLT) remain unchanged for the purchase of a primary residence.

From 31 March 2025, the temporary increase to thresholds will end, and SDLT will be due on primary residences from £125,000 (currently £250,000), with the nil-rate threshold for First Time Buyer’s Relief also due to fall, from £425,000 to £300,000.

Corporation Tax

The headline rate of Corporation Tax remains at 25%.

Current expensing reliefs are maintained.

Individual Savings Account (ISA) Allowances

Individual Savings Account (ISA) Allowances are now frozen until 2030; an extension of two years that will face significant fiscal drag as a result of inflation.

By the end of the decade, the annual deposit cap of £20,000 will have remained unchanged for a total of 13 years. The issue is exacerbated by the hike in Capital Gains Tax rates.

The total ISA Allowance remains at £20,000.

The total Junior ISA Allowance (for under 18s) remains at £9,000.

The Lifetime ISA Allowance (for saving towards a first home or retirement) remains at £4,000, with a 25% government bonus provided on contributions. The home value limit of £450,000 appears to be unchanged.

Pension Annual Allowance

The standard Pension Annual Allowance remains at £60,000, although it may be reduced to as low as £10,000 if one has flexibly accessed income via their pension, or if they have high earnings and are subject to the tapered annual allowance.

Pension Carry Forward

The ability to Carry Forward unused Pension Annual Allowances from the previous three tax years, remains.

This means a theoretical maximum contribution of £200,000 may be made in the current tax year, subject to relevant earnings. For now, this is expected to rise to £220,000 in the 2025/26 tax year, and to £240,000 in the 2026/27 tax year, based on historical Annual Allowances.

Personal Savings Allowance (PSA)

The Personal Savings Allowance (PSA) is the maximum amount of cash savings on which interest is not taxed, and remains unchanged as follows;

  • For Additional Rate Income Taxpayers, the PSA is zero
  • For Higher Rate Income Taxpayers, the PSA is £500
  • For Basic Rate Income Taxpayers, the PSA is £1,000
Capital Gains Tax (CGT) Allowances

Each UK adult continues to benefit from a Capital Gains Tax (CGT) Allowance of £3,000 per year.

Interspousal mechanisms remain.

Dividend Tax Rates and Allowances
  • Dividend Ordinary Rate remains at 8.75%
  • Dividend Upper Rate remains at 33.75%
  • Dividend Additional Rate remains at 39.35%

Each UK adult continues to benefit from a Dividend Tax Allowance of £500 per year.

Pension Access Allowances

Replacing the now abolished Lifetime Allowance (LTA) are;

  • Lump Sum Allowance (LSA) of 25% of the value of your pensions up to a maximum of £268,275
  • Lump Sum Death Benefit Allowance (LSDBA) of £1,073,100
  • Overseas Transfer Allowance (OTA) equivalent to the LSDBA

The Lump Sum Allowance (LSA) limits the tax-free lump sums you can take from pensions. Any amount you take over your allowance will be taxed at your marginal rate of income tax.

The Lump Sum and Death Benefit Allowance (LSDBA) limits the tax-free lump sums you can take from pensions, as well as tax-free lump sums that can be paid to beneficiaries after your death.

The Overseas Transfer Allowance (OTA) limits the amount you can transfer to a qualifying recognised overseas pension scheme (QROPS) without tax charges applying.

These allowances, first introduced in April 2024, remain unchanged, despite speculation that the LSA in particular might have been reduced to £100,000. If you recently made a request to draw a lump sum from your pension, as a result of this speculation, then you may wish to consider whether this decision is still in your best interests.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

Embark on your financial journey.

Obtain Your Bespoke Plan

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

Please note that Cash ISAs are not available through St. James’s Place and although anyone can contribute to an ISA for a child only the parent/legal guardian can open the ISA for them.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Legacy Planning Redefined: Navigating the new Inheritance Tax landscape for Pensions

Pensions set to be brought inside of Estates for Inheritance Tax (IHT) purposes from April 2027

One of the most surprising announcements in Labour’s first Budget, was the Chancellor’s decision to subject pensions to Inheritance Tax (IHT). This policy reverses George Osborne’s 2015 decision to exclude pension pots from an individual’s Estate for IHT purposes. Although this change won’t take effect until 2027, it has already faced criticism as a “cruel blow” for grieving families.

This guide will outline the key changes and actions you can consider.

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What’s changing?

Currently, private pensions are not counted as part of an Estate, and are free from Inheritance Tax. If you inherit a private pension from someone who died aged 75 or older, you’ll pay income tax on it; however, if they died younger than 75, it’s tax-free, unless taken as a lump sum after two years.

From April 2027, pensions will be counted as part of the Estate. This shift might deter individuals from saving into their pensions.

