Pensions come with great tax benefits. For a start, investments in your pension are free from Income Tax and Capital Gains Tax. Pension contributions up to your annual allowance will also receive an automatic 20% top-up from the taxman, and higher-rate and additional-rate taxpayers can claim back another 20% or 25% through their Self Assessment.
Pension contributions up to your annual allowance will also receive an automatic top-up from the taxman.
Because of these generous tax rules, there is a limit to the amount you can pay into your pension. Each year you can contribute as much money as you earn, usually up to £40,000 (although this tapers down to £10,000 for higher earners). If you earn enough, you may also be able to make extra contributions by carrying forward any unused allowance from the last three tax years.
ISAs are also free from Income Tax and Capital Gains Tax. The ISA allowance is currently £20,000 – this doesn’t carry over between tax years, so any allowance you don’t use by 5 April will be lost forever. This is why it makes sense to use as much of your allowance as you can afford to each year.
The Government gives you several other allowances for savings held outside pensions and ISAs. You don’t need to do anything to start using these allowances, but if you exceed them you must inform HMRC and may need to complete a Self Assessment.
For example, the Personal Savings Allowance is a tax-free allowance for interest payments. It is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers but doesn’t apply to additional-rate taxpayers. All taxpayers also receive a £2,000 tax-free allowance for dividend income.
If you are married or in a civil partnership, you may be able to save money by structuring your finances as a couple to ensure you are using both spouse’s tax allowances. This could be an especially good idea if one spouse pays tax at a lower rate than the other.
You could save money by structuring your finances as a couple.
For example, one spouse could transfer income-generating investments to the other to use their Income Tax allowance, or transfer ownership of an asset before selling it to use their Capital Gains Tax exemption. In either situation you will need to contact your providers to arrange the transfer of assets, and there may also be paperwork to complete.
The deadline for online tax returns is midnight on 31 January. If you are required to submit a Self Assessment for the 2017/18 tax year, make sure you send it before this date to avoid penalty fines.
If you are a higher-rate or additional-rate taxpayer who can tolerate a high level of investment risk, you could also consider more complex tax-efficient investments such as Venture Capital Trusts (VCTs). These offer generous tax breaks to offset the added risks of investing in smaller, younger and unquoted companies*.
Our financial planners spend their days helping clients to make the most of these tax rules and allowances, and structuring their finances tax-efficiently to ensure they don’t pay more tax than is necessary.
To find out if they could help you, please book a no-obligation consultation at our cost. We can speak to you over the phone or meet you at your home, workplace or nearest Tilney office.
*VCTs should be regarded as higher risk investments. VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change, and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.