Tax efficient considerations for everyone

ISAs

• ISAs are available to all and the adult allowance is £20,000 in a tax year
  • There are different types, though most commonly held as cash or stocks & shares. The £20,000 contribution limit applies in total (e.g. £10,000 into a cash ISA & £10,000 into an S&S ISA)
  • A Lifetime ISA (LISA) can be opened if you are aged 18-39
    • Contribute up to £4,000 per tax year – the government adds 25%
    • There are rules on withdrawals and potential penalties
  • Junior ISAs can be opened by parents/guardians for children under 16 and anyone can contribute up to £9,000 per child, per tax year.
    • You can have a cash and a stocks & shares JISA, although the £9,000 contribution limit applies (e.g. £4,500 into a cash JISA & £4,500 into an S&S JISA)

Pensions

• Pensions are available to all and a minimum allowance available of £3,600 per tax year, even for non-earners. That means if you put £2,880 into a pension, the government will top it up to £3,600. £720 of free money.
• For those earning over £3,600, the basic premise is that you can make gross pension contributions of up to £40,000 per tax year or your gross income, whichever is lower.

 Capital Gains Tax

• Everyone has a £12,300 annual capital gains allowance, meaning you can have gains up to this level and not pay CGT (at 10% / 20% or 18% / 28% if property related).
• Consider selling some assets to realise a gain and utilise your annual CGT allowance

Dividends

• Everyone has a £2,000 dividend tax free allowance

Options & considerations based on your earnings level…….

Non-earning?

• ISAs – contribute up to the annual limits
• Pensions – contribute up to £2,880 and the government will top it up to £3,600

Earning up to £60,000

• ISAs – contribute up to the annual limits
• You pay 20% income tax on earnings between £12,500 and £50,000 and then 40% on earnings above £50,000.
• If you have children and claim Child Benefit, this is effectively taken away by an additional tax on earnings over £50,000. This means you are paying an effective tax rate of 60%+ between £50,000 to £60,000.
  • The main option to ‘reclaim’ this benefit and not suffer the additional tax is to make pension contributions.
  • If you earn £55,000 for example, make a £4,000 cash pension contribution. This is topped up to £5,000 through tax relief, meaning you’re then at £50,000 for tax purposes. You can also reclaim a further 20% of tax back through your self assessment (SA) return

£60,000 – £125,000

• ISAs – contribute up to the annual limits
• You’ll pay 40% tax on earnings between £50,000 and £150,000, but for those earning over £100,000, the Personal Allowance (worth £12,500) is withdrawn by £1 for every £2 earned over £100,000, meaning that at £125,000, you are left with no personal allowance
• The answer can be pension contributions again. Make a £20,000 cash pension contribution and the government adds £5,000. This means your adjusted earnings are now at or below £100,000, restoring your personal allowance. This gives you an effective tax saving of up to 60%. When you complete your SA return, you can then claim further back. Win, win.
• At this level of earnings and above, if you have the cash, you could make pension contributions up to £40,000 and receive tax relief (this means cash contributions of up to £32,000). Don’t forget to include any employer and personal contributions and tax relief when looking at total contribution levels.

£125,000 +

• ISAs – again!
• Pensions – again! Personal pension contributions will receive tax relief in the pension and you can claim additional tax relief through your SA return.
• Tax on earnings above £150,000 is at 45%, which hurts. Pension contributions can again be made. Save tax, boost your pension.
• Above £200,000 of earnings, it’s possible your pension contribution allowance will be tapered. I’d seek advice if you’re in this territory. 

There is a the potential to make additional pension contributions using carry forward rules, meaning you can go back a further 3 tax years and utilise any unused allowances. I’d recommend having a chat with a financial advisor, like me, before committing to using carry forward, as it can be somewhat complicated and it’s important to get it right.

There’s a fair amount to consider here, but if you’d like to chat through your position, get in touch

Thanks for reading.