If you do one thing this year, make the most of your tax allowances

While tax is a necessary part of life, there are ways you could make sure you don’t pay more than you need to on your savings and investments – to help you grow your wealth.

According to recent figures from HMRC, we’re paying more tax than ever. That’s why it could really pay off to think about whether you could minimise how much tax you’re paying as part of your long-term financial plans. One way of doing this is through an ISA or a pension.

Often the two types of investing are pitted against each other to see which comes out on top. However the different tax saving benefits that each offers, means they could both have a valuable role to play when it comes to reducing the amount of tax you might have to pay.

How could a pension help you?

Gareth Smith, Skipton Building Society’s Retirement Planning Lead explains, 'When you invest into a defined contribution pension, you benefit from tax relief of at least 20%. Effectively, for every £80 you pay in, tax relief means a further £20 goes into your pension pot. If you’re a higher or additional rate taxpayer, and you claim for it through self-assessment, you can get tax relief of 40% or 45% respectively. 'Typically, you can pay a maximum of £40,000 each year into your pension,' continues Gareth. 'There’s also the lifetime allowance. This limits you to having £1,073,100 (increasing to £1,078,900 for the 2021-22 tax year) in your pension before it is subject to additional tax.”

With the lifetime allowance being set so high, it means there could be an opportunity for you to pay into a pension to support your financial future, while benefitting from tax relief at the same time. And with the pension freedoms meaning you can use this money however you wish, pensions are no longer just about saving for your retirement.

There are still important tax considerations around using your pension:

You can’t access it before age 55

Only 25% is tax-free to withdraw

The rest is taxed at your marginal rate – making it important not to withdraw too much in one go

What’s the deal with an ISA?

Gareth continues, 'With ISAs, there’s no tax relief when you invest money. But once inside an ISA, there’s no tax to pay on any growth you achieve, or to make withdrawals. 'Because of the tax benefits that come with an ISA, there’s a limit on how much you can invest in one tax year. For 2020/21 this amount stands at £20,000.'

The ISA allowance for each year doesn’t roll over. So if you haven’t used this tax year’s allowance, it could prove really beneficial to do so, while you still have the chance. And to start thinking about using your 2021/22 ISA allowance from April 6.

One final tip

Gareth also revealed there’s another valuable tax benefit from pensions – 'Your family could inherit your pension fund tax free.'

If you were to die before the age of 75 and have up to the lifetime allowance amount in your pension, then typically it can be passed on to your family without incurring an inheritance tax charge.

Gareth adds, 'If you were to die after your 75th birthday there may still be tax to pay. However, your beneficiaries might choose to receive the benefit at a time when they themselves are paying a lower rate of income tax – such as when they retire.'

It doesn’t need to be one or the other

'Savvy investors are likely to make good use of both pensions and ISAs. It’s all about considering your long-term goals, and how and when you need your savings', Gareth concludes.

Both long-term investment approaches will mean your capital is at risk. You could

get back less than you paid in. The tax treatment of your investments depends on your individual circumstances and may be subject to change in the future.

Building your wealth doesn't need to be complicated

It’s a given that’ll you want to do all you can to reduce your tax bill. But you might not be entirely sure of what comes next.

That’s why Mail Finance have teamed up with Skipton Building Society. They have over 30 years’ experience of helping people to plan their finances, and they are here to support you in building a stronger financial future.

A friendly and relaxed conversation with one of their advisers could make all the difference. They’ll take the time to understand what it is you want to achieve with your money.

If you’d like to speak to a Skipton adviser about your finances, it’s free to find out more about how they could help you.

Skipton’s recommendations are likely to include stock market-based investments. These are not like bank and building society savings accounts as your capital is at risk and you may get back less than you invest. The value of your investments and any income from them may fall as well as rise.