When Osborne initially allowed pensions to be passed on tax-free, it was part of broader reforms, including scrapping the 55% charge on certain inherited pensions. Along with Jeremy Hunt’s abolition of the pension Lifetime Allowance (LTA), pensions became an attractive legacy planning tool. Now, however, the Government says it is “removing the opportunity for individuals to use pensions as a vehicle for Inheritance Tax planning.”

The Government has opened a consultation on implementing this change, as experts warn of complex administration challenges.

Families may need to rethink their Estate planning under this new policy.

It’s worth noting that pensions left to a spouse or civil partner remain inheritance tax-free. The inheritance tax spousal exemption allows married couples and civil partners to transfer their estate to one another tax-free upon death. In contrast, benefits passed to an unmarried partner may be subject to inheritance tax. Surviving unmarried partners could face reduced income and, as a result, a lower standard of living in retirement.

Explore your options, with a no-obligation financial planning consultation.

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Double taxation

Families may now face an effective 67% rate of tax on inherited pension funds following the rule changes; with a ‘double hit’ from the combined effects of Inheritance Tax and Income Tax.

The removal of the Inheritance Tax exemption effectively imposes a double tax on death benefits that don’t qualify for an Income Tax exemption, particularly for those who pass away after age 75. When the entire pension fund is subject to 40% Inheritance Tax, and beneficiaries are then taxed at their marginal rate of Income Tax on the remaining amount, this can lead to a combined tax rate of up to 67% on the pension’s death benefits.

Even basic-rate taxpayers could face a 45% marginal rate of Income Tax, depending on how they choose to withdraw the funds. Beneficiaries may choose between receiving a lump sum or ongoing income, which affects their tax rate. For example, a lump sum might push them into a higher tax bracket. These changes could leave families with less than a third of the original pension pot.

Key planning actions

Drawing the tax-free Lump Sum Allowance

Despite pre-Budget speculation, the Lump Sum Allowance (LSA) remains consistent, at one quarter of the previous LTA, or £268,275.

Withdrawing the LSA and using it during one’s lifetime, to fund spending, or make gifts to family members, could offer an efficient way to reduce the value a pension subject to Inheritance Tax.

Usual gifting rules apply; for instance, surviving seven years from making the gift.

Gifting

One could gift part of their pension pot to avoid the added levy. Regular income gifts may also help you avoid the seven-year rule: for example, taking £50,000 from drawdown each year, but only spending £30,000, allows you to gift £10,000 annually to a child’s pension or a grandchild’s ISA if done regularly and without diminishing your lifestyle.

Relocating into tax wrappers

Some savers may choose to withdraw from their pensions and pay income tax, to reallocate the funds into tax-efficient vehicles like ISAs. The decision comes down to a trade-off: either keep funds in your pension, or withdraw and pay tax to invest them in a more tax-efficient structure. Obviously each person’s circumstances will differ.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Paying For Private School Fees: Start Planning Early And Optimise For Tax Efficiency

Introduction

More children than ever before are attending private schools for a higher quality education, smaller class sizes, more abundant resources, and specialised academic and vocational programmes. The number of pupils attending private school has steadily increased over the past decade, with a record 556,551 pupils now attending 1,411 Independent School Council (ISC) member schools across the UK, the highest level since records began in 1974.1

However, giving your children the best possible education comes at a cost, and the expense was already a barrier for many families – before the application of VAT to school fees from January 2025.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil had cost, on average, £23,925 per year, rising to £42,459 for pupils who board.2 However, fees at some private schools can be considerably higher. Unless your school has absorbed some of the increasing costs, the application of VAT at 20% brings the average day fee to £28,710, and the average boarding fee to £50,951.

1, 2 ISC Census and Annual Report, January 2024

At a glance

  • Parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.
  • ISAs and Investment Bonds can be used as tax wrappers to save towards school fees, potentially making tax-efficient or tax-deferred returns on your investment.
  • Unit Trusts and General Investment Accounts (GIAs) may also provide access to investing in various asset classes, with tax treatment dependent on individual circumstances.

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Average boarding school fees to hit £50,000 per year

Taking a tax-efficient approach to saving towards private school fees…

Let’s assume that school fees increase by 3.5% a year. This would be the lowest increase seen over the course of a 14-year education, particularly in comparison to an 8% uplift from 2023 to 2024. Based on the average costs, parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.

However, while these figures are considerable, the sooner you start saving towards your child’s school fees, the better.

By starting early, saving regularly, and investing, parents could build up a substantial sum over time to help cover the costs of private education.

Taking a tax-efficient approach to school fees can help make private education much more accessible.

Key tax-efficient solutions

Individual Savings Accounts (ISAs)

An ISA is a tax-efficient investment vehicle that enables parents to put aside a certain amount each year, without incurring any income or capital gains tax (CGT) on the interest or investment returns earned on the savings.

