Maximising your Pensions and ISAs for the tax year

The tax year is drawing to a close on April 5th, and with this it’s essential to review your financial strategies to make the most of the available allowances and tax reliefs while you can. While ISAs often take centre stage, the impact that optimising your pension contributions can have on your overall finances should not be overlooked when striving for tax-efficiency. In this article we briefly cover how you can maximise your pension and ISAs to avoid paying more tax than you need to.

A summary of some basic tax allowances:

-??????? Personal Allowance = ￡12,570

-??????? Pension/ Annual Allowance = ￡60,000

-??????? ISA Allowance = ￡20,000

-??????? JISA Allowance = ￡9,000

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Your Personal Allowance and the 60% tax trap

Making yourself aware of the basic allowances and how much tax you are subject to is a great starting point. With the Personal Allowance figure for the current tax year at ￡12,570, you will not pay any tax on earnings up to this amount; however, for those who have significant earnings, this is reduced by ￡1 for every ￡2 of income above ￡100,000. Therefore, with income over ￡125,140 your entire earnings are taxable. Keeping this tapered allowance in mind you should also beware of the 60% tax trap.

What is the 60% tax trap and how can you avoid it?

This is a stealthy trap where you are taxed at 60% as a result of the reduction in your personal allowance when you are earning between ￡100,000 and ￡125,140, meaning anyone with income between this amount is subject to tax at a higher rate than usual.

Here’s an example:

If your current income is ￡100,000 and you receive a bonus of ￡10,000.

• The income tax paid on your bonus would amount to ￡4,000 (with a rate of 40%).
• Your personal allowance would decrease by ￡5,000, making it subject to tax at the 40% rate.
• The additional income tax paid due to the tapered personal allowance is ￡2,000 (which is an extra 20% on your tax bill).

At the end you are left with only ￡4,000 keep out of your bonus with a total of 60% being paid in tax…which isn’t ideal for achieving your financial goals.

Your Tax Relief Opportunity:?

• To beat the tax trap, you can pay any additional earnings over ￡100,000 into your pension pot, to help bring your taxable income below the threshold, allowing you to keep your personal allowance and benefit from the additional 40% tax relief on the contribution.?

Using Your Pensions

Pension/ Annual Allowance = ￡60,000

Your pension is one of, the most tax-efficient tool you have easily available to you. You’re able to make contributions up to ￡60,000 annually (or contributions worth up to 100% of earnings) into your pension tax-free. However, it is important to note that the available allowance could be lower if you have a threshold income over ￡200,000 or if you have flexible access to your pension pots.

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The Tax Relief:?

• With your pension you can carry over any allowance that you didn’t use from the last 3 tax years if you utilised your full allowance for the tax year.
• You will also receive tax relief on your pension contributions worth up to 100% of your annual earnings, based on the rate of income tax paid. This means making a contribution of ￡1,000 as a higher-rate income taxpayer, you will only contribute ￡600 and claim the 40% tax relief to receive ￡400. This tax relief is great to help you strive for financial stability when you reach retirement.

With the income tax thresholds frozen and the government introducing tax cuts to help people save more of their earnings, more people are being dragged into paying more tax as their taxable income increases with these decisions. If you haven’t already, consider making use of your pension contributions to help mitigate the impact of this (as your contributions are not subject to income tax), while the money in your pot compounds over time.

Maximising Your ISAs

ISA Allowance = ￡20,000

JISA Allowance = ￡9,000

Alongside pensions, ISAs are another top tax-efficient tool to use when making the most out of your money. For those who invest in stocks and shares (or even those who are just starting out), with an ISA all the earnings you make are exempt from both income tax and capital gains tax, helping to maximise the earning potential of your investments.

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For the current tax year, you will be able to make investments of up to ￡20,000 tax-free. However, it is important to note that you cannot carry your unused allowance into the next tax year…so be sure to make the most out of your allowance before you lose it.

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The Tax Relief:

• ISAs not only offer tax-efficient opportunities, but some flexibility as well, as money can be withdrawn from your ISA at any time without losing your tax benefits.
• You can also transfer your ISA to another provider at any time, allowing you to benefit from the best rate available,
• Lastly, with this you can gift money into your child’s JISA, to remove it from your own estate, which helps to mitigate Inheritance Tax for your loved ones while building your child’s future finances.

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As inflation is still high, the decision to hold all your excess earnings in a Cash ISA may mean the value of your money is decreased in real terms. Yet with a stocks and shares ISA you may benefit from compounding your investment over a long period of time, potentially beating the impact of inflation even with fluctuations in the market. It’s important to find a perfect combination based on your personal finances and goals, and with the help of a Financial Advisor through financial planning you can be put on a path to bettering your finances.

*Please note that returns on your investment are not guaranteed when investing.

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So, how ready are you for tax year-end?

If you don’t know where to start or you want to get ahead of the next tax year with a financial plan in place to help achieve your goals in a tax-efficient manner, reach out to one of our financial advisers at https://www.belvederewm.com/consultation-form