Use it or Lose it - Utilise Your Tax Allowances
We’re only weeks away from the end of the tax year. It’s extremely important that you take advantage of any valuable tax reliefs before that date or risk losing them. It’s a case of `use it, or lose it’ and perhaps also thousands of pounds you could have saved.
Here’s our usual annual checklist for you to take a look at, whether you’re still working, or retired.
For those who are working:
If you are still working, maximise your pension allowance as much as you can afford, up to the £40,000 annual limit. The tax relief is incredibly generous and immediately grows your pension in a way that would otherwise take years. If you’re a basic rate taxpayer, the relief is 20%, so the government will add £8,000 to a £32,000 contribution – potentially double that, if you’re a higher rate taxpayer.
If you have unused allowances from the last three years, this is your last chance to use them. Someone who hasn’t paid in anything this year or the previous three could pay in up to £160,000. Rules surrounding this are important so advice is key.
Remember, if you are 55 or are approaching that age, in making these contributions, you’re not putting that money beyond your reach. You can start to access your pension from the age of 55.
If you own your own company, pension contributions made to you by the business as your employer are a highly tax efficient way of extracting profits. It’s extremely useful if you’ve accumulated cash in the business which you want to invest. You will not only save yourself 19% in corporation tax but also benefit from the pension relief.
Under the exchange salary for pension contributions scheme, by mutual agreement with their employer, an employee can exchange some of their remuneration, whether that’s salary or bonus, in return for a larger pension contribution from their employer. This saves on National Insurance that would have been paid by both the employer and employee.
Also, remember your ISA allowance. You can contribute up to £20,000 to your ISA or ISAs in any tax year, but these allowances can’t be carried forward. Again, this is your own personal tax haven, as dividends and capital growth are income tax and capital gains tax free.
If you're retired:
If you’re married, are you and your spouse both making the most of your personal allowances? Tax allowances aren’t transferable and both partners’ should be used to the full. Two people can have a joint income of £25,000 a year tax free, by using both personal income tax allowances.
Couples who are drawing income from their pension funds, can top up the tax free element by using ISAs. Top up investment pots that can provide tax free income.
Remember, if you have reached retirement and have no earned income, you can still contribute to your pension. You could use money from cash deposits, ISAs, investment income or rental growth etc. However you may be limited to £3,600 gross a year.
If you review your affairs, seek advice and take action before the end of this tax year, you can make yourself more financially comfortable in the next tax year.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover.