Planning for the End of the Tax Year

I know it’s only February, but it’s amazing how quickly the 5th April comes around! In our blog last month, Charlene talked about the opportunities that are available for sheltering some of your money in tax efficient investments. To make the most of what’s available in the current tax year, contributions need to be made by the 5th April 2024, but I would suggest that the end of March is your deadline to ensure you don’t miss it!

Individual Savings Accounts (ISAs)

Individual Savings Accounts (ISAs) were introduced on 6th April 1999. They have changed a little over the years, including some iterations to assist first time buyers. They are held individually, not jointly, as the name suggests. The main benefits are that they are not subject to income tax or capital gains tax.

There are currently 4 types of ISA:  

• Cash ISA
• Stocks and Shares ISA  
• Lifetime ISA    
• Innovative Finance ISA      

To open or contribute to an ISA, you must be a UK resident or Crown servant, if you don’t live in the UK. For a cash ISA, you must be over 16. For a stocks and shares or innovative finance ISA, you must be over 18. Lifetime ISAs differ slightly in that you must be over 18 and below 40.

You can contribute £20,000 to an ISA in any tax year, which can all be contributed to one type, or split between 2 or more, other than a Lifetime ISA into which the maximum contribution is £4,000.      

If you have savings, it is a good idea to hold them in an ISA to avoid paying tax on the income or growth generated by them.      

Defined Contribution (DC) Pensions      

Defined Contribution Pensions may be known as workplace pensions, occupational DC pensions, personal pensions, SIPPs and SSASs. With these pensions, you will build up a pot of money that is invested to provide you with an income, and sometimes a lump sum, in retirement. You can draw from these pensions from age 55 at present, although this is increasing to 57 in April 2028. Currently, 25% of the fund can be drawn tax free, which may be done as part of your income payments or as a lump sum, series of lump sums or ad hoc lump sums.

If you have a final salary or career average pension, the rules differ. It can be possible to buy “added years” for these pensions. It is best to contact the scheme administrator for your pension in these cases. The increase in benefits to these pensions are classed as contributions towards the annual allowance, which we explain later.      

If you make a personal contribution into a DC scheme, basic rate tax relief will be added, i.e. a contribution of £80 from your bank account will have £20 added as tax relief. Higher rate tax relief will be repaid via your self-assessment. Employer contributions are made gross, i.e. no tax relief is added.      

Contributions into DC pensions are limited in a number of ways. The gross (including basic rate tax relief) maximum personal contribution that can be made in a tax year is the higher of 100% of your earned income or £3,600. This means that contributions of £3,600 gross (£2,880 from your bank account) can be made into a pension even if you do not have any earned income.      

Contributions are also limited by the annual allowance. In the current tax year, the annual allowance is £60,000. This is the limit for all contributions into all of your pensions. However, if you have not fully used the annual allowance in the previous 3 tax years, you may be able to carry these allowances forward. These calculations can be confusing, so it is best to take advice if you plan to make a substantial contribution.      

If you are a high earner, with earned income in excess of £200,000, your annual allowance may be tapered, although the rules around this are complex so it is best to take individual advice if you are in this position.      

If you have previously drawn taxable income from a DC pension, you will be subject to the Money Purchase Annual Allowance, which is £10,000 in the current tax year.      

In order to maximise your contributions to an employer scheme, you should contact your HR department, who should be able to let you know who to speak to. For personal contributions or employer contributions where you own the company, it is best to take advice from a professional financial planner. They will help you to work out how much you can contribute and where to invest your pension.      

Personal Tax Planning      

At Smart Financial, our financial planners are experts in personal tax planning. We can help with your end of tax year arrangements and how they fit in with your plans for the future. ISAs, pensions, and other financial products are the tools to help you to live the life you have always wanted. Your hopes, aspirations and fears will be the primary focus when we first meet, so that we understand what your priorities are and how your money needs to work for you. For a free initial meeting with one of our planners, please email contactus@smartfinancial.co.uk.