End of Year Tax Planning

by John McLaughlin, in ,

Most tax-free allowances and reliefs are available on a “per-tax year basis”. So, as we approach the end of the tax year, it is worthwhile making sure that these have been optimised to assist with reducing UK tax liabilities. This is a quick checklist that every UK taxpayer should review before the new tax year begins on 6th April 2025.

 

1. Pensions

The current annual contribution allowance is £60,000 per year (subject to tapering for high earners). If you are in a fortunate enough position to utilise this full allowance, then you should consider doing this before the tax year ends. There will be a further £60,000 available in the next tax year.

This is more important for high earners who have a tapered allowance and a restriction on how much they can contribute with full relief. They may want to consider utilising unused allowances from the previous three years to maximise their pensions contributions. It is very important to be aware that an unused allowance from 2021/22 will not be available after 5th April 2025 so now would be a good time to utilise that allowance to make the most of your pension.

More information on pensions can be found on our website – https://pjdtax.co.uk/updates/changes-to-the-uk-pension-contribution-allowance/

 

2. Retention of the Personal Allowance

The UK provides a tax-free personal allowance of £12,570 that can be used against all sources of income. The allowance is reduced by £1 for every £2 that an individual’s income goes above £100,000. This loss of allowance results in an effective tax rate of a little over 60%(!!!) on income earned between £100,000 and £125,140.

The £100k threshold is measured against “Adjusted Net Income”. This is essentially, total income minus any relief claimed, namely pension relief. So, this means an individual can use pension contributions to reduce their net relevant earnings below £100,000 to retain the personal allowance. The effective tax relief here is 60% so it is worth considering this. FYI – this isn’t investment advice, just good old sensible tax planning.

The HMRC website is a good source of information on how pension relief is claim – https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

 

3. Tax-free childcare

For UK taxpayers with young families, there are 30 hours of tax-free childcare available. There is also a childcare account on which the UK government provide 20% relief, further reducing the cost of childcare. However, the use of the account is lost and tax-free childcare is reduced for those who have income above £100,000.

As above, this threshold is measured against Adjusted Net Income. So, it is possible to make pension contributions to reduce income below £100,000 to enable the full tax-free childcare. HMRC will look at net income over the entire tax year, so a contribution at the end of the tax year will help to ensure that income remains within the allowable limits.

Childcare can be very expensive, so it is definitely worth a look. More information can be found on the HMRC website – https://www.gov.uk/tax-free-childcare

 

4. ISA Allowance

Adults (over the age of 18) can put £20,000 into an ISA every year. This is a tax-free savings account (although not US tax-free for any US taxpayers reading this).

The allowance renews every year. So, for those looking to invest, there is £20k available this side of April and then another £20k available in the new tax year.

However, unlike pension contributions, this is not tax deductible. Putting money into an ISA will have no impact on your tax liability or net relevant earnings.

There are a few different types of ISA available. The allowances differ slightly for Lifetime ISAs and Junior ISAs but the concept is the same, think about utilising the available allowance now before it’s too late. More info here – https://www.gov.uk/individual-savings-accounts

 

5. Capital Gains Allowance

Every year, HMRC allow you to make £3,000 of capital gains tax-free. This will be gains outside of an ISA or pension.

If you hold an asset that has appreciated in value, you could consider selling part of it now to utilise the current CGT allowance and the remainder after 5th April to benefit from a second £3,000 allowance. This is obviously easier to do with a share portfolio than it is with single large assets (such as a house) or assets with no marketable value, but you get the gist.

The CGT allowance has been significantly reduced over recent years so the impact of this is less attractive than it has been in the past. But a penny saved, is a penny earned. Why pay more tax than you need to.

To be clear, this isn’t investment advice. Make sure you speak with an investment professional for advice on whether selling an asset is the appropriate thing to do.

 

6. The new Foreign Income & Gains (FIG) Tax Regime

This new tax regime will come into force on 6th April 2025. There may be an opportunity to do some last-minute planning for those with foreign assets, depending on their particular circumstances.

We have a series of articles on our website about this and how best to take advantage. Please start here – The New FIG Tax Regime – What is it?

 

If you would like to discuss any of these points further, please get in touch.