Once your tax return is filed, don’t just put all your paperwork away and breathe a sigh of relief that you don’t have to do it again for another year. Instead, use this deadline as an incentive to fire up next year’s tax return, making sure you’ve jotted down any key information over the course of the tax year so far such as any charitable donations you have made and making early calculations of extra income you have earned, such as from freelance jobs.
If your tax bill was heavy this year, consider ways soften the financial hit for next year such as paying more into your workplace or personal pension to secure more income tax relief, using up your £20,000 ISA allowance, or crystallising any capital gains to maximise this year’s more generous exemptions. Subscriptions to other more esoteric tax efficient schemes, such as Venture Capital Trusts and Enterprise Investment Schemes, also provide income tax rebates (at 30%), though these are higher risk and aimed at wealthier investors.
This is more important than ever this year after Chancellor Jeremy Hunt froze most personal tax allowances in his Autumn Statement in November, lowered the threshold at which the highest 45% income tax band kicks in from £150,000 to £125,140, reduced the annual Capital Gains Tax exemption and unveiled steep reductions in the annual tax-free dividend allowance.
For this reason, investing in a pension is the best way to reduce an income tax liability, since tax relief is provided at your marginal tax rate which is particularly attractive to the rapidly growing number of people subject to the higher tax bands. A record 5.5 million people are expected to pay income tax at the 40% band this year, a number that is sure to rise further under the planned freeze in thresholds until 2028.
With the risk that the Chancellor or a future Labour government could target these generous pension tax reliefs in the future, it would be wise for those subject to the highest tax bands to maximise their pension contributions this tax year, with those paying basic tax receiving 20% tax relief on contributions, higher rate taxpayers receiving an extra 20% and additional tax rate payers an extra 25%.
While the maximum gross annual contribution is £40,000 for those with total adjusted incomes below £240,000, once that is utilised you can mop up unused reliefs from the previous three tax years – a process known as pensions carry forward – starting with the earliest year. To be eligible you must have had a pension in place in the year from which you are carrying forward to use unused allowances, but your new contribution does not need to be paid into the same pension.
Investments go down as well as up and investors may not get back the amount originally invested.
Prevailing tax rates and reliefs depend on individual circumstances and are subject to change.