It’s time to make sure you’re not missing out
Now is the time to check that you’re making full use of all your tax allowances, writes Adrian Watson
AT THIS time of year, you would be wise to check if you are making the maximum use of tax reliefs, exemptions and allowances that run out at the end of the tax year.
One of the key planning areas to focus on before the tax year end on April 5 is pensions. Most of us do not make full use of the annual allowance. This is the limit on the amount of pension contributions that can be made each year and qualify for tax relief.
The standard rule is that you can contribute the lower of your annual earned income or £40,000. You may also be able to “carry forward” unused annual allowances from the three previous tax years. Although for the highest earners, those with adjusted income over £150,000, the situation has become more complex as the standard rules don’t apply.
Many people are aware that tax relief on pension contributions can significantly enhance your retirement savings over the long term. Fewer realise that pension contributions can provide a more immediate benefit by reducing your income tax bill.
Any contributions you make into your pension can be deducted from your earnings before you are taxed. This reduces your taxable salary.
So if you earn £45,000 a year and contributed 5% of this (£2,250) to your pension, then your taxable salary becomes £42,750. As the higherrate tax band starts at £43,000 this would have the effect of moving you from being a higher-rate taxpayer back into the basic rate.
Making a pension contribution can also help higher earners regain their full personal allowance, which is reduced on earnings in excess of £100,000.
The personal allowance is the amount everybody can earn each year without paying income tax. High earners lose £1 of their tax-free personal allowance for each £2 of income they receive above £100,000, with the full allowance lost once income exceeds £122,000.
For those on salaries between £100,000 and £122,000, this pushes up their effective highest rate of income tax to 60%. Making a pension contribution, and so reducing your taxable earnings, can help you avoid paying such a high marginal tax rate.
Adrian Watson is divisional director – financial planning, Brewin Dolphin, Cardiff.