The Value of Advice: pt 4

This is the fourth in a series of articles where we explain how good financial planning and advice adds value.

Here at Clear Vision FP we are slightly obsessed with ensuring we add value to our clients affairs. However, I appreciate it isn’t always clear what value a good financial planner can add. In my view, there are six key areas that the added value falls under. These are…

  1. Setting and achieving goals;
  2. Investment management;
  3. Efficiencies – cost savings;
  4. Tax planning;
  5. Behavioural coaching;
  6. The ‘other’ stuff.

Today we will be focusing on tax planning and how that can add value.

Tax Planning

This is often seen as one of the more obvious areas that a financial planner can add value in. The title of tax planning encompasses lots of things. This can include using allowances, making the most of existing tax reliefs as well as more aggressive tax avoidance.

But how much value can be added? The answer to this question is, it depends on your situation! Lets look at a couple of examples…

Business Owner – Pension Contributions
Let’s assume that you run a successful and profitable business. After going through the full financial planning process it is identified that in order to meet your goals and make your finances more efficient, you should maximise pension savings. However, you pay yourself a small salary and a large dividend. As a result, personal pension contributions are limited to the amount you pay yourself as a salary.However, assuming you have the profit spare, you can pay a large company pension contribution. You decide to pay in £40,000. Because the employer contributions count as an allowable business expense, the company could save up to £7,600 in corporation tax.

Large Pension Savings – Lifetime Allowance
Let’s assume you have a large pension pot. As long as you haven’t paid in any contributions since April 2016, we can help you to apply for Fixed Protection 2016 to increase your lifetime allowance to £1.25 million as opposed to accepting the current lifetime allowance of £1.03 million. This could potentially save you up to £55,000in tax charges.

Building up ISA’s
You are building up an investment pot. If you take advice and make sure ISA’s are maximised you could save yourself paying income tax on dividends as well as capital gains tax when selling funds. This can contribute to a tax efficient income stream in retirement. For example, if a portfolio of £100,000 achieves net growth of 5% per annum for 5 years the total portfolio value would be £127,628. If the portfolio then needed to be switched around or sold for some reason, the capital gains tax payable would be £1,592; assuming it all falls into basic rate tax. If it fell into higher rate tax, the amount payable would be £4,459. This doesn’t even mention the tax payable on the dividends payable each and every year. If the same portfolio were held in an ISA wrapper, there would be zero tax payable.

There are lots of tax saving measures, sometimes the tax savings are large and immediate, whereas others are incremental and build up over time. Either way, working with a good financial planner can lead to serious tax savings. This makes reaching your financial goals much easier, and makes the benefits of using a financial planner very visible and tangible.

As a final word of warning, don’t be sucked into using aggressive tax planning tactics. I very rarely see these work in the long-term.

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