If both parents make monthly contributions that fully utilise their ISA allowance (£20,000 per person in the 2024/25 tax year) from the child’s birth, this could accumulate to a sum of £585,000 by the time the child is 11 years old, based on 5% net annual growth after fees, compounding monthly.* Withdrawals from an ISA are tax efficient, so parents can extract funds as needed to pay for school fees without incurring any capital gains or income tax liability, or invest in other options, such as stocks and shares.

*These figures are examples only and they are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment.

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than you invested.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

On- and Offshore Investment Bonds

An Investment Bond is a tax-efficient investment wrapper that allows parents to save and invest to pay for private school fees. An Investment Bond invests in a range of assets, such as stocks, shares, bonds, and funds. You can invest a lump sum or make regular contributions.

During the term of the investment, returns earned within the bond are not subject to income or capital gains tax (CGT), providing significant tax savings over the long term with the option to draw down up to 5% of your original investment per year on a tax-deferred basis. As the 5% allowance is cumulative, any unused allowance is carried forward for up to 20 years.**

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

**Please note that if the withdrawals taken exceed the growth of the bond, the capital will be eroded.

Unit Trusts and General Investment Accounts (GIAs)

Unit Trusts and General Investments Accounts (GIAs) pool capital from multiple investors into a single fund, which is then invested across various asset classes, such as stocks, bonds, and property. Investors benefit from an annual dividend allowance of £500 in the 2024/25 tax year, and an annual capital gains allowance of £3,000 in the 2024/25 tax year.

Howver, Unit Trusts and GIAs are subject to income tax on any dividends or interests earned, which can reduce the overall tax efficiency of the investment. The tax treatment of these investments can also vary depending on personal circumstances, such as income level and tax bracket.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Gifting Allowance

Under current UK tax law, individuals can give up to £3,000 per year to another person using their annual gifting exemption, including a child or grandchild attending a private school. If you are married or in a civil partnership, you can combine this with your partner’s allowance, resulting in a total annual gifting exemption of up to £6,000 per year.

This offers a tax-efficient way to pay for private school fees. However, financial gifts above £3,000 can be subject to inheritance tax (IHT) if the donor dies within seven years of making the gift. The current nil-rate band for inheritance tax is £325,000 per person.

If a parent has adequate disposable income, this may be utlisied to pay for education costs (including private school fees) under ‘Dispositions for the maintenance of the transferor’s children’ rules.*** A disposition is not a transfer of value for IHT purposes if it is made by one party to a marriage or civil partnership and is both:

– in favour of a child of either party and
– for that child’s maintenance, education or training for a period not ending later than the year ending 5 April in which the child attains the age of 18, or
– after attaining 18, ceases to undergo full-time education

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

***Further criteria applies within the HMRC IHT Manual IHTM04175 which is subject to change.

Scholarships and Bursaries

Many private schools offer means-tested bursaries to help with the cost of tuition. A third of pupils in private education receive means-tested bursaries,3 which can cover up to 100% of fees.

Bursaries are awarded based on financial need, and can be a valuable way for families who may not otherwise be able to afford private school, to access high-quality education for their children. The amount of the bursary awarded is based on a means test, which considers a family’s income, assets, and other relevant factors.

Scholarships are typically awarded based on merit, such as academic or athletic achievement, musical talent, or artistic ability. Scholarships may not cover the full cost of tuition. The proportion of fees covered will depend on the school and the type of scholarship offered.

3 ISC School Fee Assistance, April 2023

Paying in advance

Paying private school fees in advance can be a way to save money on the overall cost of tuition. Many private schools offer discounts to parents who pay tuition fees in advance, with the size of the discount increasing with the size of the advance payment.

However, parents considering paying fees in advance should carefully weigh the potential gains against the risks associated with tying up a significant amount of capital in pre-payment.

Depending on the investment chosen, there may be potential for higher returns than the discount offered for advance payment, but there is also a risk of capital loss.

Navigating a myriad of options

Private school education can provide children with a vital head-start and opportunities that help them to achieve their goals. However, it’s undoubtedly an expensive commitment, and navigating the options for paying private school fees can be complex and daunting.

Many options are available, including tax-efficient investments, bursaries and scholarships, pre-payment of tuition fees, and a range of capital drawdown routes. It’s important to carefully consider your options and obtain expert advice when planning and funding private school fees.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us

Seven Steps To Retire Early

What does retirement look like to you?

Retirement often revolves around relishing life’s simple pleasures or embracing newfound financial freedom for spontaneous pursuits, fulfilling long-held dreams, and ambitions once sidelined by work commitments. This guide outlines seven steps to retire early.

Are you eagerly anticipating retirement, feeling assured that your plans are well-managed? Or do you harbour unease, wondering if you’ve adequately prepared? Perhaps you aspire to retire early but question if it’s financially viable.

