Pensions, Isas, child benefit limits and inheritance tax: Your ten point end of tax year checklist
In five year’s time the annual income of another 2.1 million taxpayers will fall into the higher rate tax threshold, a rise of 47 per cent, according to the Office for Budget Responsibility (OBR).
The threshold has been frozen since April 2021 – and is expected to stay frozen until April 2028 while the threshold at which taxpayer start to lose their tax-free personal allowance will stay at £100,000, an amount which has not changed since it was introduced in April 2010.
The personal allowance is cut by £1 for every £2 of net adjusted income above £100,000 – until your allowance is zero once you earn £125,140. This is an effective tax rate of 60 per cent.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said taxpayers were seeing their income tax rise as well as the tax paid on capital gains and dividends.
“If you’re a higher rate taxpayer, it feels like there are tax attacks on all sides. But there is some hope. There are some end-of-tax year strategies that can cut your tax bill significantly.”
One: Pay into a pension
Higher rate taxpayers who pay into a pension can extend their basic rate tax band which means paying into a pension can push people out of paying higher rate tax altogether.
Coles said: “You can pay up to £40,000 into your pension this tax year, and up to £60,000 next year. You can also carry forward unused allowances from the previous three tax years.
“If your employer offers a salary sacrifice scheme, you get even more of a benefit, because you don’t pay National Insurance on sums you sacrifice into your pension either.”
Two: Avoid the high-income child benefit tax charge
“The benefit of paying into a pension doesn’t necessarily stop there. It also reduces your net adjusted income. If you are a parent earning between £50,000 and £60,000, cutting back towards £50,000 means you can reduce your high-income child benefit tax charge. If you’re earning just over £60,000, you may also be able to use the technique to cut at least some of the charge,” said Coles
Three: If you earn over £100,000
If someone earning over £100,000 pays into their pension, and cuts their adjusted net income, it means they get back some of their personal allowance, so for every £2 their income falls, they’ll get £1 of their allowance back. It means less of their income is subject to tax at an eye-watering 60 per cent. “Plus, if a parent can bring their income back under £100,000, they may also keep their eligibility to tax-free childcare too,” explained Coles.
Four: Make use of your CGT allowance
Higher rate taxpayers pay 20 per cent on capital gains on investments and 28 per cent on gains from property.
In the current tax year 2022/23, you can make gains of £12,300 before you pay tax on them, whereas from 6 April this drops to £6,000. If you have investments outside an Isa, it’s worth considering taking advantage of your allowance in every tax year. You can use the Bed and Isa process to move these assets into an ISA.
Don’t forget, you can offset any capital losses you make during the tax year against gains. If your total taxable gain is still over the tax-free allowance, you may be able to deduct any unused losses from previous tax years. If just some of your losses reduce your gain to below the tax-free allowance, you can carry forward the remaining losses to a future tax year.
Five: Put income-paying assets in an Isa wrapper
Higher rate taxpayers pay tax on dividends at 33.75 per cent. In the current tax year, they have an allowance of £2,000 but that drops to £1,000 in the next tax year. If you use the Bed and ISA process to shelter income-producing assets in an ISA, you won’t pay tax on these dividends. Because the dividend tax rate is higher than the capital gains tax rate, it’s often worth prioritising this when making decisions about how to use your ISA allowance.
Six: Always consider a cash Isa
You have a £500 personal savings allowance, but now that the most competitive fixed rates have pushed as high as 4.5 per cent, it means any higher rate taxpayer with savings of over £11,000 could face tax at 40 per cent on some of their interest. You need to factor in the fact that cash ISA rates tend to be slightly lower than their savings accounts equivalents. However, those with large cash holdings, especially those who are nearing the additional rate tax threshold, at which point the personal savings allowance is lost, may want to consider a cash ISA.
Seven: Use your couple power
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you can both take advantage of your allowances, and then the rest is taxed at their marginal rate rather than yours.
Eight: Look ahead to the next tax year
This is particularly key if you’re expecting to become a basic rate taxpayer – which often happens in retirement. Usually in this position, people will consider delaying receiving income or capital gains so they pay a lower rate on them. However, this year the falling capital gains tax and dividend tax allowances will mean you’ll need to calculate whether this is still worthwhile.
Nine: Give to charity
This will cut your tax bill – although clearly won’t leave you better off overall financially. The charity will receive 20% in gift aid, and you can claim back the other 20% through your tax return. You also get the benefit of knowing you have donated to a charity you care about.
Ten: Consider a venture capital trust (VCT)
These aren’t right for everyone, because they are very high risk, so should only ever be considered as a small part of a large and diverse portfolio. However, if you use these schemes, you can get up to 30% income tax relief on the amount you invest – which can reduce your overall tax bill.”
Pension tax breaks – not quite ‘use it or lose it’
The end of the tax year is also opportunity to review your pension contributions and to make sure you are making the most of tax breaks on pensions, too.
Becky O’Connor, director of public affairs at PensionBee, said: “The Government has given pension savers further motivation to check the tax position of their pension by radically changing pension allowances in the Budget.
“The end of the tax year is dubbed ‘Isa season’ for investors, because with ISAs, if you don’t use your allowance in that year, you lose it.
“With pension allowances, it is not quite ‘use it or lose it’ at the end of the tax year. That’s because with pensions, although there is an annual allowance, you can also use unused allowance from the previous three tax years.
“This means that unless you have been able to use up your annual allowance for those years, you could have a bit extra on top of your current annual allowance to make tax-free pension contributions, by taking advantage of these rules.
“Now that the lifetime allowance is set to be abolished (and depending on the next Government’s plans), the only allowance most pension savers need to be aware of is the annual allowance. This remains at £40,000 for the 2022/23 tax year but will rise from 6 April for the 2023/24 tax year, to £60,000. If you put more than this amount into your pension in a year, you could face a tax charge. Meanwhile the maximum you can put into a pension in a tax year and still get tax relief is the amount you earned in total in that year.
Don’t forget the carry forward pension allowance
O’Connor said carry forward rules can be particularly handy if, for example, you have received a sum from an inheritance that you would like to put in a pension, or if you have sold a property and want to invest the proceeds tax efficiently, or if you are self-employed and had a particularly good year with a bit more than usual to set aside. However, even using carry forward, the amount of tax-relievable pension savings you can make in a tax year could only go up to your earnings in the year you make the contribution.
“Being motivated to make the most of your pension allowances can give your retirement fund a massive boost particularly if you are in the years leading up to retirement, from your early fifties onwards. That’s because it’s not long to wait until you can access that money again and if you use your pension rather than savings or ISAs to store it, you benefit from that valuable tax relief.”
End of tax year pension checklist:
Could you increase your contributions for the year ahead?
If you are a basic rate taxpayer and pay in £100 a month (£1,200 a year), you get £300 a year in basic rate tax relief. If you increase your contribution to £120 a month, you’d get £360 a year in tax relief. Try the PensionBee tax relief calculator to see how much of a tax boost your money could get from HMRC.
Have you claimed all of the tax relief you are owed?
If you are a higher or additional rate taxpayer and in what’s known as a ‘relief at source’ scheme, you get basic rate tax relief automatically via your pension scheme, but have to claim higher or additional rate relief through a Self Assessment tax return. See table 1 below for the amounts that higher and additional rate taxpayers have been claiming over the past five years. Previous PensionBee analysis has revealed that higher and additional rate taxpayers have left £1.3 billion in tax relief unclaimed since 2016/17. If you are a higher or additional rate taxpayer but in a net pay or salary sacrifice scheme, your relief will be added for you by your employer. So it is important to know what kind of tax relief system your pension scheme operates.
Are you in a salary sacrifice pension arrangement through work?
Increasing your pension contributions can be a way to beat any income tax increase you might face through receiving a pay rise. For instance, if your pay goes over £50,270, making you a higher rate taxpayer, you could divert the extra income to your pension and would then not face the extra higher rate tax on your earnings.
Be aware of pension allowances.
These are changing after the Government announced the abolition of the lifetime allowance and also an increase to the annual allowance from £40,000 to £60,000 in the last tax year.
