Tax breaks don’t come much better than this
If it's tax breaks you're after, stick your money in your pension, says Merryn Somerset Webb.
Everyone who owns anything that could conceivably be the target of a new tax breathed a huge sigh of relief on Friday morning. Unless they live in Scotland, they can, they think, now look forward to five years of hanging on to the bulk of their own money. But we should be wary of thinking that five more years of the Conservatives means five low-tax years.
Not only do the Tories say they will clampdown on tax evasion (which is not legal, and so is a perfectly legitimate target) and tax avoidance (which is legal), but the UK's public finances are in just as much of a mess today as they were this time last week which suggests that some taxes will rise.
All this makes it more vital than ever that we use the tax allowances we still have as efficiently as possible. The best way to do this? Now that we know we have a new Tory government, and can be sure their new pensions freedoms will stay with us, it is definitely pensions. Don't like paying income tax and national insurance (NI)? The answer is pensions. Don't like capital gains tax (CGT) and dividend tax? Pensions. Don't like inheritance tax (IHT)? Pensions again.
Right now you can put £40,000 a year into a pension. Any basic-rate tax already paid on the money will automatically be credited to your pension. The rest will come back to you via self-assessment. So that's income tax dealt with. That money will then roll up entirely free of CGT and dividend tax until you need it, at which point you can take out 25% of the cash without any other tax due. That bit has gone in 100% tax free and come out 100% tax free.
There's more. If you die before 70, it all goes to your heirs IHT free. If you die after 70 it also goes to your heirs IHT free, with the caveat that they have to pay their marginal rate of income tax on it if they withdraw money with IHT at 40% and basic-rate tax 20%, that's still a great deal.
Add in the IHT allowance of £650,000 (£325,000 for each partner) and the new Conservative idea that there should be an extra allowance of £350,000 for the "family home" (£175,000 each) and it should soon be possible for a careful couple to keep £2,900,000 out of the IHT net. How about that?
Pensions aren't perfect. We've written about our strong objections to the life-time allowance (the sum you can have in your pension on retiring before you have to pay extra tax at 55% on the excess), which the last government planned tocut to £1m. And we're wary of Toryplans to slash the amount those earning over £150,000 can put in their pensions. Even so, tax breaks don't get much better than this.