Every year each individual is allocated a number of different allowances so far as taxation, savings and investments are concerned. When assisting individuals, we can often use these tax reliefs and allowances as part of the overall process of financial planning.
We’re just six weeks away from the end of the current tax year and start of a new one, meaning the countdown is on to make the best use of tax breaks and allowances available.
Here we provide 10 tips on how to make best use of your allowances before 6th April 2018.
- Maximise annual pension allowance. The annual allowance for most individuals contributing to a personal pension is £40,000. With the cost of living rising and people having a tendency to vastly underestimate how much they will need in retirement, making the most of the allowable pension contribution (which also includes any contributions made by your employer) could make a significant difference to your pension pot when you decide to retire.
- Take note of carry forward rules. It is worth noting that carry forward rules allow unused allowances from the past three years to be utilised – a tactic that can help you pay in over and above the annual allowance in a certain year should you have the funds to do so. This is particularly relevant to those approaching the end of their working lives as they will have less time left to accumulate funds.
- Make the most of higher rate relief. Any individuals earning over and above £45,000 which is the basic rate threshold of £33,500 plus the full personal allowance (11,500 for the current tax year 2017/18) will be afforded additional rate relief when making personal pension contributions. It is not clear how much longer these reliefs will be available, so additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 45%, 40% or even 60%.
- Sacrifice bonus for a pension contribution. If you usually receive an annual bonus, it could be worth speaking to your employer about sacrificing this in favour of an additional pension contribution. Depending on the size of the bonus, taking this approach could result in significant NI contribution savings for both employer and employee. Which could also be added to the pot, further enhancing your pension savings.
- Use ISA allowance. ISAs offer savers valuable protection from income tax and Capital Gains Tax (CGT) and the annual ISA allowance is on a use it or lose it basis. It is therefore worth considering maximising ISA contributions to the annual limit, currently £20,000 per annum. We now have some clients with significant fund values which can provide a valuable source of tax free income in retirement.
- Recover child benefit. Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once their income exceeds £60,000. A pension contribution will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
- Regain personal allowance. Since 2010, individuals earning in excess of £100,000 per annum have been subject to a tapering of their personal allowance – £11,500 in the current tax year – which reduces by £1 for every £2 that their adjusted net income rises above £100,000. If your earnings are between £100,000 and £123,000, it is worth considering making additional pension contributions, ideally to bring your ‘taxable income’ below the £100,000 threshold, therefore allowing you to regain your full annual tax free personal allowance. This type of planning can result in an effective rate of income tax relief of up to 60%, meaning the net cost of a £23,000 pension contribution could be as little as £9,200.
- Review how you structure remuneration as a Director. Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package and is often of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so. Pension contributions also provide an opportunity to extract value from your business over time and help to reduce your exposure to creditor and business risk.
- Avoid annual allowance tapering. If you are a higher earner (over £150,000) you may be aware that the annual amount you are able to pay into your pension may now be liable to tapering. Every £2 of ‘adjusted income’ received over and above £150,000 results in a £1 reduction in your annual pension allowance, until their allowance drops to £10,000. If you have unused pension allowances from the previous 3 years, you may be able to carry these forward and make a personal pension contribution to reduce or remove the impact of allowance tapering.
- Pay employer contributions before corporation tax relief reduces. Another one for business owners – there are plans for Corporation tax, which currently stands at 19%, to reduce to 17% by 2020. Companies may want to consider bringing forward pension funding plans in order to benefit from the current rate of tax relief before the reduction.
Even if you’re just able to do one or two of these things, you’ll be in a better position in the long run.
For further help or advice specific to your circumstances, please get in touch with us and one of our financial advisers will be able to assist.
NB: The Financial Conduct Authority does not regulate tax planning.