Tax year end planning
An example-based summary of tax year end planning opportunities that utilise pension contributions and the ISA allowance.
As the end of the 2024/2025 tax year draws near, it is worth reminding clients of the benefit of using up their annual allowances and tax reliefs. Here we remind you of some of the traditional approaches.
Utilise the annual allowance
Pension funding is incentivised by generous tax benefits. Tax relief against personal contributions and equivalent benefits for employer contributions represent an exemption from income tax on the segment of earnings that are directed to retirement funds. This is a significant benefit and should be fully utilised within the client’s financial means.
Each tax year, total personal contributions above £3,600 gross are restricted to relevant UK earnings; and total contributions (including accrual of defined benefits) from all sources are restricted by the standard or tapered annual allowance plus carry forward. Clients who have triggered the money purchase annual allowance are further restricted to total money purchase contributions of £10,000 each tax year without carry forward, but can use their remaining allowance to accrue within defined benefit schemes.
Pension funding is incentivised by generous tax benefits.
Planning
Within the limits of affordability (and assuming the money purchase annual allowance doesn’t apply), clients should top up their money purchase contributions to the lower of:
- The remainder of their unused relevant UK earnings
- Their remaining annual allowance plus carry forward.
Example
Adam earns £120,000 in 2024/2025. He has already paid £10,000 and benefitted from matched employer contributions. He is not subject to the tapered or money purchase annual allowances and has a total of £15,000 carry forward available from 2021/2022 to 2023/2024.
His maximum tax-relievable personal contribution is the lower of:
- Unused relevant UK earnings: £120,000 – £10,000 = £110,000
- Unused annual allowances: £60,000 – £20,000 + £15,000 = £55,000.
If he can afford the contribution, Adam should pay £55,000 gross (£44,000 net) to his money purchase pension before the end of the tax year in line with the provider’s end of tax year requirements.
He will get 20% tax relief at source – £11,000 and a further £11,000 higher rate tax relief provided that he submits a claim for this via HMRC. Furthermore, he will reclaim the remaining £5,000 of his income tax personal allowance, reducing his tax bill by a further £2,000.
His effective rate of tax relief will be 43.6%.
Carry forward
In the above example, it was necessary to work out the unused annual allowances for carry forward purposes. This allowed the unused allowances from the three previous tax years to be brought forward and added to this year’s allowance.
For those who can pay contributions above their annual allowance for the year (including those paid by their employer), carry forward is an integral part of tax year end planning. The rules are straightforward:
- the unused annual allowance (standard or tapered) of each of the last three tax years is carried forward and added to this year’s allowance
- carry forward from a particular tax year is only available if the client was a member of a registered pension scheme in that year
- the current year’s allowance is used first, then the allowance of the earliest available carry forward years, then the next earliest year and so on
- no formal application is required, but if the annual allowance plus carry forward is exceeded the excess needs to be noted on the supplementary self-assessment form.
Earnings are not carried forward, so a scheme member still needs relevant UK earnings to justify personal contributions. Employer contributions, however, are not limited by earnings.
Example
Omid is self-employed and earned £35,000 in his financial year ending in 2024/2025. He has paid no pension contributions yet this year but wants to pay a contribution of £100,000 utilising some of his unused allowances from 2021/2022 to 2023/2024.
Whilst Omid has unused annual allowances from the three previous tax years, carry forward is not relevant for him. His maximum tax-relievable personal contribution this tax year is £35,000 gross and he cannot receive employer contributions.
A good understanding of carry forward can help you work through your client’s maximum funding contribution.
A good understanding of carry forward can help you work through your client’s maximum funding contribution. The following worked example covers the relatively complicated situation where carry forward is being used within three years of a previous carry forward exercise.
Example
Tyrone, whose annual salary is £100,000, used carry forward in 2022/2023.
At the time he had the following unused annual allowances:
| Tax year | Annual allowance | Pension input amount | Unused allowance |
| 2019/2020 | £40,000 | £18,000 | £22,000 |
| 2020/2021 | £40,000 | £38,000 | £2,000 |
| 2021/2022 | £40,000 | £6,000 | £34,000 |
| 2022/2023 | £40,000 | £0 | £40,000 |
His carry forward amount was £58,000, which was added to his £40,000 annual allowance in 2022/2023. However, he did not pay the full amount. Instead, he paid a personal contribution of £75,000. This used up annual allowance from four separate years in the order shown:
| Tax year | Annual allowance | Pension input amount | Unused allowance | 2022/2023 contribution |
| 2019/2020 | £40,000 | £18,000 | £22,000 | (2) £22,000 |
| 2020/2021 | £40,000 | £38,000 | £2,000 | (3) £2,000 |
| 2021/2022 | £40,000 | £6,000 | £34,000 | (4) £11,000 |
| 2022/2023 | £40,000 | £75,000 | £0 | (1) £40,000 |
In 2024/2025, Tyrone wants to fully utilise his available annual allowance. He has paid no further contributions since 2022/2023.
