Consider your savings, investments and pension options before the upcoming tax year end

Bank of England research has shown that many households have been building up their savings in the last year. The research also shows that the majority of those households have accumulated those funds in deposit accounts receiving very low interest. It is therefore worth thinking about what to do with those funds to maximise the returns on them. There are various ways to give those funds a boost from tax savings and at the same time get the potential for better returns.


All adults can save a total of £20,000 each year in ISAs. Importantly, if you don’t use all the allowance, it can’t be carried forward. Investors with an unused ISA allowance for this year should consider using it if they can before the 5 April deadline.

If you have investments held outside of a tax efficient wrapper, such as a General Investment account, a Bed and ISA transaction could be a simple way to open and fund a new ISA, or top up an existing one. The investment, such as a General Investment account, is sold and the proceeds are then moved into an ISA.

Bed and ISA transactions can be useful if you want to take advantage of the tax benefits in your ISA and don’t have readily available additional cash.

There may be a capital gains tax liability if the profit on the sale of the General Investment account, so you need to be mindful that you do not exceed your annual CGT allowance of £12,300 in 2020/21, however once in the ISA, all dividends and future capital growth are free from income or capital gains tax.

Pension allowance

The pension annual allowance for 2020/21 is £40,000 – (this includes both contributions by you and your employer.)

Pension annual allowance can be carried forward for up to three years, so you should consider whether you have made as much use of your pension annual allowance as possible, ahead of the end of the tax year.

Individuals with very high incomes or those who have started to take taxable income from drawdown will have a restricted annual allowance.

If you are looking to make use of carry forward, note that personal contributions in any year are also limited for tax relief to 100 per cent of your earnings to the maximum as noted above. People with no earnings (including children) can still save up to £3,600 a year in a pension (including basic rate tax relief).

The tax-free personal allowance for most people is currently £12,500. However, if your taxable income reaches £100,001+, your personal allowance is cut by £1 for every £2 of your income, which means that you lose the allowance completely once your income reaches £125,000.

For example, someone who receives a pay rise from £100,000 to £110,000 will lose £5,000 of their personal allowance. They will be taxed at 40 per cent on their pay rise, amounting to £4,000, and then taxed at 40 per cent on their lost personal allowance, amounting to £2,000. This means they pay £6,000 on the £10,000 pay rise – which equates to an effective tax rate of 60 per cent. Those who are in this position should consider reducing their taxable income so that it falls below the £100,000 level to avoid their personal allowance being eroded. You can do this by contributing to a pension.

By putting money into a pension, you are a making tax savings in the form of getting your personal allowance back (as in the example above) whilst also saving for your future and benefiting from pension tax relief at 40 per cent, so you wipe out the 60 per cent effective tax rate completely.

Child Benefit

Parents with children (still in approved education) are entitled to child benefit, but as soon as one parent exceeds the £50,000 earnings threshold, the entitlement to child benefit gets reduced, before the benefit is completely wiped out when they earn £60,000 or more.

The current benefit will see a parent with two children get £1,820 per year in child benefit, but for every £1,000 they earn over £50,000 they will lose 10 per cent of their child benefit – so someone earning £51,000 will lose £182.

However, parents that have not crossed too far over the threshold can get around this by increasing their pension contributions. What’s counted for the purposes of the child benefit ‘High Income Charge’ is your salary after any pension deductions. This means if you contribute enough to your pension to get your salary back to £49,999 then you’ll get the full child benefit again.

One of the biggest frustrations for many parents is that the income rule applies if either parent earns more than £50,000, regardless of their partner’s income. So, you could have both parents earning £48,000 each and have no problem, but if one earns nothing and the other earns £60,000 then you’ll lose the benefit.

Gifting money

Gifting money in your lifetime needs careful consideration to avoid any surprise tax bills. Lifetime cash gifts are known as PETs or potentially exempt transfers and can create an inheritance tax charge if you, as the donor, pass away within seven years of the date of the gift.

However, you also have an annual gift allowance of £3,000 and any unused allowance from the previous tax year can be carried forward. Gifts of up to £250 made to an individual are also exempt each tax year.

You can also make regular gifts of any size out of surplus income without paying tax, as long as your lifestyle isn’t detrimentally affected.

Get in touch

For more information on any of the points mentioned or to review your options with an experienced financial advisor, contact us here.

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