Active Chartered Financial Planners managing director Karl Pemberton with some useful tax and pension advice…
Pensions still remain one the most tax efficient and legitimate ways of saving available to a UK tax payer, yet so many do not use the annual allowances available to them each tax year.
Given the Pension Reforms that came into effect in April 2015 through ‘Pension Freedoms’, future access and tax efficiencies are now even greater too.
The maximum gross amount that can be contributed by yourself (or your employer) into your pension this current tax year is £40,000. This allowance applies to all of the schemes you belong to and includes all of the contributions that you (or your employer) make. If you are making personal contributions, you are limited to 100% of your earnings should you earn less than £40,000 in this tax year.
Contributions above the annual allowance are taxed as income, unless you are able to carry forward unused annual allowance from the last three tax years. The annual allowance does not apply to any pension transfers.
If you made these contributions personally, you would only need to pay the Net Amount (less 20% basic rate income tax) into the scheme;
• £20,000 Gross Contribution
• £16,000 Net Client Contribution
• £4,000 Tax Relief added by the Government
If you were a higher rate taxpayer (40%), you could also claim the additional 20% relief (£4,000) through your annual tax return.
This therefore becomes a very attractive option for some when planning for the future.
Individual Savings Account (ISA)
The annual ISA allowance for tax free savings is now £15,240. However, unlike the Pension allowances above, you cannot use any previous years unused allowances. It is therefore as simple as; if you do not use it, you will lose it.
The annual allowance can also now be split between Stocks and Shares, and Cash ISAs. That said, following changes in the Summer 2015 Budget, you can now earn up to the first £1,000 of Interest Income from Savings completely Tax Free (depending upon your tax status), reducing some of the benefit normally derived from Cash ISA’s – unless you have significant balances of course.
For the new tax year 2016/17 the ISA limit is expected to stay the same at £15,240.
Managing director, Active Chartered Financial Planners