Last call for the end of the tax year

Published by Tom Bulbrook on 18 March 2020

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With the end of the tax year less than three weeks away, be sure to not miss this opportunity for achieving significant tax savings.

Maximise pension contributions

If you run a limited company, making pension contributions through the business can often be very tax efficient and a good method of cash extraction, as unlike some company benefits this is not treated as a benefit in kind.

Any employer pension contributions by the company reduce the business’s overall profit, meaning the amount of Corporation Tax payable is also reduced.

Individuals can also make employee contributions either through their payroll, or by personally making lump sums throughout the year.

The total amount that can be contributed tax-free each year, known as the Annual Allowance, is the lower of £40,000, or 100% of the individuals UK relevant earnings and does include the total of both employee and employer contributions.

High earners, with annual adjusted income (total income inclusive of pension contributions) in excess of £150,000 should be aware that they may be affected by the tapering of their annual allowance, reducing it by £1 for every £2 of their adjusted income exceeding this figure. This is subject to threshold income (total income excluding pension contributions) exceeding £110,000 and the Annual Allowance being reduced to a minimum of £10,000 (2019/20 tax year).

It is possible to carry forward up to three years’ worth of unused allowance if you have not fully utilised this previously. However, this can be a complex area and professional financial advice should be sought if this applies to you.

With March and April typically being when many businesses calculate and award bonuses, it could be worthwhile sacrificing this in favour of an employer pension contribution, saving both yourself and the company National Insurance payments on the amount. Do however be aware under current pension rules you cannot then ordinarily access the amount until age 55.

Making pension contributions can be a great opportunity both in the short-term, by extracting profit and in the long-term for retirement planning.

All pension contributions for this current tax year must be received by your pension provider by 5th April 2020, possibly before dependent on the provider.

Don’t miss out – extra tax relief

Up to the Annual Allowance, the government provides basic rate tax relief of 20%. This in most cases is automatically claimed by your pension provider directly from HMRC and added to your pension policy.

If you are a higher, or additional rate taxpayer, you can claim further tax relief through your annual Self-Assessment tax return.

Use it or loose it – ISA allowances

Funds invested in either a Cash, or Stocks & Shares ISA provide valuable protection from both income tax and Capital Gains Tax.

Any ISA funds also benefit further from not having to be included within your annual self-assessment returns.

The current allowance is £20,000. Unlike pensions however, any unused allowance cannot be carried forward to following years. Investments made after 6 April 2020 will instead count towards the next years allowance.

Recover personal allowances and child benefit

Pension contributions reduce an individual’s taxable income. In turn, this can have a positive effect on both your personal allowance and if applicable, Child Benefit for higher earners, potentially resulting in a lower tax bill.

An individual pension contribution that reduces income to below £100,000 could result in the tax payer being entitled to the full tax free personal allowance. The effective rate of tax relief on the contribution could be as much as 60% if an additional rate taxpayer.

Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and eligibility is cancelled altogether once their income exceeds £60,000. A pension contribution could reduce income and potentially reverse the tax charge, wiping it out altogether if income falls below £50,000.

The content of this article is for information only and does not constitute formal financial advice.

This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Contact our Financial Planning Team on +44 (0)1227 768231 or provide your details on our online enquiry form to ensure that you are making the most of all available opportunities to extract profit from your business in a tax efficient manner.

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