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How you could improve tax efficiency by claiming work-related expenses

Have you considered claiming tax relief on work expenses? It could reduce your tax bill and help your money go further. Read on to find out if you could receive tax relief and how to make a claim.

The rules about what you can claim tax relief on are strict, but it’s worth checking if you could be eligible.

You could make a claim if you use your own money to buy goods or services that are necessary for your job. You must only use these purchases for work unless you can calculate the proportion of use for private and work purposes, which may be complex. You cannot claim tax relief if your employer reimburses costs.

Potential claims will depend on your role and industry. Common claims include the cost of:

• Cleaning, replacing, or repairing a uniform or specialist work-related clothing
• Repairing or replacing small tools
• Professional subscriptions or fees
• Work-related travel that is not your regular commute
• Mileage if you use your private vehicle for work.

If you work from home, you may also be able to claim tax relief on the additional expenses you incur, such as increased utility bills. However, you will usually be “required” to work from home, rather than choosing to do so, to successfully make a claim.

The tax relief you receive will depend on your Income Tax bracket

To claim work-related expenses, you must have paid Income Tax in the tax year you’re claiming for.

HMRC will use your Income Tax bracket to calculate the amount of tax relief you’re entitled to. For example, if you’re a basic-rate taxpayer and make a purchase for £60, you’d be entitled to claim £12 tax relief as your Income Tax rate is 20%. If you’re a higher-rate taxpayer, in the same scenario, you could claim £24 in tax relief as your Income Tax rate is 40%.

When you make a successful claim, HMRC will usually adjust your tax code, so you’ll pay less Income Tax. You can make claims for the last four tax years.

If you intend to claim tax relief for work-related expenses, it’s often a good idea to keep records of your spending.

How to claim tax relief for work-related expenses

To receive the tax relief you’re entitled to, you’ll need to send a claim to HMRC. It is usually straightforward.

If you already complete a tax return, you can include work-related expenses as part of your submission.

For workers that don’t complete a tax return, you can fill in a P87 form. You can do this online or submit a claim through the post. If you want to make claims for multiple tax years, you’ll need to complete a separate form for each year.

You will need to provide your personal details and those of your employer to complete the form. You should then list each expense you’d like to claim relief on.

If you want support, there are specialist tax refund companies. However, they will take a fee from any repayment you receive and, depending on the agreement, could be entitled to other tax returns you receive as well.

There have been cases of scammers targeting victims by claiming they can assist in completing tax relief forms. So, make sure you check the firm is legitimate and carefully read what you’re agreeing to before providing any personal details or signing paperwork, including digital documents.

Contact us to talk about making your finances tax-efficient

Claiming work-related tax relief could help make your finances more tax-efficient. There may be other steps you could take to improve tax efficiency too, such as:

• Using an ISA to save or invest
• Contributing to a pension to invest for your retirement
• Making use of the Marriage Allowance to reduce your Income Tax bill
• Using exemptions to reduce tax when you make a profit selling assets.

As part of a wider financial plan, we could help you understand which tax allowances make sense for your circumstances and goals. Reducing your overall tax bill may help you get more out of your money.

Please contact us to arrange a meeting.

Please note:

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

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

5 powerful reasons to learn more about your pension today

For many people, their pension is a crucial part of their retirement plan. With Pension Awareness 2023 starting on 11 September, it’s the perfect time to learn more about your pension savings.

Despite pensions often being essential for reaching retirement goals, a survey suggests many savers lack pension knowledge and don’t plan to seek support.

According to a report in FTAdviser, 31% of savers either don’t know where to go for retirement advice or won’t accept support. In fact, 26% of over-55s say they won’t seek any support in the run-up to retirement. For some, not seeking advice could place their retirement at risk.

The potential knowledge gap is especially concerning given the current cost of living crisis. Rising prices could hamper people’s ability to save and place pressure on those that have already retired, who may not have planned for a period of high inflation.

Similarly, the Great British Retirement Survey 2022 found 59% of retirees worry about the rising cost of living.

The survey results also suggest people tend to be overoptimistic about their income in retirement and aren’t sure how much they need to save to reach their goals. Not fully understanding your pension or what steps you could take to secure the retirement you want could lead to the next chapter of your life falling short of your expectations.

So, here’s why you should embrace the Pension Awareness campaign to boost your knowledge.

1. Planning for retirement could mean you’re more likely to reach your goals

It’s never too soon to start planning for your retirement. Having a goal in mind and being aware of the steps you need to take to reach it could mean you’re more likely to enjoy the retirement you want.

Without a target for your pension, it can be difficult to understand what income it may provide. According to the Great British Retirement Survey, 6 in 10 pension savers have no idea what their income will be in retirement.

