- Pensions
- Adding money to a pension offers a tax-efficient way to save for retirement, and an opportunity to cut your tax bill in lots of ways. This includes the potential to lower your income tax liability, and shelter long-term investments from dividend and capital gains tax.
How much tax relief will I get?
- If you’re a UK resident under 75, you’ll automatically get 20% basic-rate tax relief added to anything you pay into your personal pension – even if you don’t pay tax.
- You can usually pay in as much as you earn up to £40,000 each tax year across all your pensions, and get tax relief. If you earn £3,600 or less (including non-earners) you can still pay in up to £3,600, including tax relief.
- If you’re a higher-rate taxpayer, the tax benefits are even more appealing. You can claim back up to a further 20% or 25% in tax relief through your tax return. Scottish taxpayers pay different rates of tax and could claim up to 26% in tax relief.
- Pension and tax rules can change, and benefits depend on your circumstances.
- ISAs
- You can currently invest £20,000 each tax year into a Stocks and Shares ISA, which allows you to shelter your money from UK income and capital gains tax. If your investments go up in value, you won’t have to pay capital gains tax when you sell them. And if your ISA investments make income, you won’t pay UK income tax on that either. This could be particularly useful if you’re likely to be impacted by the upcoming dividend tax hike. Withdrawals are tax free.
- If you’re saving to buy a first property and are aged 18-39 you could consider a Lifetime ISA (LISA). In addition to tax-free growth, you get a 25% bonus on contributions. You can save or invest up to £4,000 each tax year and the government will give you a bonus of up to £1,000. You can withdraw your money to buy your first home from 12 months or wait until you’re 60 and take your money out then. Other withdrawals will usually mean there’s a 25% government withdrawal charge.
- Don’t forget Junior ISAs (JISAs) too. In the current tax year, you can save or invest up to £9,000 in a JISA for any qualifying child, and all interest, dividends and capital gains are free of UK tax. They can access this at the age of 18, or roll it over into an adult ISA.
- Investments can fall as well as rise in value, so you could get back less than you invest.
- Salary sacrifice
- In some cases, the government will let you give up a portion of your salary and spend it on certain things free of tax (and in some cases National Insurance). This includes pensions, bike-to-work schemes, and technology schemes. This won’t boost your take-home pay, but it will cut your tax bill. It’s worth speaking to your employer about any salary sacrifice schemes they might offer.
- Sharing assets with a spouse
- Assets that produce an income can usually be passed between spouses or civil partners without triggering a tax bill. This can help you to manage your tax bill if one of you is nearing an allowance limit.
- Marriage allowance
- If one spouse is a non-taxpayer, and the other is a basic-rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.
- To put this into context, let’s say you’re a non-taxpayer earning £10,000 and your spouse is a basic-rate taxpayer earning £40,000. Their taxable income would be £27,430 (as the first £12,570 is tax free).
- As the non-taxpayer, if you claim marriage allowance, you could transfer £1,260 of your personal allowance to your spouse. Your personal allowance becomes £11,310 and your spouse gets a ‘tax credit’ on £1,260 of their taxable income.
