Financial planning

Boosting your pension and savings before tax year end

Colin Dyer

The 2020/21 tax year ends on 5 April. This blog explains what that means for your pension plan and savings, and how you can make the most of the tax breaks and allowances available.

 

Get ahead of the pack this tax year end

Staying on top of your tax position is important all year round. But with the 2020/21 tax year ending on 5 April, just a few weeks away, it’s a good time to consider if you’ve made the most of this year’s tax allowances and pension tax benefits. If you haven’t, there’s still time for any payments or changes to be processed.

You should bear in mind that tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

Saving into a pension?

Your pension is a tax-efficient way to save for your future thanks to the tax relief on contributions you make to it.
If you’re a higher or additional rate taxpayer, you can benefit from 40% or 45% tax relief on your pension contributions (if you’re in Scotland, income tax rates are slightly different). 

A pension is an investment so its value can go down as well as up, and could be worth less than what was paid in.

The way tax relief is given depends on the type of pension scheme you’re in and how you make payments. In a lot of workplace schemes, your employer deducts your pension contribution from your salary before tax is collected. So there’s no need for you to claim tax relief yourself. But in other schemes you may need to claim the tax relief from HM Revenue and Customs. 

If you’re not sure how your pension plan works, speak to your employer, provider, a financial planner or find out more from the Pensions Advisory Service

You can normally contribute as much as you earn each year into your pension, up to the annual allowance of £40,000 and benefit from tax relief on your contributions. 

However, different rules apply if your income, when added to your employer’s contributions, is more than £240,000, or you’ve already started to take flexible pension benefits.

If you contribute more than your annual allowance then you could face a tax charge designed to take back your tax relief, unless you can use any ‘unused allowance’ from the last three tax years.

Use any unused allowance

The good news is that if you haven’t used all your annual allowance in the last three tax years, you could pay more into your pension plan by ‘carrying forward’ what’s left to make the most of the tax relief on offer.

However, if you’ve started to take your pension benefits in a flexible way and you’ve taken more than your tax-free cash allowance – normally 25% of your pension savings – you can’t carry forward any unused allowances. You will also be subject to the Money Purchase Annual Allowance. This is £4,000 a year.

Get your tax-free Personal Allowance back

When your taxable income reaches £100,000, you start to lose your tax-free Personal Allowance. This is the amount of income you don’t have to pay tax on, which is £12,500 for the 2020/21 tax year.

After £100,000, your Personal Allowance drops by £1 for every £2 of your income, and you don’t get any Personal Allowance once your income reaches £125,000.

But there is a way you can get it back if your income is in this range. Making pension contributions can reduce your income for Personal Allowance purposes, giving you some or all of your allowance back.

As a higher rate taxpayer, for example, you could benefit from 40% tax relief on what you pay in, and save tax by keeping your tax-free Personal Allowance.

Pay your bonus into your pension and save tax

If you’re lucky enough to get a bonus from your employer then choosing to pay it into your pension plan means you could save on the tax and even NI (National Insurance) payments which you would otherwise pay, if taking it as part of your income.

It can be a tax-efficient way to boost your pension savings and could make your bonus work harder for you.

If you’re considering this, check whether it would take you over your pension Lifetime Allowance or your Annual Allowance as you could face a tax charge. And if you’re unsure, speak to a Financial Planner.

Top up your tax-efficient savings

Finally, the ISA (individual savings account) is an important consideration at the end of the tax year. Unlike your Annual Allowance there’s no ‘carry forward’ available. So it's worthwhile considering using up the £20,000 allowance for this current tax year.

You don’t pay tax on any interest earned in a Cash ISA or any potential investment growth from a Stocks & Shares ISA.

And if you want to save for your children or grandchildren, they get their own Junior ISA allowance of £9,000.

With both Stocks & Shares ISAs and pension plans your savings are invested, which means that they have the opportunity to grow over time. But as these are investments, the value can go down as well as up, and could be worth less than what was paid in.

If you need help building or reviewing your own financial plan, please get in touch with us, we’d love to hear from you.

Important information

The information in this blog should not be regarded as financial advice. If you’re in any doubt about your options, you may wish to speak to a financial adviser. There will likely be a cost for this. Tax rules and legislation can change. All information is based on our understanding in February 2021.

1825 accepts no responsibility for information on external websites. These are provided for general information.