Taking steps to improve your knowledge about your pension now could lead to more financial freedom later in life.

2. You could identify potential gaps in your pension

Analysis from Scottish Widows suggests 1 in 3 Brits could struggle financially in retirement. A third of people are on track to receive a retirement income that means they’re “at risk of not covering their needs”.

Engaging with your pension now could help you identify potential gaps sooner. It could provide you with an opportunity to increase contributions or take other steps to bridge the shortfall. If you spot a gap in your 40s, you may have more options to close it compared to if you didn’t review your pension until you were ready to retire.

3. It could put your mind at ease

Retirement is a big step and you may need to make decisions that could affect your finances for the rest of your life. So, it’s natural to worry about if you have “enough” or how you’d cope if the unexpected happens.

Taking some time to learn more about your pension and seeking support if you need it could provide peace of mind. Tailored financial planning could help you understand the lifestyle your pension will realistically provide and what you can do to improve your financial resilience.

4. You could find ways to get more out of your pension contributions

Often, pension contributions are deducted from your salary automatically. So, you may give little thought to whether you’re getting the most out of your money.

There may be things you can do to boost your pension savings or even reduce how much tax you pay now. For example:

• Are you claiming all the pension tax relief you’re entitled to?
• Would your employer increase their contributions if you put more into your pension?
• Could salary sacrifice schemes reduce your tax liability now?

Learning more about how pensions work and why they could be a useful way to save for retirement may help your savings go further.

5. You may better understand how your pension is invested

Usually, your pension savings are invested. By investing, the aim is that your pension will grow over the long term.

If you’ve not selected how you’d like your contributions to be invested, they will often be in your provider’s default fund. It’s worth taking a look at how your pension is invested and what the other options are. Typically, a pension provider will offer several funds to choose from, with various levels of investment risk.

How you invest your money will have a direct effect on the value of your pension when you retire. So, spending some time understanding how it could help your savings grow to support your goals may be worthwhile.

We can offer you advice about your pension

Retirement advice that’s tailored to you could provide peace of mind when you reach the milestone and help you get the most out of your money. If you’d like to talk about your pension, whether retirement is years away or just around the corner, please contact us to arrange a meeting.

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 results.

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.

Millions of retirees could be overlooking the benefits of annuities, research suggests

The number of retirees choosing an annuity to generate an income is on the rise. Yet, research suggests millions of people may be overlooking the option because they don’t understand how annuities work.

An annuity could provide you with a way to create a guaranteed income throughout retirement. It’s something that you purchase, and it will then pay out a regular income. Given rising inflation and investment volatility over the last couple of years, it’s not surprising that some retirees find annuities to be an attractive option.

According to statistics from the Association of British Insurers (ABI), annuity sales soared by 22% in the first three months of 2023 compared to the same period in 2022.

However, a separate survey indicates some retirees may be disregarding annuities even though it could be an option that’s right for them.

19 million over-50s could be overlooking annuities

A survey conducted by the Financial Services Compensation Scheme (FSCS) found that just 10% of over-50s are willing to take risks with their money. Yet, despite an annuity providing a guaranteed income, just 28% said they either have one or would consider buying one.

Alternatives to annuities could mean your retirement savings are exposed to investment volatility. So, for risk-averse retirees, annuities may be an option to consider. The FSCS estimates that 19 million over-50s could be overlooking annuities.

Annuities could alleviate some of the key concerns those nearing retirement have.

37% of people that are unwilling to take risks say they worry about not having enough money to last the duration of their retirement. A guaranteed income could ease financial concerns for some people and help them enjoy the next chapter of their life.

Misunderstandings may be to blame for some over-50s disregarding annuities.

• 25% of survey participants said they didn’t understand how annuities worked.
• 26% said they worried a provider would go bust. However, UK-regulated insurers are protected by the FSCS, so retirees would usually still receive an income if this happened.

Annuities could form a valuable part of your retirement income, but you need to weigh up the pros and cons to understand what’s right for you.

The pros and cons of annuities you need to know

3 key benefits of annuities

1. They provide a guaranteed income

One of the potential benefits of annuities is that they provide a guaranteed income. So, you may feel less concerned about running out of money in your later years. For some retirees, this could provide peace of mind.

2. It is possible to link your income to inflation

When you’re selecting an annuity, you can choose one that will provide an income that would increase each year in line with inflation. As the cost of living is likely to increase during your retirement, a static income would gradually buy less and less. An income that’s linked to inflation may help preserve your spending power.

3. They could provide an income for your partner

If you’re doing your retirement planning as a couple, you may also choose an annuity that would continue to provide an income after you pass away. It’s a step that may ensure the long-term financial security of both you and your partner.

