Why Tax-Year-End Planning Matters
Tax year end planning matters because some allowances reset each year and cannot be carried forward.
The tax year in the UK ends on 5th April. Every year. Maybe you get to this date calmly, knowing you have done everything necessary. Maybe it's always a last-minute panic. Or, like many people, perhaps you don't really know why tax planning matters and don't really do anything.
If you can, take some time out well before the end of the tax year to think about how you could maximise your tax efficiency. That way you can make a positive difference to your long-term outcomes and keep more of the money you have. Having a plan is always better than last-minute-panic action and using tax ‘wrappers’ and allowances, your money can go further.
What does tax-year-end planning involve?
You should be reviewing certain things towards the end of the tax year so you know what options are available to you. You should look at:
- Your income – what you have earned over the year
- Your savings – what you have in savings
- Your investments – how your investments are structured and performing
- Your pensions – what you have and the contributions you have made over the year
- Any gifts you have made over the past 12 months.
You can then look at what allowances are available and ensure that, where possible, you have used them before they reset for another year. It’s not about trying to avoid tax completely – it’s about paying the correct amount instead of more than you need to.
Tax wrappers can protect long-term growth of assets
Tax wrappers sound like they could be complicated structures only available to the very wealthy with large portfolios. In fact, they are a generic term for things that protect investments from certain taxes. ISAs and pensions are examples of tax wrappers.
When you put your money into a pension fund or ISA, there are restrictions on how and when you can access it. In return, you get a more tax-efficient environment so you can keep more of your money. As it grows, more can be reinvested - rather than being paid out in tax.
What are the key allowances to review before 5th April each year?
Pension contributions – tax relief
You get tax relief on your pension contributions. When you put money into your pension, the government effectively adds back the income tax you would have paid. For example, if you pay basic-rate tax of 20% and put £80 into a pension, the government adds £20 too (the tax you would have paid) and £100 goes into your pension. This usually happens automatically.
If you pay tax at a higher rate, you may need to claim additional relief through your tax return. If your pension is set up under a net pay or salary sacrifice arrangement, full tax relief is usually applied automatically. However, if your pension is set up as ‘relief at source’, only basic-rate relief (20%) is applied automatically so if you don’t claim the extra, you may miss out. It’s worth checking how your contributions are treated if you’re not sure.
Pension contributions – reducing your taxable income to avoid the 60% tax trap
Pension contributions can also reduce your taxable income, which is particularly useful for higher earners. The 60% tax trap refers to the fact that in the UK, if you earn more than £100,000, you effectively pay around 60% tax on income between £100,000 and £125,140. For every £2 you make above £100,000, you lose £1 of your personal allowance - and at £125,140, the allowance stops.
Therefore, in some circumstances, making pension contributions can help you reduce your taxable income to back below £100,000. This means you can then keep your personal allowance, avoiding the higher effective tax rate.
Gift Aid donations - reduce taxable income
When you donate to charity using Gift Aid, the charity can claim basic-rate tax. This means an £80 donation becomes £100 for the charity. If you pay tax at a higher rate, you may be able to claim further tax relief through your tax return. This means that Gift Aid donations can impact how much tax you pay. Essentially, they can extend your basic-rate tax band and reduce your adjusted net income. Depending on what you earn, this could also help you reduce your income to back below the £100,000 level.
Using your allowances before tax year end
ISA allowances
At the moment you can invest up to £20,000 in an ISA (Individual Savings Account) each tax year. ISAs are a great way to build up savings over time without creating additional tax liabilities. However, the allowance resets every year, so if you don’t use it, you can’t carry it forward. From April 2027 it is changing to £12,000 for Cash ISAs if you are under 65, so there is even more reason to take advantage of it while you can.
Capital gains tax allowance
When you sell investments, if they are not in a tax wrapper, capital gains tax can apply. The tax-year end is a good time to review whether you have assets you should sell to realise any gains, especially if gains will be below the capital gains tax allowance.
If you are married or in a civil partnership, you might also be able to transfer assets before they are sold. Transfers of this type are usually free of capital gains tax. This way couples can use both their allowances (£6,000 in total) and potentially reduce the overall tax payable.
Savings and Dividend Allowances
It is a good idea to review how your income from savings and investments is being taxed each year. The personal savings allowance means basic-rate taxpayers can earn up to £1,000 of interest each year without paying tax, and higher-rate taxpayers up to £500. There is also a dividend allowance of £500. These allowances have reduced in recent years (the dividend allowance, for example, was £2000 in 2023) - which is another great reason to ensure you are maximising your opportunities.
Inheritance tax gifting
You can usually give away up to £3,000 each tax year without it forming part of your estate for inheritance tax purposes, subject to certain requirements, plus you can make gifts from surplus income. You’ll find more information about gifting in our blog about reducing inheritance tax.
Acting before the 5th April
Although the actual tax deadline is 5th April, you will need to act before then. Pension providers need time to process contributions, ISA payments must be made and processed before the end of the tax year, and so on - and this all takes time. Don’t leave your planning or instructions until the last minute or you could miss out!
Your tax planning is not just for this tax year
Year-end tax planning is part of building a long-term strategy so your savings, investments, and actions all work towards a more positive outcome. Even small annual decisions can have a significant cumulative impact over time. And the sooner you start planning, the more impact they will have.
Have you reviewed your position this year? Make sure you speak to a qualified financial adviser to ensure you’re not missing out. At Paula Bicknell Wealth we work with you to help maximise your wealth and improve your options. Please get in touch and let us help you get to the tax-year end calmly and profitably.
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Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
Please note St. James's Place does not offer a cash ISA.