Achieving a comfortable retirement entails no shortcuts, despite prevalent misconceptions suggesting otherwise. It demands diligent planning and strategic decision-making.

38% of working age people are under-saving for retirement, according to a 2023 analysis by the UK Government.1 But how much is that? Research has shown that 77% of savers don’t know how much they’ll need in retirement.2

A £1 million pension pot might sound substantial, but it’s the pension sum many of us will require to sustain our current lifestyle throughout retirement. While it may initially appear daunting, attaining this goal is potentially achievable with the early adoption of prudent financial habits and comprehensive planning strategies.

1 UK Government, March 2023
2 Pensions and Lifetime Savings Association (Based on research involving 249 participants), October 2023

Retire Early: At a glance

  • A couple may need in excess of £59,000 a year to live a ‘comfortable’ retirement, according to the Pensions and Lifetime Savings Association, February 2024.
  • You could get tax relief of up to 45% on pension contributions, if you’re an additional rate taxpayer, meaning a £2,000 contribution has a net cost of just £1,100.*
  • For most people the Annual Allowance is £60,000, but this can be tapered to a lower level if you have a high income. However, personal contributions are also limited to 100% of your earnings, up to a maximum of £60,000, in the tax year the contribution is paid.
  • Compounding has the potential to significantly improve the return on your investment, highlighting the importance of starting early.

*On the basis that any tax relief over the basic rate is claimed via your annual tax return and that you have invested the additional tax relief claimed.

Retire Early: How much will it cost?

Research for the Pensions and Lifetime Savings Association shows what kind of lifestyle you could have in retirement.

Source: Pensions and Lifetime Savings Association, February 2024

MinimumModerateComfortable
Single£14,400 a year£31,300 a year£43,100 a year
Couple£22,400 a year£43,100 a year£59,000 a year
Standard of livingCovers your needsMore financial security
and flexibility		More financial freedom
and some luxuries

Why save into a pension?

Savings vehicles like ISAs offer significant flexibility and are effective means to accumulate wealth for the future. However, pensions possess a distinct advantage: tax relief. Individuals under 75 can enjoy a 25% boost on their pension contributions from day one, as everyone receives 20% basic rate tax relief on their pension contributions from the government.

Moreover, higher or additional rate taxpayers may be eligible for additional tax relief through their annual tax returns. Additionally, any growth within a pension is exempt from Income Tax and Capital Gains Tax, providing further enhancement to your retirement fund.

Because of the favourable tax treatment of pensions, they can be an effective method to retire early.

IMPORTANT UPDATE: IT WAS ANNOUNCED ON 30 OCTOBER 2024, THAT PENSIONS WILL BEGIN TO FALL INSIDE YOUR ESTATE FOR INHERITANCE TAX (IHT) PURPOSES FROM THE 2027/28 TAX YEAR. THIS ARTICLE WILL BE UPDATED ACCORDINGLY, AS SOON AS IS FEASIBLE.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

How much does each £2,000 contribution cost you?

Contributing £2,000 monthly into your pension could be more attainable than you realise, largely due to tax relief on your contributions. This estimate is predicated on the presumption that contributions are eligible and that any amount exceeding the basic rate of tax is reclaimed through your annual tax return and subsequently allocated to your pension.

retire early

How much can I pay into a pension?

For most individuals the tax benefits on pension contributions is typically limited to £60,000 per tax year. This include contributions from you, your employer, any third party as well as the tax relief added by the provider. The contributions you make are also limited to 100% of your earnings in the tax year they are paid.

Your Pension Annual Allowance may be tapered if you are a high earner – read more here.

Seven top tips for boosting your retirement fund to help retire early

1. Start early

It’s undeniably tempting to prioritise immediate financial objectives and rewards, especially when retirement may seem distant.

You might find yourself thinking that you’ll start saving for the future “when I can afford to” or “when I’m earning more money.” However, adopting this mindset carries the risk of procrastination and potentially leaving it too late to prepare to retire early adequately.

The crux of attaining a comfortable retirement lies in saving as much as possible, as early as possible. By embracing this approach, you lay a solid foundation for securing your financial future and ensuring peace of mind during retirement. Starting early could also help you to retire early.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

2. Maximise the use of your Pension Annual Allowance

For most people, contributions are limited to the £60,000 annual allowance. This includes any employer contributions and tax relief applied to your personal contributions. Tax relief on your personal contributions is also limited to the level of your relevant earnings in the tax year, or £3,600 if earnings are lower than this.

To capitalise on their annual pension allowance, an individual with a gross annual income of £200,000 could make a gross monthly pension contribution of up to £5,000.   As an additional rate taxpayer, the tax relief at 45% on these contributions amounts to £2,250 per month.  Their net contribution after allowing for the tax relief is therefore £2,750, equivalent of 16.5% of their gross earnings. This does not factor in any employer contributions that the individual might benefit from.

