8th February 2018 at 10:00am
As we head towards the end of this tax year at midnight on 5 April 2018, here are our top tips to help you keep a step ahead and get your savings in shape. It’s not financial advice, just some things to consider.
It might seem obvious, but give yourself enough time to understand and make the most of your pension tax benefits, this year’s tax allowances and top up tax-efficient savings such as your ISA by 5 April if you can.
This year it’s the Thursday after the Easter weekend, which is a busy time of year for many people.
Some people do get the dates mixed up or you might be off on holiday, and miss out. Do it online and you’ve got a few more hours extra that evening before the next tax year starts.
Make the most of pension tax benefits
Your pension is a tax-efficient way to save for your future and saving more before the tax-year end on 5 April could be great way to build up your savings and manage your tax.
If you’re a higher or additional-rate taxpayer it could make sense to make the most of the 40 or 45% tax relief you can get on your pension contributions. Just make sure you claim the tax back from HMRC if you need to.
If you’re topping up your pension, it’s usually easier and you can save time by doing it online. You can use our App to check how much you’ve paid in this tax year and how much more you can pay in.
Read more on this in our guide to pension tax relief.
Top up your pension to make the most of your annual allowance
You can normally contribute as much as you earn each year into your pensions, up to the annual allowance of £40,000. If your income is more than £150,000, your allowance tapers off and reaches £10,000 by the time you earn £210,000 a year. Save more than your allowance and you could face a tax charge designed to claw back your tax relief.
However, if you haven’t used any annual allowance in the last three tax years, you could pay more into your pension by ‘carrying forward’ what you have left.
If you’ve started to take your pension savings: Things are different when you start to take your pension savings and you’ve taken more than your tax-free cash allowance – normally 25% of your savings.
You get the Money Purchase Annual Allowance, which is £4,000 a year, and you won’t be able to carry forward any allowances from the past three years. If you just take your tax-free cash, and don’t touch your pension income, you’ll keep the full £40,000 allowance.
Make the most of a bonus – pay it into your pension
Spring is typically when many companies pay bonuses to their employees. Around £24.5bn was paid out in bonuses in the UK between December and March last year alone, according to ONS.
If you’re lucky enough to get a bonus from your employer, tax and NI is taken off. However, save some or all if it into your pension and these don’t apply, allowing you to save more and benefit when it comes to tax.
So if you’re a higher-rate taxpayer who gets a £10,000 bonus, for example, you could choose to save all of it into your pension, free of tax and National Insurance.
Take it as a payment and you’d get around £5,800 after 40% tax and National Insurance.
There are things to think about if you’re considering this, including how much money you’re paying in and whether this would take you over your annual allowance. And whether you might need the bonus for other things.
Pay into your pension and you could get your tax-free Personal Allowance back
When your taxable income reaches £100,000, tax rules mean you start to lose your £11,500 tax-free Personal Allowance (that’s for the 2017-18 tax year; it’s £11,850 for the 2018-19 tax year).
After £100,000, your Personal Allowance drops by £1 for every £2 of your income and you don’t get any tax-free Personal Allowance when your income reaches £123,000.
There is a way you can get it back. If your income is in this range, making pension contributions can reduce your taxable income, giving you some or all of your Personal Allowance back.
As a higher-rate taxpayer you’d benefit from 40% tax relief on what you pay in, and you save tax by keeping your tax free allowance.
How paying into your pension could get your child benefit back
Worth over £2,500 a year to a family with three children, child benefit is reduced by a tax charge when one parent’s income reaches £50,000 – and it stops at £60,000.
But paying into your pension could mean you get it back, and save more for your future.
Making a pension contribution reduces what’s counted as your income. So, paying more in to your pension – or move pension saving from the parent who earns less to the higher-earning partner – could cut the tax charge. You might even get your full child benefit back.
Find out more about the High Income Child Benefit Charge.
Remember, a pension is an investment. Your savings are invested, which means that they have the opportunity to grow over time. As with all investments, the value can go down as well as up, and you could get back less than you paid in.
It’s important to note that laws and tax rules may change in the future and your own personal circumstances will have an impact on tax. The information here is correct in February 2018 and shouldn’t be taken 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.