FREQUENTLY ASKED QUESTIONS

Income Tax is levied on earnings derived from sources such as employment or pensions. The majority of individuals benefit from a tax-free personal allowance, currently set at £12,500. Income exceeding this threshold is taxed at varying rates: 20% for income between £12,501 and £50,000, 40% for income between £50,001 and £150,000, and 45% for income above £150,000. In Scotland, there are five distinct tax bands, with rates ranging from 19% to 46%.

Capital Gains Tax is levied on the profit made when you sell or otherwise dispose of an asset that has appreciated in value. This includes gifting or exchanging the asset. Each individual is entitled to a tax-free allowance of £12,000, with profits below this threshold exempt from taxation. The applicable tax rate is 10% or 20%, contingent on whether you are a basic-rate or higher-rate Income Tax payer. For residential property gains, these rates increase to 18% and 28%, respectively.

An Individual Savings Account (ISA) serves as a straightforward and widely-used option for tax-free saving and investment. Funds within an ISA are exempt from both Income Tax and Capital Gains Tax. However, there is an annual contribution limit, currently set at £20,000, to balance these tax advantages.

Everybody receives an annual allowance for dividend income received from shares held outside an ISA. The dividend allowance is currently £2,000. Any dividend income above this amount will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

Venture Capital Trusts (VCTs) are ‘pooled’ funds that invest in smaller and younger companies. VCTs are high risk as these companies can struggle and fail, and their shares can also be difficult to sell. To offset these risks, VCTs offer tax benefits. These include a 30% Income Tax rebate on investments up to £200,000 each tax year, but only if you have paid the amount of tax being rebated and stay invested in the VCT for a minimum of five years.

The Enterprise Investment Scheme (EIS) allows direct investment into small, unquoted companies (those that are not listed on the London Stock Exchange). Similarly to VCTs, EIS offers a 30% Income Tax rebate on investments up to £1 million. However, you must have paid the amount of tax being rebated and hold the shares for at least three years.

The Seed Enterprise Investment Scheme (SEIS) is similar to EIS, and encourages direct investment into start-ups. However, the tax benefits are more generous than EIS as these companies are younger and may not have fully developed a product or service yet. You receive a 50% Income Tax rebate on investments up to £100,000 as long as you have paid the amount of tax being rebated and stay invested for at least three years.

Inheritance Tax is usually charged at 40%. The charge drops to 36% if you give at least 10% of your estate away to charity when you die.

The nil rate band is your personal allowance that is free from Inheritance Tax. It is currently £325,000 per person. Any unused allowance can be transferred between married couples and civil partners when one spouse dies.

Gifts that are not immediately tax-free are considered potentially exempt. If you die within seven years of making a potentially exempt gift, it counts as part of your estate and may be subject to Inheritance Tax.

If you made a potentially exempt gift that was bigger than the nil rate band, you could benefit from taper relief (also known as the seven year rule). This gradually reduces the amount of Inheritance Tax that is chargeable over the seven years after you made the gift.

- The annual gifting allowance is £3,000 and you can split this between as many people as you like. If you don’t use it, you can carry it forward one year for a maximum allowance of £6,000 - Gifts to your husband, wife or civil partner are tax-free if their permanent home is in the UK You can make as many small gifts of £250 as you want, but one person can receive no more than £250 - Regular gifts from excess income are tax-free, as long as they won’t affect your normal lifestyle - Gifts to charities, museums, universities, sports clubs and some political parties are tax-free The rules can be complex so it is worth speaking to a financial planner if you have questions about making gifts.

Any money left in your pension when you die does not form part of your estate, meaning it isn’t taken into account when your Inheritance Tax bill is calculated. Taking income from other sources in your retirement means you might be able to reduce the size of your estate (and future Inheritance Tax bill) while passing on your pension to your beneficiaries tax-free.

A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation. On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you or your employer has contributed and how well your pension investments have performed.

Usually you can pay as much as you earn each year into your pension, up to a maximum of £40,000. This is your annual allowance. The allowance reduces for people with more than £150,000 of annual income, down to a minimum of £10,000. This is known as the tapered annual allowance.

For people with income of more than £150,000, the £40,000 annual allowance is cut down. It is reduced by £1 for every £2 of income earned above £150,000 down to a minimum of £10,000 for those with an income of more than £210,000.

Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ unused allowance from the previous three tax years (as long as you have sufficient earnings). You still will receive tax relief on the payments and it can be useful for those affected by the tapered allowance.

The lifetime allowance is the amount you can hold in your pension over your lifetime. The allowance is currently at £1.055 million. Your pension is assessed against the allowance when you take benefits, die or reach age 75. Any excess is taxed at 25% on top of Income Tax if taken as income, or 55% if taken as a lump sum.

Investments in pensions grow free from Income Tax and Capital Gains Tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The taxman will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate tax payers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.

You can normally take up to 25% of your pension tax-free – either as a single lump sum or as a series of smaller withdrawals. You can also take a regular income from your pension by making lump sum withdrawals, buying an annuity or setting up income drawdown.

A defined benefit pension, often referred to as a final salary pension, typically ceases to provide income upon the death of the pension holder or their dependant. Conversely, a defined contribution pension can be transferred to beneficiaries. If the pension holder passes away before reaching the age of 75, the pension is transferred tax-free. For deaths occurring after the age of 75, beneficiaries are subject to their standard Income Tax rate on any withdrawals.

Pensions are generally excluded from your estate and are not subject to Inheritance Tax upon your death. However, any income or lump sum death benefits derived from your pension may be considered part of your estate and could therefore be subject to taxation.