Starting at 35, investing £5,000 each month, the employee could expect their pension pot to be worth approx. £2,520,000 by the time they reach 55.

Please note that you can currently access your personal pension at 55 but this is increasing to 57 in 2028.

If they started at 45, the pot would be worth approx. £861,000 a decade later.

Based on £5,000 invested each month, increasing 2.5% a year: return 5% a year, compounded monthly, after charges. These figures are only examples and are not guaranteed – they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

3. Give your money time to work

Initiating saving sooner enables your money to remain invested for a longer duration, significantly enhancing the prospects of its growth. This phenomenon is propelled by the power of compound investing, where regularly investing money allows the returns generated to compound over time.

Compound investing serves as a potent tool, wherein the returns you earn have the potential to generate additional returns. Over time, this compounding effect can yield substantial gains, irrespective of the fluctuations in financial markets.

It is also important to consider leaving your pension untouched for as long as possible, even if you wish to retire early, if you have other sources of income or assets.e

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

4. Increase your contributions whenever you can

After initiating contributions to a pension plan, it’s essential to periodically assess and adjust your contribution levels. Simply allowing it to persist at a lower contribution rate may not align with your retirement objectives, or help you to retire early.

Whenever you receive a pay increase, contemplate raising your pension contribution by a corresponding percentage. Even a minor uptick can yield substantial benefits over the long term. Additionally, consider investing bonuses or inheritances as a strategic approach to inch closer to your savings target. Making larger, one-time payments can exert a meaningful influence on your retirement fund when invested over several years.

It’s also worth finding out if you have any unused annual allowance from previous years. Subject to certain limits this could enable you to pay in more than £60,000 in one year and still get the tax benefits on the whole amount. You can ‘carry forward’ unused allowances for up to three years. For instance, in the 2024/25 tax year you can use this year’s £60,000 annual allowance, then anything unused from 2023/24 (£60,000), then 2022/23 (£40,000) and finally from 2021/22 (£40,000), up to a theoretical maximum of £200,000 – provided you were a member of a pension scheme during each of those years, and made the relevant earnings.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

5. Don’t dip into your pension if you can help it

You can usually access your pension from age 55 (rising to 57 in 2028). This is when you can take up to 25% tax-free as a lump sum. Many people do, perhaps to pay off their mortgage or make a big-ticket purchase.

However, if feasible, it’s advisable to refrain from accessing your pension for as long as possible, allowing it ample time and potential to grow. Ironically, this may help you to retire early.

Keep in mind that a modern retirement might span 30 years or even longer. This prolonged duration underscores the significance of maintaining your standard of living throughout retirement, which is facilitated by maximising the growth potential of your pension fund.

6. Track down old pensions

Throughout your career, you might work for different employers and accumulate a collection of workplace pensions through various schemes. You may also have some personal pensions, especially if you have been self-employed at any point. You might accumulate several workplace pensions with different employers during your career. Tracking these down may help you to retire early.

It’s not always easy to keep track of your pensions, or for your pension provider to keep track of you. Multiple pension pots from different providers mean you run a much higher risk of losing track of them. House moves are often to blame for this as paperwork is lost and providers not notified.

It adds up to a lot of money. 2.8 million pension pots worth £26.6bn are lost or dormant in the UK.3 That’s money that could be helping people towards a more comfortable retirement. That could include you.

You’ve got a few options for tracking down forgotten pension pots:

Reach out to each former employer with the dates of your employment. They should be able to confirm the pension provider they contributed to for workplace pensions during that period. Ensure you have your National Insurance number handy.

Use the government’s free Pension Tracing Service, which can assist you in finding old employers. Once you obtain their contact information, contact them to request the name of your pension provider and policy number.

If you recall the name of your old pension provider, reach out to them directly. You’ll likely need to provide your name, address, and National Insurance number.

3 Pensions Policy Institute, October 2022

7. Review your Pension Plans

Once you’ve gathered a comprehensive view of your pensions, it’s advisable to seek advice.

Understanding how your accumulated pensions will contribute to your desired retirement is crucial. Evaluate the performance of your investments – are they still suitable for your needs? Identify any restrictions or significant benefits you should be mindful of. It’s possible that adjustments may be necessary, particularly if a pension hasn’t been reviewed for an extended period.

You’ve dedicated considerable effort to earning your money. Taking the time to optimise your pension plans can ensure that all your assets are maximising their potential in preparation for your retirement, and can help you to retire early.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Book a no-obligation review

We’d be delighted to review your existing retirement plans, and wider financial circumstances, to help you retire early, in a tax-efficient way. Book a review with one of our experts today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us

Taking Retirement Income: Tax in Retirement and Drawing Down

Introduction

There’s much greater flexibility when it comes to retirement income these days, but there are also a few traps waiting for the unwary.

