Five essential steps to take before the tax year end
Andrew Tricker, 18 February 2025
Andrew Tricker, 18 February 2025
You are able to make contributions to pensions each tax year and receive tax relief on them. Tax relief is given at your marginal rate and, therefore, the more income tax you pay, the greater the tax relief on pension contributions.
There is a limit to how much you can contribute to pensions while receiving tax relief, though it may be possible to make use of unused pension allowances from previous tax years to further boost your pension funding.
Capital invested in a pension is also free from tax on income, dividends and capital gains. Together with the available tax relief, this makes pensions a highly efficient way to save and invest money over the long term while reducing your immediate tax bill if you are a high earner.
Pensions are currently considered to be outside of your estate for Inheritance Tax (IHT) purposes. From April 2027, this tax treatment will end and thereafter pensions will be included in your IHT liability. Nonetheless, pensions will remain a highly tax-efficient means of saving for the future due to the previously mentioned tax advantages.
An Individual Savings Account (ISA) allows you to invest funds in a range of savings and investments and pay no tax on the income, dividends and capital gains. Each tax year, all adults in the UK receive an ISA allowance, which is currently £20,000. If you do not use this allowance it cannot be carried forward into future tax years.
In addition, all children under the age of 18 receive a Junior ISA allowance, which is currently £9,000. Like an adult ISA, a Junior ISA fully shelters savings from tax and the child will have full control over the account when they turn 18.
Capital Gains Tax (CGT) is the tax that you pay when disposing of certain assets for a profit. You have an annual CGT exemption of £3,000 in the 2024/25 tax year that can be used to offset some (or all) of the capital gains arising on such assets.
The exemption has been steadily reduced over the past few years and cannot be carried forward into future tax years. Therefore, it is important to make sure you make use of it to reduce future CGT liabilities on taxable investments.
You can make use of your CGT exemption for the current and next tax year by disposing of assets in two tranches: one before 06 April 2025 and another in the new tax year.
Inheritance Tax (IHT) is a tax on assets that you leave behind when you die and on some gifts that you make during your lifetime. One way to gradually reduce your potential IHT liability is to make use of your annual gift exemption.
You are permitted to gift up to £3,000 each year and these gifts are outside of your estate for IHT purposes immediately.
For couples, this means that you can gift a total of £6,000 each year and, if you have not used your exemption for the previous tax year, you can carry this forward for one tax year making the total amount you can gift £12,000.
You can also make gifts of up to £250 to as many people as you want in the tax year provided you have not used the annual exemption on the same person.
Ensuring your finances are in order around the end of the tax year can be a challenge when there are many moving parts.
Seeking professional advice from a financial planner will help you make the most of the various available allowances, exemptions and reliefs to ensure your finances are tax optimised.