The lifetime allowance still applies for the 2022/23 tax year. The charge will be abolished from 6 April but pension pot values will still be tested against the lifetime allowance for the tax year 2023/24 before the allowance is completely scrapped.
The amount of pension contribution that can receive tax relief depends on what you earned in that tax year. So if you earned £30,000 in a year, that’s also the most you could pay into your pension and still get tax relief. You can technically pay more into your pension, but you wouldn’t get the tax relief and if you went over the annual allowance, you might face a tax charge.
Carry it forward
If you have a large lump sum you would like to add to your pension, perhaps from an inheritance or house sale, you might look to use the carry forward rules, which allow you to use unused annual allowance from the previous three tax years. Do you have enough annual allowance and unused annual allowance from the previous three tax years, as well as high enough earnings in the current tax year, to add this to your pension? You can use the Government calculator and emember that all contributions, including tax relief added and employer contributions, count towards your annual allowance.
If you are a high earner, remember the annual allowance is tapered away once you earn more than £240,000, although this threshold is rising to £260,000 on 6 April. You’ll need to do some sums to work out if this applies to you and there is guidance on what to do here.
Table 1: Total and average amount of higher and additional rate tax relief claimed via Self-Assessment from 2016 to 2021
| Tax year | Total higher and additional rate relief | Average amount claimed by higher and additional rate taxpayers |
| 2016-17 | £988m | £3,000 |
| 2017-18 | £815m | £3,000 |
| 2018-19 | Figures not available | Figures not available |
| 2019-20 | £1,287m | £4,500 |
| 2020-21 | £1,800m | £6,500 |
How to save up to £336,000 in inheritance tax
If a couple save £60,000 each into a pension for seven years they could save up to £336,000 in IHT, according to Tom Parry, chartered financial planner and pensions expert at Old Mill.
The chancellor has effectively created an unlimited inheritance tax (IHT) shelter as a result of his decision to scrap the lifetime allowance (LTA), claimed Parry.
In the Budget on 21 March Jeremy Hunt abolished the lifetime allowance – meaning there is now no limit to the total amount of money you can build up in a pension, and increased the amount you can put into a pension each year, from £40,000 a year to £60,000. Parry says the new rules could potentially enable pensions savers to avoid IHT by saving more into their pensions.
“Pensions are usually exempt from IHT, and as a result, are increasingly being used as a way of passing money on to the next generation,” he said. “These new rules enable people to utilise this IHT break even further and create an unlimited IHT shelter.
If a couple were to save £60,000 each into a pension every year for seven years (the time it takes for funds to be outside the reaches of IHT when making a gift or placing funds in trust) they would have a combined pot of £840,000 and have saved up to £336,000 in IHT
Parry adds: “These changes will certainly have an impact as more and more people start using pensions for IHT planning and in retirement, start taking money from ISAs and other investments – which are often subject to IHT – before accessing their pensions.
“Many of our clients have already come to us asking how the changes impact them. We have clients who had already reached their LTA – or were near to it – now able to start contributing to their pensions again. And given you can backdate pension contributions by up to three previous years, plus the year you’re in, they could potentially be looking to invest up to £180,000 into their pensions in the next few months.
However, warned Parry, if the pension is not structured correctly you could end up mitigating one tax but becoming liable for another:
“Whilst pensions are free from IHT, there can potentially be an Income Tax charge levied on the beneficiary of a pension pot if the plan is not structured correctly and/or nominations are not up to date. I’d advise savers to review the details of their plan to ensure they’re not inadvertently swapping one tax liability for another.
“It is also worth keeping in mind that, given that Labour have already said they would reverse blanket abolishment of the LTA and that we are still waiting for the detail of the upcoming Finance Bill on this matter, there is still uncertainty as to how this will evolve over the coming months and years..
“Effective IHT planning will generally involve a combination of things, for example gifting in your lifetime, the use of IHT efficient investments (such as AIM portfolios), and the use of trusts, and the right plan for you will depend on your other financial objectives as well as your attitude towards investing and you should always take advice about your individual circumstances before taking any action.”