It used to be that when you reached retirement, your journey as a pension investor effectively ended. That’s no longer the case, thanks to the 2015 reforms to Defined Contribution (DC) pensions, which have resulted in many people remaining invested during retirement. The process is now much more seamless, and in some cases very little really changes.

But some things do change, and it’s important to be aware of them. Perhaps the most obvious is the way in which you’re taxed once you begin to take an income in retirement. While there are more opportunities for tax-efficiency these days, there are also a few more pitfalls that need to be avoided.

What you need to know

A new tax regime

During your working life you generally didn’t have to think too much about which income would be taxed, because it would usually be your earnings. And you may well be aware that while you can still be charged Income Tax in retirement, you don’t pay National Insurance on investment income or on any earnings after hitting State Pension age.

But the tax situation is suddenly quite different in other ways too. From a tax perspective, you can now control much more about how you take your income and how much tax you pay. You could well have pensions, Cash ISAs, Stocks & Shares ISAs, property, earnings and so on. But how you extract money from that, and use it as income, is treated and taxed differently.

The best course of action won’t always be obvious. For many of those who are deciding where to take an income from once they’ve retired, the starting point will be their pension – but while the first quarter of your DC pension pot can be taken tax-free, people often forget that anything above that 25% will be taxed at your marginal rate. In other words, the way the pension is taxed makes it worth exploring other options.

For example, income from your ISA won’t be taxed, giving you flexibility to take your income from one place and not another, or to have a mix. A lot of people don’t necessarily realise this and they would rely heavily on a pension income that’s taxed, perhaps because they’re not aware of other ways of doing it. This is where an adviser can step in and help you, simply by knowing which levers to pull.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Steering clear of the traps

There’s one failsafe way to ensure you don’t end up paying more tax in retirement than you need to – get pension advice from someone who knows the costly mistakes to avoid.

When you’re approaching retirement, you should speak to an adviser to ensure you’re taking income in the most tax-efficient way, because it is quite different from how you’re taxed when you’re working. This applies to anyone leading up to and entering retirement. And it can be especially pertinent for those reaching retirement with both DC and Defined Benefit (DB, or final salary) pension pots.

That’s because the income from a DB pension will be paid to you whether you want it or not, and it will be taxed. So, it’s important to know which incomes you’re going to get anyway and which incomes you have more flexibility with.

An adviser can help you see the bigger picture and understand which of your assets are subject to which tax regime when you take money out. It’s a time of life when a lot of people want to take lump sums, and there are important decisions to make, so you don’t want to take your eye off the ball at the last minute.

Planning for your retirement can be overwhelming, but Apollo can help you begin the journey of budgeting for your later years. If you’re thinking of starting a pension or would like to review your existing pension plans, it’s a good idea to get advice.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is generally dependent on individual circumstances.

You can also access free impartial pensions guidance from the Pension Wise website, or you can book an appointment over the telephone: 0800 011 397.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Using a Life Cover Insurance Plan Written in Trust to Meet an Inheritance Tax (IHT) Liability

Introduction

Inheritance Tax (IHT) can be tricky to understand, but its impact can mean less money ends up in the pockets of your loved ones. This is even more so the case as pensions will form part of your estate from 2027. A solution could be to write a Life Cover Insurance Plan into Trust.

Tax allowances such as the residence nil-rate band (RNRB) begin to fall away for estates valued in excess of £2 million. In the case of the RNRB, this is tapered by £1 for every £2 an estate exceeds £2 million.

What is a Life Cover Insurance Plan?

Life insurance offers a tax-exempt payout to a chosen beneficiary upon your death.

This insurance comes in two forms; term assurance and whole of life assurance.

Term assurance covers you for a set duration. It is often chosen to safeguard against debts that will diminish or conclude over time, like a mortgage repayment, or to ensure there is a fund available for specific future expenses, such as your children’s education costs.

Whole of life assurance, on the other hand, guarantees a payout at the time of death, as long as the premiums have been consistently paid throughout the policy’s term.

Whole of life policies are generally aimed at addressing financial responsibilities that will arise at your death, regardless of its timing, like covering an inheritance tax bill or enhancing the inheritance you leave behind. These plans are suitable when the need for coverage is indefinite or unclear.

How can a Life Cover Insurance Plan help pay towards an Inheritance Tax (IHT) bill?

Over and above gifting sufficient assets to reduce your gross estate value to within £2 million, if you have excess income during your retirement, it might make sense to consider a Life Cover Insurance Plan written in trust, to meet the eventual IHT liability, which could be as high as £400,000 on an estate valued at £2 million.

It is important that the Life Cover Insurance Plan is written into Trust, and that the premiums are paid using excess income, rather than from assets – otherwise, the premiums paid could be treated as a chargeable lifetime transfer (CLT).

