Personal Finance Clinic Tax Planning Tips

Many of you will be able to take advantage of some tax planning tips to help you keep hold of more of your hard-earned cash. Today, I’m discussing pensions, redundancy and ISAs.

Claim tax relief on pensions

Pensions are a fantastic way to save for retirement because personal contributions receive tax relief. In other words, instead of handing over tax to HMRC, it goes into your own pension pot. For example, if you make a £100 pension contribution, this is topped up to £125 to take account of basic rate tax-relief (20%). If you pay tax at a higher rate, you are entitled to more tax relief.

Crucially, many pension schemes only automatically apply tax relief at the basic rate of tax (20%) so if you know you are paying Income Tax at 40% or 45%, you need to make sure the additional 20% or 25% is being credited to you.

Check with your HR Department to make sure you are getting the correct tax relief. If you are paying into a personal pension separately from work, you need to let HMRC know or there’s a good chance you’re missing out. This can be done via an annual self-assessment, so make sure you record your pension contributions correctly on this. If you don’t complete an annual self-assessment, write to HMRC to claim the tax relief due to you – and you can only go back four tax years for this.

Retiring Soon?

If you are planning to retire in the next couple of years, have you thought about topping up your pension now? Each tax year, most people can contribute the lower of £40,000 a year or 100% of their salary per year (called the Annual Allowance). Perhaps you earn £80,000 a year and, between you and your employer, put in 10% of your salary – or £8,000 a year. At the same time, perhaps you have already paid off your mortgage and have, say, £50,000 in savings. Did you know that you could put £20,000 of those savings into a personal pension, receive a top up of £5,000 into your pension from HMRC straight away (20% relief) and receive the additional 20% of tax relief back via adjustment to your tax code.

You may want to seek advice on this as it’s important your individual position is carefully considered to ensure suitability and do remember that your contribution will be invested and subject to investment risk. Investments can go down as well as up.

Been made redundant?

Be aware that you could contribute some of your redundancy pay to your pension and receive tax relief on this too.

Clearly, if you’ve been made redundant, you need to make sure you have enough money to live on until you find another job, before considering this. For some people, however, it can be a sensible approach, such as if you’ve already got another job lined up, don’t need the redundancy money for anything else and your pension provision is currently lower than you’d like.

Income of more than £150,000, are you aware of the tapering rules?

Individuals with total income, taxed to Income Tax, of £150,000 or more a year need to be aware of the new tapering rules or they could unknowingly end up facing a tax charge. Previously, if you earned £150,000 or more a year, you would be able to contribute £40,000 a year to pensions between yourself and your employer. For some, this has now been reduced right down to just £10,000 a year. For example, imagine your salary, bonus and rental income from letting out a property takes your total income to £210,000. At this level, you are only permitted to contribute £10,000 a year, yet it’s quite feasible you’re contributing much more. Go over your allowance and HMRC will send you a tax bill in due course. If you act now, you may be able to make use of Carry Forward rules, which means carrying forward any unused allowances from previous tax years to offset an overpayment in the current tax year. It is vital this is documented so that you can present it to HMRC.

Individual Savings Accounts (ISAs)

If you haven’t done so already, contribute to your ISA. You can contribute up to £20,000 per person to ISAs per tax year. The beauty of an ISA is that it’s a tax wrapper, which means that any cash or investments held within one of these accounts can grow in value, free of taxation. Over time, you can save a fortune in tax, by holding your investments in ISA accounts, especially if you are able to contribute to it every year.

Most people feel quite comfortable with Cash ISAs, but have you considered opening a Stocks & Shares ISA? If you can invest for at least five years, preferably ten, a Stocks & Shares ISA might be for you, especially if you already have cash savings for a rainy day elsewhere.

Over time, investments in an ISA can really start to build up and some people are now ISA millionaires, saving thousands in tax each year because they hold their investments in this type of account. Plus, when you withdraw money from your ISA, there’s no tax to pay either, so you can use ISA withdrawals to top up taxable income in retirement.

Saving for your first home?

Lifetime ISAs were recently launched to help the under 40s save for their first home. If you think you will want to buy in a few years, you may wish to open a Lifetime ISA now. You can put in a maximum of £4,000 in this tax year and the government will top your contribution up by 25%. So, if you put in £4,000, the government puts in £1,000. There are rules and restrictions with these accounts that you need to be aware of, however.

Lauren Peters, Senior Financial Adviser at Fiducia Wealth Management, is a Chartered Financial Planner. She also holds the Pensions Specialist and Later Life Specialist qualifications. You can contact Lauren directly via [email protected] or via 07850 873126.

This article was also recently published in the Moulsham Times.