3 potential drawbacks of annuities

1. They are less flexible than alternative options

Compared to some options, an annuity is less flexible. For instance, if you choose flexi-access drawdown, you could increase or decrease the income you take based on your needs. An annuity will provide a regular income, but if you wanted flexibility, you’d need to use other assets to do this.

2. You wouldn’t benefit from potential investment returns

As you’ll use your savings to purchase an annuity, the money won’t remain invested as it may with other options. While this means you’re not exposed to investment volatility, you also wouldn’t benefit from potential returns either. If growing your wealth is part of your retirement plan, an alternative may be better suited to you.

3. Some annuities may have high fees

Annuities may come with higher fees when compared to alternatives. However, fees can vary between providers, so understanding the potential costs is crucial when you’re weighing up the different options.

A financial plan could help you create a retirement income that suits you

There are several ways to access your pension and you can choose to mix and match the different options. So, understanding your retirement goals and what suits you is crucial. As financial planners, we can work with you to put together a retirement plan that’s right for you.

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. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Investing 101: What you need to know about tax efficiency and your investment options

Investing may provide a useful way to grow your wealth, but getting started can be overwhelming. There are some important decisions to make when investing that could affect the outcomes and the tax you’re liable for, and we’re here to offer support.

Last month, you read about investment risk and what to consider when creating a risk profile. Now, read on to discover what your options are if you’re ready to start investing.

Shares v funds: What’s the difference?

Investing is filled with terms that can seem confusing. When you’ve looked at investing, you may have come across options like investing in shares or through a fund.

You may want to consider both options and understanding the differences is important.

Shares

When you purchase a share, you’re investing in a single company. When you hold a share, you essentially own a very small portion of the business. You can then sell the share at a later date and, hopefully, make a profit.

The value of shares is affected by demand. A whole range of factors can affect demand, from company performance and long-term plans to global economic conditions.

If you purchase shares, you’re in control and can decide which companies to invest in and when to sell them.

It’s normal for the value of shares to fluctuate, even daily. It can be tempting to try and time the market by buying when the price of a share is low and selling when it’s high. However, consistently timing the market is impossible. For most investors, buying shares to hold them for the long term often makes sense.

Funds

A fund pools together your money with that of other investors. This money is then used to purchase shares in a range of companies.

A fund is managed on behalf of investors. So, you wouldn’t make decisions about which companies to invest in or when to buy or sell shares.

There are lots of funds to choose from, so you can select an option that suits your risk profile and goals.

Funds can be a useful way to ensure your investments are diversified. As your money is spread across many companies, it can help create balance. When one company performs poorly, the success of another could balance this out. So, the value of your investment in a fund may be less volatile than individual shares.

However, the value of your investment will still rise and fall, and investing with a long-term plan is often advisable.

2 tax-efficient ways to invest and reduce your potential tax bill

When you sell certain assets and make a profit, you could be liable for Capital Gains Tax (CGT). This includes investments that aren’t held in a tax-efficient wrapper.

For the 2023/24 tax year, individuals can make £6,000 of gains before CGT is due – this is known as the “annual exempt amount”. If profits from the sale of all liable assets exceed this threshold, you could face a CGT bill. In 2024/25, the annual exempt amount will fall to £3,000.

The rate of CGT depends on your other income, but when selling investments, it can be as high as 20%. So, CGT may significantly affect your profits.

The good news is that there are tax-efficient ways to invest that could reduce your bill, including these two:

1. Invest through a Stocks and Shares ISA

ISAs provide a tax-efficient way to save and invest. For the 2023/24 tax year, you can add up to £20,000 to ISAs. The returns made on investments held in a Stocks and Shares ISA are not liable for CGT.

There are many ISAs to choose from. They can hold shares or you can invest in a fund through one. Usually, you can access your investments that are held in an ISA when you choose.

2. Use your pension to invest for the long term

If you’re investing with your long-term wealth in mind, you may want to consider pensions. Pensions are tax-efficient for two reasons.

• First, you could claim tax relief on the contributions you make. This provides a boost to your contributions, which may grow further too, as tax relief would be invested alongside other deposits.
• Second, your investment returns are not liable for CGT when held in a pension. Instead, you could pay Income Tax when you start to access your pension once you reach retirement age.

In 2023/24, you can usually add up to £60,000 (up to 100% of your annual earnings) into a pension while retaining tax relief – this is known as your “Annual Allowance”.

If you are a high earner or have taken an income from your pension already, your Annual Allowance may be lower. Please contact us if you’re not sure how much you can tax-efficiently save into a pension.