Note that probate is required to release estate assets, and IHT needs to be paid before probate is granted. Therefore, an estate’s assets cannot be directly used to meet IHT liability, and an alternative solution such as life cover in trust provides the funds required.

How much might a Life Cover Insurance Plan cost?

As of February 2024, a guaranteed whole of life joint plan with a sum assured of £400,000 would cost £6,520 per annum, assuming a 65-year-old male non-smoker and 65-year-old female non-smoker insured through Legal & General, and not including ‘waiver of premium’ as an additional option. These figures are based on guaranteed premiums, meaning the provider cannot change the premium as you get older.

Guaranteed whole of life cover provides certainty; if the premiums are paid until death, then the sum assured will pay out. To put the figures in perspective, a 65 year old woman has a life expectancy of 24 years. By the time she is 89, she would have paid around £156,000 in premiums, but the payout from the plan would be £400,000 on second death. If the woman lives to 100, she will have paid £228,000 in premiums, and the payout from the plan would still be £400,000 on second death.

The value of financial advice and Inheritance Tax (IHT) planning

IHT is a highly complex area and very few people know every rule, exemption and allowance, or how to use them.

As your assets increase or decrease in value, your IHT liability will change and regular reviews of your financial position will therefore be important. It’s always a good idea to get in touch with a financial adviser whenever you buy or sell property too, or if you’re thinking of doing so. They can help make sure the choices you make will be tax-efficient for you – and those you leave behind.

Making confident decisions about Inheritance Tax planning while you’re still fit and healthy helps to create a better world for everyone you care about.

Appointing an expert wealth manager may enable you to capitalise on tax efficiencies such as these, mitigating paying unnecessary tax in your retirement and in the event of your death.

The levels and bases of taxation and reliefs from taxation can change at any time.

Tax relief is generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Pensions: Explaining The Tapered Annual Allowance

Introduction

For those earning a high income, it’s essential to understand the implications of the Tapered Annual Allowance on making pension contributions. This guide offers an overview of the tapered annual allowance and its operational mechanism.

Understanding when the Annual Allowance is Tapered

Pension tapering regulates the amount high-earning individuals can contribute to their pensions annually while still receiving the full benefits of tax relief.

For the 2024/25 tax year, the standard annual allowance is set at £60,000. Nonetheless, those earning a higher income may see their allowance reduced to as low as £10,000, based on their total yearly income.

Individuals with a ‘threshold income’ over £200,000 and an ‘adjusted income’ over £260,000 are subject to the tapered annual allowance. The reduction in allowance halts when ‘adjusted income’ exceeds £360,000, setting the annual allowance to a minimal £10,000 for pension savings that receive the full benefit of tax relief.

Broadly, ‘Threshold Income’ includes all taxable income received in the tax year, including rental income, bonuses, dividend, and other taxable benefits.  From this you deduct any personal pension contributions to personal pension scheme.

‘Adjusted income’ includes all taxable income plus any employer pension contributions and most personal contributions to an occupational pension scheme.

Mechanics of the Tapered Annual Allowance

Individuals exceeding both a ‘threshold income’ of £200,000 and ‘adjusted income’ of £260,000 will experience a reduction in their annual allowance by £1 for every £2 exceeding £260,000 in adjusted income.

For instance, an ‘adjusted income’ of £280,000 reduces the annual allowance by £10,000, resulting in a £50,000 allowance instead of £60,000.

Tapered Annual Allowance and Carry Forward

The tapered annual allowance does not prohibit the use of carry forward rules, which permit the transfer of unused annual allowance from the previous three tax years. The tapered allowance for each year determines the amount that can be carried forward.

Employer Contributions and Exceeding the Tapered Annual Allowance

The tapered annual allowance applies to all pension contributions, including those made by employers. Exceeding your annual pension allowance incurs an annual allowance charge at your highest marginal income tax rate.

Calculating Your Tapered Annual Allowance

Determining your adjusted and threshold income can be complex. Additional information on calculating your tapered annual allowance is available on the Government’s website, and consulting an expert Adviser or tax specialist is advisable for tailored planning.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Lifetime Allowance Changes: Carry Forward Pension Allowance up to £200,000

Introduction

In spring 2023, the government took pension savers by surprise, by announcing Lifetime Allowance changes, including the removal of the Lifetime Allowance (LTA) Charge. In the 2023-24 tax year, the tax charge for exceeding the Lifetime Allowance threshold of £1,073,100 (or a higher threshold where LTA protection applies) was effectively removed, and the Lifetime Allowance itself was abolished from 6 April 2024.

The Lifetime Allowance changes are particularly welcome news for those whose pensions were already above the value of the LTA, and who were nearing a benefit crystallisation event – including turning 75 years old, drawing down funds, purchasing an annuity, or indeed upon their death.

