Just as the end-of-January self-assessment deadline fades from view, another date in the HMRC calendar comes hurtling into focus: the end of the tax year on 5 April.

As this important fiscal milestone approaches, many will be prompted to review their tax affairs, ensuring they are making the most of the annual allowances and reliefs available while not incurring any unwelcome or unexpected charges.

In this article, we explore the role of pension contributions, highlighting some of the key points to consider as the tax-year end approaches.

Tax-efficient savings for later life

Data from Standard Life pinpoints February as the busiest month for pension searches in recent years, underlining the significance of this area of personal finance in the period prior to the April tax-year-end deadline.

A fundamental reason is that paying into a pension can offer the dual benefit of supercharging your retirement savings while also optimising your tax position. The tax relief on contributions makes pensions an efficient savings vehicle, and in the context of taxable income, there are certain situations where paying into a pension can effectively extend tax bands or ensure personal allowances are secured.

An example is the Personal Allowance – the amount of income you can receive before paying tax. This is currently set at £12,570 for the 2022/23 tax year. However, if you earn above £100,000, your Personal Allowance is reduced.

This works on a sliding scale where £1 of your Personal Allowance is lost for every £2 you earn over the £100,000 threshold. This gradually reduces the Personal Allowance from its maximum level of £12,570 to the point where it disappears altogether when your income reaches £125,140.

Pensions can be a helpful option for individuals who are both keen to avoid this situation while also topping up their retirement savings. Qualifying gross pension contributions can be deducted from your total income, resulting in adjusted net income (ANI) being contained within the £100,000 threshold or limiting the extent to which the Personal Allowance is eroded.

In the same way, it may be prudent to consider the possibility of using pension payments as a means to mitigate the High Income Child Benefit Charge (HICBC), which applies if an individual has an adjusted net income that exceeds £50,000 and the household is claiming Child Benefit.

This charge gradually increases for incomes between £50,000 and £60,000, beyond which point the charge is equal to the total amount of Child Benefit received. However, gross pension contributions can reduce adjusted net income to below the HICBC threshold, meaning no charge is due.

Be aware of your allowances

Ultimately, there is no limit on how much an individual can choose to pay into their pension every year. However, it is only possible to invest a certain amount, known as the Annual Allowance, before incurring a tax charge. The Annual Allowance is currently set at the lower amount of either £40,000 or 100% of your taxable earnings.

Unused pension allowances from previous years can be used to increase contributions in a given year. Under the rules governing this process – known as carry forward – you can combine unused allowance amounts from the previous three years and still receive tax relief as long as you were a member of a pension scheme during that time. The amount available to carry forward will depend on how much allowance you have previously used. Furthermore, the total value of contributions can’t be above your annual earnings for that tax year.

For some higher earners, the Annual Allowance is also subject to tapering. This applies to those with adjusted income over £240,000 and a threshold income above £200,000. In these circumstances, tapering reduces the £40,000 Annual Allowance by £1 for every £2 over £240,000. Above £312,000 tapering no longer applies, meaning everyone should benefit from an Annual Allowance of at least £4,000.

When making contributions, it is also important to understand the total value of your pension since there is a limit on the value of the benefits you can accrue without incurring a tax charge. This is known as the Lifetime Allowance and it is currently fixed at £1,073,100 until at least April 2026. Going over this allowance typically means there will be a charge on the excess, which is either 55% if the money is withdrawn as a lump sum or 25% if taken as income.

The value of planning

The deadline of the tax-year end means the subject of allowances is very timely in the months and weeks leading up to 5 April. When considering strategies for optimising your position and maximising your use of allowances and reliefs, it is always sensible to seek out expert professional advice since tax can be a very complex subject.

To ease the pressure at this time, it can also be beneficial to consider taxation within your overarching financial planning. By taking a holistic, long-term view, you can put a framework in place that integrates all aspects of your wealth, enabling you to plan for any forthcoming deadlines while supporting longer term financial ambitions.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.

You should be aware that the value of an investment can fall as well as rise and that investors may not get back the amount they invested.