Diversifying Tax Risk - RECAP

Diversifying tax risk – The four box approach

Tax planning remains one of the most effective ways advisers can deliver long-term value to clients. In a recent Aberdeen Techzone Webinar, titled "Diversifying tax risk – The four box approach", Tony Davies, Technical Engagement Consultant at Aberdeen, shared practical insights into using multiple investment wrappers to optimise tax efficiency and reduce client risk.

Why Diversifying Tax Risk Matters

Clients face an ever-changing tax landscape, with shifting allowances, income thresholds, and legislation. By spreading investments across various investment wrappers, advisers can help clients:

• Maximise available UK tax allowances, including the personal, savings, and dividend allowances
• Manage exposure to different income tax bands
• Optimise the order in which withdrawals are taxed
• Support goals such as tax-efficient retirement income and legacy planning

This strategic framework, known as the four box approach, offers a resilient and flexible route to long-term financial planning.

Key Areas of Focus for Advisers

Tony Davies emphasised four fundamental factors that shape effective wrapper strategies:

1. Main UK Tax Allowances

These include the personal allowance,  dividend allowance, and savings allowance. These provide critical levers for reducing taxable income when used effectively across different wrappers.

2. Income Tax Bands

Knowing how a client's income interacts with the basic, higher, and additional rate bands is essential. Proper wrapper placement can help manage income flows to keep clients in lower bands where appropriate.

3. Order of Taxation

The sequence in which assets are accessed can significantly affect outcomes. Withdrawals from certain wrappers may trigger tax earlier or in larger amounts, making smart sequencing vital.

4. Maximising Tax Allowances

Leveraging ISAs, pensions, and both onshore and offshore bonds enables advisers to make full use of allowances and create a more tax-efficient strategy for both accumulation and decumulation phases.

Case Study: Tax Management in Practice

The session included a real-world case study that demonstrated how integrating multiple wrappers can help:

• Create a balanced and tax-efficient withdrawal strategy
• Manage income levels and tax exposure across retirement
• Avoid unnecessary tax charges through wrapper blending
• Enable more effective long-term planning, including legacy considerations

The example reinforced how theory translates into practical, tangible results for clients.

Elevating Advice Through Wrapper Strategy

The four box approach is a valuable tool that allows advisers to showcase the impact of well-structured tax planning. It enables more comprehensive, tailored advice that accounts for changing allowances, income patterns, and long-term objectives.

Incorporating these ideas into client conversations can elevate your role as an adviser, especially when supported by tools like Timeline which help visualise cashflows and model tax strategies. For firms looking to modernise their service proposition, Adviser 3.0 provides a blueprint for adopting leading-edge technology and thinking in advice delivery.