Many who stopped making contributions to their pension, will now be considering restarting contributions, including Carry Forward Pension Allowance. If you’ve been a member of a qualifying pension scheme, but haven’t used your annual allowances for 2023/24 (£60,000), 2022/23 (£40,000) or 2021/22 (£40,000), then together with this year’s annual allowance of £60,000, you could kickstart your pension by carrying forward these allowances to make a one-off contribution of up to £200,000.

However, it is critical to remember that from the 2027/28 tax year, pensions will be considered part of one’s Estate for Inheritance Tax (IHT) purposes.

How the Lifetime Allowance changes impact retirement planning and saving

Removing the LTA is designed to keep people in work, and attract people back to the workforce

In the UK, employers are required to contribute to their employees’ pensions at a minimum rate of 3% of qualifying earnings, subject to that employee contributing at least 5% of their qualifying earnings. Over time, it’s a considerable benefit of being employed in the workforce. Previously, as workers’ pension savings had approached the LTA, they were becoming disincentivised to continue working. Now, employees may work longer, and those who had already retired may consider re-joining the workforce, which could lead to greater macroeconomic performance in the UK economy, and potentially lessen the burden on the state to subsidise people’s retirements.

It’s also designed to further incentivise savers, to maximise their pensions before turning to other investment vehicles

While it’s important to note that the Lifetime Allowance Charge might be reintroduced in the future, its removal coincided with the government raising the annual allowance from £40,000 to £60,000 (or 100% of your UK Relevant Earnings, whichever is lowest) with effect from the 2023-24 tax year. The purpose of the LTA had been to cap the tax privileges of pensions. Additional rate taxpayers qualify for income tax relief on pension contributions at up to 45%. If an additional rate taxpayer had opted to use their entire annual allowance at the previous level of £40,000, they would have attracted up to £18,000 in tax relief. With the increased annual allowance of £60,000, they could gain up to £27,000 in tax relief; an additional £9,000 a year. This may incentivise a greater amount of pension saving, subject to the limits on tax relief on pension contributions, before savers turn to other investment vehicles such as ISAs. One option is to Carry Forward Pension Allowance.

The tapered annual allowance may still punish ‘late savers’

Despite the removal of the LTA charge benefitting many savers, the complex tapered annual allowance (TAA) remains for those with threshold income in excess of £200,000 and adjusted income in excess of £260,000 who will see their annual allowance (the maximum they may save into their pension that tax year and still benefit from tax relief) taper down (to a minimum of £10,000) by £1, for every £2 their adjusted income exceeds £260,000.

It doesn’t leave out those who took out fixed lifetime allowance protection

In 2012, 2014 and 2016, some pension savers had the opportunity to take out fixed protection against the falling Lifetime Allowance. Each form of fixed protection allows the claimant to retain the level of Lifetime Allowance that was available immediately before the reduction (£1.8 million, £1.5 million and £1.25 million respectively). As a result, those claimants have not made pension contributions for several years in order to preserve their protection.

With these Lifetime Allowance changes, claimants are likely to want to restart pension contributions. This would previously have automatically resulted in the fixed protection being lost and would have resulted in their maximum tax-free cash dropping to the current level of £268,275.

However, HMRC has since confirmed that, as long as fixed protection had been registered before 15 March 2023, the protections cannot be lost. They can therefore restart their contributions without renouncing their bigger tax-free lump sums.

What next?

If over the last few years, you had elected to cease making pension contributions, as the value of your pension crept above £1 million; then the Lifetime Allowance changes may represent a unique and valuable opportunity to significantly boost your retirement savings.

Assuming, as a member of a qualifying pension scheme, you have not used any of your annual allowances from the tax years 2021/22, 2022/23, 2023/24, and the current tax year 2024/25, you could make contributions amounting to up to £200,000 before 6 April 2025 – provided you are not subject to tapering in any of those years. This is via Carry Forward Pension Allowance.

The net cost of each £1,000 contribution could be as little as £550.

That’s because you’ll receive automatic basic rate tax relief of 20%, and an additional rate taxpayer may claim a further 25% tax relief via their tax return.

And, because of the gradual loss of your personal allowance for income between £100,000 and £125,140 resulting in an effective 60% tax trap, you could gain even more if restoring your full personal allowance.

However, it is critical to remember that from the 2027/28 tax year, pensions will be considered part of one’s Estate for Inheritance Tax (IHT) purposes.

There are a number of factors that may cause different results in individual circumstances, which is why it’s important to seek professional advice from an expert adviser, to help you maximise the amount you can contribute to your pension and benefit from tax relief on this year.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time.

The value of any tax relief is dependent on individual circumstances.

Any tax relief over the basic rate is claimed via your annual tax return.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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