Before you start investing in a pension, one key thing to consider is when you’ll want to access the money. Usually, you cannot make withdrawals from your pension until you are 55, rising to 57 in 2028. So, your goals and other assets should play a role in deciding if investing more into a pension is right for you.

Contact us if you have questions about your investment portfolio

We can work with you to create an investment portfolio that suits your risk profile and goals. We’re also on hand to answer any questions you may have, from deciphering financial jargon to explaining tax-efficient options. Please contact us to arrange a meeting to talk about your investments.

Once you’ve set up an investment portfolio, how often should you review the performance? Why is ongoing advice useful? Read our blog next month to learn about managing investments on an ongoing basis.

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 investment 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.

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Retirees, don’t overlook the surprising risk of underspending in retirement

Spending too much money in retirement is a common fear. Yet, some retirees struggle with the opposite challenge – they spend too little. Read on to find out why and what you can do if you’re too frugal in retirement.

Underspending once you give up work may be more common than you think. It’s easy to see why some retirees adopt this approach. As many retirees are responsible for managing their income and ensuring it lasts, there is a real danger of overspending and facing a shortfall in your later years.

In fact, interactive investor’s The Great British Retirement Survey found 40% of retirees worry about running out of money.

However, underspending can be dangerous in a different way. It could mean you don’t get the most out of your retirement despite working hard to achieve financial security later in life.

Striking a balance to sustainably use your assets in retirement is just as much about your mindset as it is about wealth.

Switching from a saving to a spending mindset

One of the key challenges for some retirees is that they need to change how they view and use money when they enter retirement.

For decades, you may have prioritised building your wealth. From adding to an investment portfolio to contributing to a pension, a saving mindset may have been important to reach your goals.

However, many people start to deplete the assets they’ve built up in retirement. Even though you’ve diligently saved so you can use your assets now, it can be difficult to switch to a spending mindset. After all, you may have developed positive saving habits over the years that are difficult to break.

You may also have heard of “rules” about using your wealth that could curb your spending.

Perhaps you’ve read that you shouldn’t withdraw more than 4% each year from your pension. While this may be a useful guide, keep in mind that what is a sustainable income for you will depend on a whole range of factors, from the age you retire to other assets you may have.

So, creating a plan that’s tailored to you can give you the confidence to enjoy your retirement while considering long-term security.

4 reasons why financial planning could help you spend more in retirement

While you may think of financial planning as focusing on growing your wealth, it’s about creating a plan that helps you reach life goals. For some retirees, that plan could be to increase their spending. There are several ways financial planning could help, including:

1. Assessing how long assets need to last

One of the difficulties of knowing how much to spend in retirement is that it’s impossible to know how long your assets need to provide an income.

Considering life expectancy is a key part of a financial plan. This means you can understand what spending is sustainable for you and provide peace of mind if you’re worried about running out of money.

2. Demonstrating how the value of your assets could change

A useful financial planning tool is cashflow forecasting. It can help you visualise how different decisions will affect the value of your assets.

Cashflow forecasting works by inputting information and making certain assumptions, such as estimated investment returns. While the results cannot be guaranteed, it’s an effective way to see the potential outcomes of different scenarios.

So, you could see the effect on your assets if you increased the income you take from your pension by 20% throughout retirement. Or whether you could afford to double your outgoings for three years to tick off bucket list goals, before returning to a lower income.

If you’re frugal in retirement because you’re worried about the long-term effects, cashflow forecasting could demonstrate how your decisions will affect your finances in the short and long term.

3. Creating a reliable income if it’s right for you

Some retirees struggle with the uncertainty of their retirement income. For example, if you use flexi-access drawdown to access your pension, investment returns could affect its value. You may worry about what would happen if the markets experienced a downturn.

There are ways to create a reliable income and some will find this provides peace of mind.

For example, an annuity is something you can purchase, which would then deliver an income for the rest of your life. If you know the income from an annuity will cover your essential expenses, you may feel more comfortable spending other assets on things you enjoy.

What’s appropriate will depend on your circumstances and priorities. You can speak to us about ways you could create a reliable income in retirement.

4. Giving you someone to turn to

Even with a financial plan in place, there may be times when you still need some reassurance. Perhaps you’re not sure if investment volatility will affect your income sustainability. Or you want to withdraw a lump sum to spend on a once-in-a-lifetime experience, but don’t understand how it’ll affect your finances long term.

Once you have a financial plan in place, regular reviews with your financial planner can help you keep it up to date.

Want help understanding your retirement income? Contact us

If you are retired or nearing the milestone and aren’t sure how much you can sustainably spend, please contact us. We’ll help you review your finances and goals to create a plan that reflects your needs.

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.

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