End of tax year planning

Overview

This article outlines some key financial planning actions you should address before the end of the tax year on 5 April 2024.

Maximising contributions to tax efficient pensions and ISAs and optimising your capital gains tax position should improve the tax efficiency of your assets, increasing net returns and helping you to grow and protect your wealth more efficiently.

A good independent wealth adviser will advise you on building and maintaining an efficient financial planning strategy, including maximising the benefits of the allowances and exemptions available to you.

Why contribute to pensions?

If you have surplus earned income and can afford to forego access to the funds until the normal minimum pension age of 55[i], you are likely to benefit from paying pension contributions.

Tax relief on contribution
Pension contributions are tax deductible at your marginal rate of income tax[ii][iii].

Pension fund growth
There is no tax on the growth and income generated by the investments you hold within your pension.

Pensions benefits[iv]

When you withdraw benefits from a pension (if you withdraw them - see below), you can withdraw up to 25% of the fund value (subject to caps) as a tax-free lump sum. You pay income tax on any further withdrawals at your marginal rate, which may be lower than the marginal rate tax you saved at the time of contribution.

Pensions death benefits

Defined contribution pension accounts can also be extremely tax efficient on death.

Most pensions are held under trust and should not form part of your estate on death. Rather the payment of the death benefits (i.e., the account balance) is decided by the trustees, based on your ‘expression of wishes’. This means that the account balance can normally be passed to your pension beneficiaries without liability to inheritance tax.

Broadly, where the pension scheme member is aged under 75 at the time of death, the account balance is paid free of tax (subject to caps).

Otherwise, the account balance is subject to income tax at your beneficiary’s marginal rate. The balance can also be paid to a beneficiary drawdown pension account. This allows your beneficiary(ies) to control when they withdraw funds, enabling them to manage the income tax liabilities on their withdrawals, while investments continue to benefit from tax free income and growth.

Maximising defined contribution[v] pension contributions

You can usually contribute up to the lower of:

your earned income, or
an annual allowance of up to £60,000 each year, which includes employer contributions.

Contribution limits for high earners

If your:

‘adjusted income’[vi] exceeds £260,000, and
'threshold income'[vii] exceeds £200,000, then

your contributions annual allowance is reduced by £1 for every £2 of adjusted income over £260,000, until you reach the minimum reduced annual allowance of £10,000 once your adjusted income exceeds £360,000.

Carrying forward of unused annual allowances

You can carry forward your unused annual allowances from the previous three tax years provided you:

First use your annual allowance for the current tax year.
Have sufficient earned income this year to pay the contribution.
Were a member of any UK registered pension scheme for the year that you are carrying forward unused allowance from. This includes owning a personal pension or a 'SIPP', even if you did not contribute.

For example, if you have not contributed to pensions in the last four tax years (including this year) you may be able to contribute between £22,000 and £180,000 (gross) this year, as outlined in the table below:

Opportunities to use carried forward annual allowances

The removal of the lifetime allowance

You may have ceased pension contributions due to concerns over of breaching the lifetime allowance, or voiding one of the various lifetime allowance protections introduced since 2006. The removal of the lifetime allowance means you should consider recommencing contributions.

If you are still working, you may have substantial carry forward to use. If you do not have earned income, for example if you have retired, you can still pay a gross contribution of up to £3,600 per annum until age 75.

Returning from overseas

If you are returning from a period overseas, you are unlikely to have been paying UK pension contributions. Once you are resident in the UK again, you can recommence contributions, and if you plan to continue to work may be able to benefit from using your carried forward annual allowances.

Increase in surplus income or a capital windfall

You may have not used your previous years annual allowances due to affordability or prioritising other costs. If your circumstances mean that you now have surplus income or capital, you should consider increasing your pension contributions and using your carried forward pension allowances.

Individual Savings Accounts (ISAs)

You can contribute up to £20,000 per year to ISAs. There is no tax on growth and income generated by the investments you hold within your ISAs and withdrawals are tax free.

Junior ISAs

Are a tax-efficient way to save for your children or grandchildren. The account can opened by the child's parents and each child can receive total junior ISA contributions of up to £9,000 in the 2023/24 tax year.

Lifetime ISAs

Are a tax-efficient way to save for your first home[viii]. You can invest up to £4,000 in the 2023/24 tax year and receive a 25% government bonus (up to £1,000) on the contribution. The maximum property purchase price for funds in a Lifetime ISA is £450,000.

ISA allowances cannot be carried forward so are lost if they are not used.

Capital gains tax planning

Using the capital gains annual exempt amount

If you have taxable investments that have made unrealised capital gains and you have not used your 2023/24 annual exempt amount of £6,000 [ix], you should consider selling investments to crystallise some of those gains. This reduces the total capital gains in your investment portfolio and helps to manage future capital gains tax liabilities.

If you have a spouse, transfers of assets between you are exempt from capital gains tax. You can therefore transfer assets for disposal by the other spouse to use both of your annual exempt amounts.

Using losses to offset gains

If you have already crystallised gains that exceed the annual exempt amount, you should review your investments to see if you have any uncrystallised capital losses and consider realising losses to offset some of your gains.

Notes:

[i] Expected to increase to 57 in 2028, and to stay 10 years below state pension age.

[ii] If you pay contributions though your workplace pension scheme you may also pay reduced national insurance contributions. Your employer may also rebate the national insurance contributions they save to you.

[iii] They also reduce ‘adjusted net income’, so in certain circumstances could enable you to reclaim your personal allowance, or access to certain benefits such as free childcare.

[iv] Assuming you pursue a pension fund withdrawal strategy. Other ways of taking pension benefits, including annuity purchase, are possible and you should discuss your position with an independent wealth adviser before withdrawing pension benefits.

[v] The rules are more complicated for defined benefits pension scheme, where pension input for the annual allowance is based on a formula rather than contributions. If you are an active member of a defined benefits scheme, you should discuss your position with an independent wealth adviser before paying contributions to a defined contribution scheme.

[vi] Broadly, total taxable income from all sources before the deduction of your own pension contributions, plus any employer pension contributions.

[vii] Broadly, total taxable income from all sources after the deduction of your own pension contributions, unless through a salary exchange arrangement set up after 8 July 2015.

[viii] Lifetime ISAs can also be used to save for retirement, though may not be as efficient as paying pension contributions.

[ix] Reduces to £3,000 from 6 April 2024.

General:

This article is meant as a summary only and we have simplified many of the areas for brevity and readability.

Before you invest in any type of investment or account, you should receive personalised advice from an independent financial adviser.

You risk losing capital when you invest.

Any reference to legislation and tax is based on our understanding of UK law and HMRCs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered.