28 Feb 2025
Investment: Tax Year End planning
The UK personal tax year runs from 6th April to 5th of April the following year. In each tax year there are a number of things you should ensure that you’re doing. These include, where possible, maximising ISA contributions, pension contributions, and optimising your taxable income level in a given tax year.
ISA Contributions
Contributions to your ISA are capped at £20,000 per person, per tax year. This can be utilised to invest in either cash (earning your interest tax-free) or stocks and shares (where investment income and also gains on sale are both tax-free inside the ISA).
Importantly, some platforms operate ‘flexible’ ISA accounts where you can add back in any amounts withdrawn during the year as long as you do so before the tax year end cut-off (potentially including any fees or costs and charges paid from the ISA). Note that in practice quite a few platforms have an internal cut-off in advance of the first week of April to avoid their system crashing or transactions being mismatched or funds delayed in arrival to the account.
The type of ISA account and the choice of underlying investments need to be aligned to your goals and time-horizons for the funds. Having an over-arching financial plan in place makes it much easier to decide what to do, and why.
Pension Contributions
Similarly, the contributions you can make to your pension each year that are limited – in this case, to the total of your pensionable income, capped at £60,000 per annum.
These limits apply to the gross amount contributed, so you need to factor in:
- Any top-up from the government received for contributions made from net income or surplus personal funds
- Employer pension contributions should be taken into account, including deemed contributions relating to final salary pension schemes*
- Not all forms of income are pensionable – for example property rental income is not pensionable and doesn’t count towards your total income for pension contributions.
*Accurately pinpointing employer contributions can be very tricky for NHS workers for example, whose pension scheme is quite simply awful at providing information in a timely and clear fashion. Getting your pension contribution wrong can be a costly mistake, so if you’re not sure, get support with calculating how much more you could put in.
Optimising Your Income
For those who’ve been fortunate enough to be awarded a bonus, this can bring with it considerations around tax implications. Most infamous is the so-called “60% tax trap” in which a bonus or salary increase that takes your income above £100k, can potentially lead to you paying a marginal tax rate of 60% on the added income as a result of loss of the personal allowance. In these circumstances, you end up with only £40 of every £100 earned over £100k going into your pocket. This earnings level can also have substantial impacts on eligibility for 30 hours state-funded childcare eligibility, potentially costing far more than any bonus earned.
A carefully thought-through strategy for pension contributions, including potentially salary sacrifice arrangements with your employer (bearing in mind that this can affect the size of mortgage you’re eligible for), can potentially avoid this and other tax surprises.
The tax benefits of pension contributions are amplified for those earning more than the basic rate income level of £50,270. Any pension contributions made by those who might suffer tax at the rate of 40% or even 45% are doubly rewarded: not only are after-tax contributions to personal pensions topped up by 25% – the only investment scheme out there that automatically increases your investment value when you contribute – but as part of your tax return, pension contributions will extend your basic rate band, typically qualifying you for tax rebates.
For example, a person earning £150k who decides to make gross pension contributions of £25k, will only need to put in £20k of their after-tax earnings, the final £5k will be added by the government. In addition, they’ll be eligible to claim back up to an extra £6,243 via their self-assessment tax return – meaning that their pension contribution could actually cost them as little as £13,757. In a future newsletter, we’ll explore the wonders of pension tax relief further.
For business owners there are a further considerations around optimising income between the firm and your personal take-home rewards. This can include smoothing dividend payments across different tax years to avoid excessive personal income taxes, as well as the company paying pension contributions to directors as an expense of the business (thereby reducing corporation tax payable). Where someone runs several businesses or has a salaried aspect as well as a consultancy aspect (for example NHS specialists with both public and private work) it can also make sense for the business to retain profits and invest these, looking to distribute out the capital at a later stage when the owner’s income profile has changed. If you own a business and would like to discuss any of this further, get in touch for a more in-depth exploration of these issues.
So what now?
Most tax planning questions are best handled as a collaborative three-way conversation between you, your accountant or tax practitioner, and your financial planner – to ensure that different perspectives are carefully considered and options aren’t forgotten.
Generally it’s best to start tax planning and investing in tax-effective ways as early as possible after the 6th of April – thereby extending tax savings and giving your funds more time invested in the market. But fear not, there is still good time now to act before the end of the current 2024-25 tax year.
If you want to discuss this more click here to get in touch
https://calendly.com/duncan-bw-hoebridgewealth/30min
Note: Equity investments do not afford the same capital security as deposit accounts. Your capital is at risk.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
None of the above is financial or investment advice and you should speak to me or someone else professionally qualified to give you advice specifically tailored to your circumstances.