Tax

7 ways to boost your savings before tax year end

MoneyPlus Features Team

The 2020/21 tax year ends on 5 April. Our simple 7-step guide explains what that means for your pension and savings, and what to do to make the most of the tax breaks and allowances available.

1. Act now to get ahead of the deadline

It makes sense to be smart about tax all year round. But with the 2020/21 tax year ending on 5 April, if you can start now, you still have time to make the most of this year’s tax allowances and pension tax benefits and can leave plenty of time for any payments or changes to be processed.

You should bear in mind that tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

2. Make the most of pension tax relief

Your pension is a tax-efficient way to save for your future thanks to the tax relief on contributions you make to it.

If you’re a basic rate taxpayer, every £100 that goes into your pension plan costs you just £80. And if you’re a higher or additional rate taxpayer, you can benefit from 40% or 45% tax relief on your pension contributions (if you’re in Scotland, income tax rates are slightly different).

A pension is an investment so its value can go down as well as up, and could be worth less than what was paid in.

Here’s how tax relief works if you have a personal pension:

 Diagram of making a £100 pension contribution with different tax rates

The way tax relief is given depends on the type of pension scheme you’re in and how you make payments. In a lot of workplace schemes, your employer deducts your pension contribution from your salary before tax is collected. So there’s no need for you to claim tax relief yourself. But in other schemes you may need to claim the tax relief from HM Revenue and Customs.

If you’re not sure how your pension plan works, speak to your employer or provider, or find out more from the Pensions Advisory Service.

Topping up a Standard Life pension is easy online. Or you can use our app to check how much you’ve paid in this tax year and how much more you can still pay in.

You can normally contribute as much as you earn each year into your pension, up to the annual allowance of £40,000 and benefit from tax relief on your contributions.

However, different rules apply if your income when added to your employer’s contributions are more than £240,000, or you’ve already started to take flexible pension benefits. You can read more about this on the Pensions Advisory Service website.

Contribute more than your annual allowance and you could face a tax charge designed to take back your tax relief, unless you can use any ‘unused allowance’ from the last three tax years.

3. Use any unused allowance

The good news is that if you haven’t used all your annual allowance in the last three tax years, you could pay more into your pension plan by ‘carrying forward’ what’s left to make the most of the tax relief on offer.

However, if you’ve started to take your pension benefits in a flexible way and you’ve taken more than your tax-free cash allowance – normally 25% of your pension savings – you can’t carry forward any unused allowances. You will also be subject to the Money Purchase Annual Allowance. This is £4,000 a year. Our guide to the pension annual allowance has more on this.

4. Get your tax-free Personal Allowance back

When your taxable income reaches £100,000, you start to lose your tax-free Personal Allowance. This is the amount of income you don’t have to pay tax on, which is £12,500 for the 2020-21 tax year.

After £100,000, your Personal Allowance drops by £1 for every £2 of your income, and you don’t get any Personal Allowance once your income reaches £125,000.

But there is a way you can get it back if your income is in this range. Making pension contributions can reduce your income for Personal Allowance purposes, giving you some or all of your allowance back.

As a higher rate taxpayer, for example, you could benefit from 40% tax relief on what you pay in, and save tax by keeping your tax-free Personal Allowance.

5. Pay your bonus into your pension and save tax

If you’re lucky enough to get a bonus from your employer then choosing to pay it into your pension means you could save on the tax and even NI (National Insurance) payments which you would otherwise pay.

It’s a tax-efficient way to boost your pension savings and could make your bonus work harder for you.

If you’re considering this, check whether it would take you over your pension Lifetime Allowance or your annual allowance as you could face a tax charge. And if you’re unsure, speak to your adviser.

6. Pay into your pension and you could get your child benefit back

Worth over £2,500 a year to a family with three children, child benefit is reduced by the High Income Child Benefit Charge when one parent’s income reaches £50,000, and cancels out the benefit at £60,000.

Because making a pension contribution reduces what counts as your income, paying more into your pension could cut the tax charge if your earnings are around this level.

Moving pension savings from the parent who earns less to the higher-earning partner could also make a difference.

Find out more about the High Income Child Benefit Charge at Gov.uk.

7. Top up your tax-efficient savings

Finally, if tax-friendly saving is on your list, you’ve still got a few weeks left to make the most of this year’s ISA allowances.

You can save up to a total of £20,000 in ISAs (individual savings account) each tax year, whether that’s in a Cash or Stocks & Shares ISA, or both. You don’t pay tax on any interest earned in a Cash ISA or investment income or gains in a Stocks & Shares ISA.

And if you want to save for your children, they get their own Junior ISA allowance of £9,000

Find out more about ISAs on the Government’s website, including the different types available, or check how much you can still save this tax year with your provider.

With both Stocks & Shares ISAs and pensions your savings are invested, which means that they have the opportunity to grow over time. As these are investments, the value can go down as well as up, and could be worth less than what was paid in.

 

The information here is correct in January 2021. It is guidance only and shouldn’t be taken as financial advice.

If you’re in any doubt about your options, you may wish to speak to a financial adviser. There will likely be a cost for this.

Standard Life accepts no responsibility for information on external websites. These are provided for general information.