Time is running out: tax year end

15th Mar, 2018

By Robert Little

We now have less than 3 weeks until the end of the current tax year, so there is just enough time to make the most of your remaining allowances (if you hurry).

In this post I have summarised some of the key allowances you can take advantage of. Please bear in mind that these options might not be suitable for you, so if you want to discuss this (or any other matter) with one of our financial advisers please visit our Contact us page or call 01642 477758.

In this post:

  1. Personal pension contributions
  2. Lifetime ISA contributions
  3. Inheritance Tax planning
  4. Giving to charity
  5. Pay into an ISA

Personal Pension contributions

If you pay money into a personal pension you can benefit from tax relief. The amount of tax relief you get depends on how much you pay in and how much you earn.

There are limits on how much you can pay in. These limits can get quite complicated for some people (which is covered later in this post), but for most people the rules are quite simple. In a nutshell you can pay in the higher of the following amounts before tax year end:

  1. £3,600 per year
  2. The total amount of your earnings (which includes salary and self-employed earnings but does not include things like pension income, state pension income, dividends or rental income)
  3. £40,000

This can look a bit tricky so I have included some examples below:

  • If you earn a salary of £40,000 per year the maximum you can pay into a pension is £40,000
  • If you earn a salary of £100,000 per year the maximum you can pay into a pension is £40,000 (although if you have been a member of a pension for the last 3 tax years you should be able to pay more than this – this topic is complicated so you should seek advice to find out more)
  • If you earn a salary of £10,000 per year plus dividends of £30,000 per year the maximum you can pay into a pension is £10,000 (because you can only contribute the value of your salary, not your dividends)

Of course, most people can’t afford to pay these amounts into a pension. These amounts are the maximum you can pay in – most people pay in less than this.

Why pay into a pension?

The biggest benefit of paying into a pension is the tax relief you can get. If you want to make a contribution of £100, you only need to pay £80. This is because the other £20 is reclaimed from HMRC and paid into your pension.

If you earn over £45,000 you should get extra tax relief because £45,000 is when you start paying a higher rate of income tax.

For example if you earn a salary of £50,000 you will pay 40% income tax on £5,000 of your salary (the bit between the higher rate limit of £45,000 and your total salary of £50,000). If you pay £80 into a pension HMRC will add £20 (taking your total pension value to £100) and you should get another £20 of tax back. This might be paid to you as a tax refund or HMRC might pay you in instalments by adjusting your tax code.

£20 might not look like much, but if you can afford to contribute more you should get more back. For example if you earn a salary of £50,000 and you can afford to pay £4,000 into a pension HMRC would add £1,000 (taking your total pension value to £5,000), plus you should get a tax refund of £1,000.

What’s the catch?

You can’t take money out of a pension until you are 55 (and this could increase to age 57 – or more – in the future). This means you should only contribute money which you definitely won’t need until this age.

The only way you can get money out of your personal pension before age 55 is if you become terminally ill or if you pass away.

Who benefits most?

The people who can benefit from paying into a personal pension most are those who earn between £100,000 and £123,000. This is because if you earn over £100,000 you start to lose your personal allowance, which is the amount you can earn tax free. You lose your personal allowance at a rate of £1 for every £2 you earn over £100,000 – so if you earn £123,000 (or more) you won’t benefit from a personal allowance.

However if you make a pension contribution you can start to reclaim your personal allowance. For example if you earn £123,000 and you make a pension contribution of £800 you will get back £500 of your personal allowance. This means you will earn £500 of your income tax free plus HMRC will add money to your pension.

Another group of people who can benefit from paying into a personal pension are those who pay a High Income Child Benefit Tax Charge. This normally happens if you earn over £50,000 and you (or your partner) receives Child Benefit. If you make a personal pension contribution you might be able to keep more of the Child Benefit payment, which means you benefit from this money plus the money HMRC will add to your pension fund.

More complicated scenarios

I mentioned earlier that the limits on paying into a pension can be quite complicated for some people. This might affect you if you fall into one of the following categories:

  • You are 75 (or older)
  • You have withdrawn money from a personal pension since April 2015
  • You earn over £110,000

If any of these points apply to you, please seek advice before you contribute to a pension.

Lifetime ISA contributions

I have covered the LISA in more detail on another page, which is available here: Lifetime ISA.

The key facts about the LISA are: if you are under the age of 40 you can open a Lifetime ISA and pay in up to £4,000 each year until you reach the age of 50. For every £1 you pay in, the government will add £0.25. This means if you pay in the maximum of £4,000 the government will add an extra £1,000.

If you withdraw this money before you reach age 60 you will pay a charge of 25%, unless you use it to buy your first home.

The deadline for contributing is the 5th of April, so if you plan to buy a home or if you would like to save for your retirement you should consider paying into a Lifetime ISA before this date.

Inheritance Tax planning

If you expect to pay inheritance tax you can reduce the value of your estate by making gifts.

Each year you can give away £3,000 to anyone and it will immediately leave your estate, so your family won’t pay inheritance tax on this amount. Importantly, you can’t give away £3,000 to your son and £3,000 to your daughter and £3,000 to your grandchild – you can only give away £3,000 once per tax year. If you didn’t give anything last year you can use last year’s allowance and make a gift of up to £6,000 before 5th April (but you can’t go back any further than this).

Some people want to give away more than £3,000. Technically there is no limit on the amount you can give away but if you give away more than £3,000 per year and then pass away within 7 years the value of the gift might still be liable for inheritance tax. Also some types of gifts (primarily gifts to a trust) can lead to an immediate inheritance tax bill.

There are other amounts you can give away (for example you can give away any number of small gifts worth up to £250, but these small gifts can’t be combined to create a single large gift).

Giving to charity

If you earn over £45,000 and you give money to a charity which has registered for the Gift Aid scheme you might get some tax relief. For example if you earn a salary of £50,000 and you give £100 to charity the charity can claim 25% of this (£25) back from the government as Gift Aid. If you tell HMRC that you gave a total of £125 (including Gift Aid) to charity you should get tax relief of £25.

If you have made use of other tax reliefs (such as pension contributions) you might not get the extra tax relief back but the charity should still get the 25% Gift Aid relief.

Pay into an ISA

You can pay a total of £20,000 into an ISA in the current tax year. ISAs are useful because you don’t pay income tax on any interest or dividends earned within the ISA, plus if you select a stocks and shares ISA you don’t have to worry about paying tax on any investment growth.

£20,000 is the overall ISA contribution limit. This can be split between a stocks and shares ISA, a cash ISA, a Lifetime ISA and an Innovative Finance ISA if you wish.

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