His available annual allowance are as follows:
| Tax year | Annual allowance | Pension input amount | CF to 2022/2023 | Unused allowance |
| 2021/2022 | £40,000 | £6,000 | £11,000 | £23,000 |
| 2022/2023 | £40,000 | £75,000 | n/a | £0 |
| 2023/2024 | £60,000 | £0 | n/a | £60,000 |
| 2024/2025 | £60,000 | £0 | n/a | £60,000 |
His total annual allowance plus carry forward in 2024/2025 is £143,000. He can pay up to £100,000 personally, but will need employer contributions of at least £43,000 to maximise the available allowance.
Reclaiming the personal allowance and child benefit
As well as building up retirement benefits in a tax-efficient way, paying personal contributions to a pension can help reclaim the income tax personal allowance and avoid the high income child benefit tax charge. In both instances, the underlying income measure that makes this possible is ‘adjusted net income’, which is total taxable income before deducting the personal allowance less relief at source pension contributions and gift aid payments.
The relevant income band for the personal allowance is £100,000 to £125,140 in 2024/2025. Every £2 of adjusted net income above £100,000 reduces the personal allowance by £1. Therefore, as the personal allowance is £12,570, it is reduced to £0 when income exceeds £100,000 by at least £25,140 (2 x £12,570).
For child benefit, the relevant income band is £60,000 to £80,000. Every £200 of adjusted net income above £60,000 of the highest earner of a couple, one of whom receives child benefit, triggers a tax charge of 1% of the benefit received. Therefore, when income exceeds £80,000 the tax charge equals 100% of the benefit received, effectively withdrawing the benefit. If child benefit has not been claimed (perhaps because the couple knew one of their incomes would be too high) there is no charge.
If their existing pension provision hasn’t done so already, individuals and couples should consider whether a pension contribution would allow them to efficiently avoid either of these restrictions.
Example
Jude receives an annual salary of £120,000. In addition, he benefits from a 15% employer pension contribution of £18,000, which requires him to pay 5% or £6,000 gross.
His adjusted net income is:
Income £120,000
Pension (£6,000)
ANI £114,000
Based on this he is set to lose £7,000 of his personal allowance.
If Jude can afford further contributions of £14,000 gross, he will reclaim his full personal allowance. The contribution will cost him £11,200 up front, but he will benefit from higher rate tax relief of £2,800 and an income tax reduction of £2,800 (owing to the increase in the personal allowance) when his self-assessment tax return has been submitted.
The contribution will ultimately cost him just £5,600, thus benefitting from 60% tax relief and within his annual allowance for 2024/2025.
Example
Sadie, who receives child benefit for two children, receives an annual salary of £68,000. In addition, she benefits from a 5% employer pension contribution of £3,400, which requires her to pay in the same amount.
Her adjusted net income is:
Income £68,000
Pension (£3,400)
ANI £64,600
Her child benefit entitlement is £2,212.60 and her high income child benefit tax charge will be:
£4,600/£200 = 23% X £2,212.60 = £508.90
If Sadie can afford further contributions of £4,600 gross, she will avoid this tax charge. The contribution will cost her £3,680 initially, but she will benefit from higher rate tax relief of a further £920 and avoid a tax charge of £508.90.
The contribution will ultimately cost her £2,251.10, thus benefiting from 51% tax relief.
Maximise the ISA Allowance
Clients can pay up to £20,000 each tax year into Individual Savings Accounts (ISAs). No income tax is paid on interest or dividends and no capital gains tax is paid on investment returns within an ISA, so they are highly tax-efficient.
There are four different types of adult ISA that can be opened in 2023/24 onwards:
- cash ISAs
- stocks and shares ISAs
- innovative finance ISAs
- lifetime ISAs.
To open an ISA clients need to be aged 18 or over.
Clients are able to save into more than one of each type of ISA in the same tax year. In both cases the maximum total amount that can be saved across all ISAs each tax year must not exceed £20,000 with no more than £4,000 to a lifetime ISA.
Please note, Lifetime ISAs are subject to specific restrictions.
Each type of ISA can access different underlying investments as follows:
- Cash ISAs can be invested in bank and building society deposits and some NS&I products,
- Stocks and shares ISA can invest in shares, collective investment schemes and government and corporate bonds,
- Innovative Finance ISAs can invest in peer-to-peer loans and crowdfunding debentures.
Case Study – Jed
Jed, aged 44, has £30,000 in a deposit account and wants to put this money into a stocks and shares ISA to invest in collective investments.
- £2,500 – He already has a cash ISA and has saved £2,500 into his account this tax year.
- £17,500 – He can take out a stocks and shares ISA and pay the remainder of his £17,500 ISA allowance into this account before 6th April 2025.
- £12,500 – He will, however, have to wait until 6th April 2025 or later to pay the remaining £12,500 into his stocks and shares ISA.
The funds held in his stocks and shares ISA can be invested in the collective investment funds he selects.
This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.
