Many people don’t always realise the significance of the end of the tax year until it’s too late. Each and every year, an individual has a set of allowances allocated to them and some of these can be lost if action isn’t taken.
So with the 6th April and the dawn of a new tax year fast approaching, what do you need to consider?
We’ve put together our top 10 considerations – split over two instalments. Here are the first 5…
Business owners: take profits as pension contributions
Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package as any contributions made during the company’s accounting year are treated as an expense, so attract corporation tax relief. Effective rates of extraction can be as low as 15% from the pension, plus you get tax free growth in the meantime.
This approach is of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so.
Pay employer contributions before corporation tax relief reduces
Another one for business owners – there are plans for Corporation tax, which currently stands at 19%, to reduce to 17% by 2020. Companies may want to consider bringing forward pension funding plans in order to benefit from the current rate of tax relief before the reduction if they have the profits and the cash available.
Employees: sacrifice bonus for an employer pension contribution
If you usually receive an annual bonus, it could be worth your while sacrificing this in favour of an additional pension contribution. Depending on the size of the bonus, taking this approach could result in significant NI contribution savings for both yourself and your employer. Even a relatively small bonus could boost your annual pension savings considerably.
Recover personal allowance
Since 2010, individuals earning in excess of £100,000 per annum have been subject to a tapering of their personal allowance – £11,850 in the current tax year – which reduces by £1 for every £2 that their adjusted net income rises above £100,000. If your earnings are between £100,000 and £123,700, it is worth considering making additional pension contributions, ideally to bring your ‘taxable income’ below the £100,000 threshold, therefore allowing you to regain your full annual tax free personal allowance. This type of planning can result in an effective rate of income tax relief of up to 60%, meaning the net cost of a £23,700 pension contribution could be as little as £9,200.
Recover child benefit
Child Benefit is eroded by a tax charge if the highest earning individual in the household has income of more than £50,000, and is cancelled altogether once their income exceeds £60,000. A pension contribution could reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
For more information on any of the above points, please contact our financial advisers for advice.
The second part of this blog can be viewed here.