Nick Rudd
HMRC figures confirm that more than 4,750 Brits spent last Christmas Day filing their tax return. Whether you’re worried about self-assessment or tax-year end, it’s certainly never too early to start thinking about your taxes, especially as a high earner.
This year, you might even have started preparing earlier than usual.
After Labour’s election victory in the summer and the fear of “hard choices” in Rachel Reeves’ Autumn Budget, you might’ve felt that the government had rather forced your hand. The Budget announcement, when it arrived, probably didn’t allay your fears.
While not all of the pre-Budget rumours came to pass, there were some surprises, and we now have a fuller picture of what the next few years of the Labour government will look like. With tax rises for businesses and extensions to existing allowance freezes, now is the perfect time to prepare for 2025/26.
Keep reading for just five practical steps you can take now to make sure you’re end-of-tax year ready.
1. Maximise your personal pension contributions
For most people, the Annual Allowance for 2024/25 is £60,000. Contribute up to this amount if you can afford to and you’ll ensure you make the most of your pensions’ tax efficiencies.
The Annual Allowance is the most you can save in your pension pots in a tax year before you have to pay tax. This includes individual and employer contributions and tax relief.
Your allowance may be lower as a high earner or if you have already flexibly accessed part of your pension. It’s also worth remembering that you might be able to contribute more than the Annual Allowance in a single tax year if you have unused allowance from previous tax years.
Maximize your Annual Allowance and then be sure to also claim the extra tax relief you’re due as a higher- or additional-rate taxpayer. Tax relief automatically applies to contributions at the basic rate of 20% but you can claim an extra 20% or 25% (depending on the rate of tax you pay) via your self-assessment tax return or by contacting HMRC directly.
Pension contributions can also be useful if you find yourself in the so-called 60% tax trap. If you earn more than £125,140, you’ll no longer have a Personal Allowance and will pay tax on all your income. This can lead to an effective tax rate of 60% on a portion of your income. Maxing out your Annual Allowance could reduce your adjusted net income so that you retain the full Personal Allowance or reduce the proportion you lose.
2. Make pension contributions for your partner and children
Tax relief on pension contributions applies even to those who aren’t earning or paying taxes.
Make contributions to your partner’s pension to max out their Annual Allowance and the tax relief they receive and then do the same for the pensions your children hold. Even people with no earnings, such as young children, can contribute up to £3,600 – that’s effectively £2,880 from them (or you) with the rest coming from tax relief.
Any contribution you make to the pension of your spouse or a now grown-up child is treated as if they were making it. The tax relief applied will be based on the rate of tax they pay, not your rate. If they pay tax at the basic rate, relief will be added at 20%, while they’ll need to claim any extra relief through their own self-assessment tax return.
3. Be sure to use your own and your family’s ISA Allowances
You might have already made full use of your ISA Allowance for the year. Making payments at the beginning of the tax year boosts your investment or Cash ISA holdings early and gives your increased fund longer to grow.
If you haven’t used your full £20,000 ISA Allowance (for the 2024/25 tax year), do so now, if you can afford to. Then check in with your partner’s ISAs and your children’s Junior ISAs (JISAs) too.
Making full use of available allowances means you’re fully utilising these wrappers’ tax efficiencies. And remember, the ISA Allowance can’t be carried forward so any allowance you don’t use is lost.
Your partner has their own £20,000 ISA Allowance spread across the ISAs they hold and they can pay into multiple ISAs, even of the same type (although you can only open one Lifetime ISA).
The JISAs you have opened on behalf of your children have their own ISA Allowance of £9,000 for the 2024/25 tax year. They share the same tax efficiencies as adult ISAs, which means no tax to pay on Cash JISA interest and no Income Tax or Capital Gains Tax (CGT) on gains in a Stocks and Shares JISA.
4. Take advantage of HMRC’s annual exemption
Giving gifts during your lifetime is a great way to help the ones you love now, while also reducing the value of your estate, helping to reduce a potential Inheritance Tax (IHT) liability in the future.
The annual exemption allows you to gift up to £3,000 a year and any unused allowance can be carried forward for a year.
The allowance is individual to you, so your spouse or partner has their own £3,000 limit too. This means you could use the annual exemption to gift up to £12,000 this tax year if neither you nor your spouse used your allowance in 2023/24.
5. Give gifts from your income
One of the most valuable and underused IHT exemptions for high earners is the gifts from normal income exemption.
This allows you to make regular gifts – into a loved one’s pension plan, say – as long as you can prove to HMRC that the gift is made from your income, is part of your normal expenditure, and doesn’t detrimentally affect your standard of living.
Interestingly, the Telegraph confirms that only 430 families made use of this exemption in 2021/22, meaning many in the UK are currently missing out.
Get in touch
To find out how we can help you get ready for the end of the tax year, please get in touch.
Contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
