Business Matters – Issue 40
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Tax-smart toolkit – Equipping you for tax-year-end success
Part 2
With the tax year-end fast approaching on 5th April, checking you’ve made the best use of the valuable tax reliefs and allowances can make a real difference to the future you look forward to.
As an entrepreneur, understanding what you need to do – both personally and professionally – at this crucial time can help you comfortably ride out the end of this tax year, arriving well-prepared for the next one.
In the second of our tax year-end special issues, we’ll be focusing on pensions, covering your current allowances, the changes from the Autumn Budget that might impact your tax year-end – as well as your team’s – and some courses of action you might wish to take.
As always, talking through your options with an expert who understands your financial goals will help you feel confident about the choices you’re making. Let’s start a conversation today.
Download your tax year-end checklist
Do you know how many tax allowances you’re entitled to – and whether you’re making full use of them? Many of us remember to top up our ISAs as much as possible before tax year-end, but there are other, often overlooked allowances and ‘carry forwards’ that can save you money.
Pension power
Wherever you are in your savings journey, it pays to be able to look ahead, confident in the knowledge that your money will last as long as you need it to.
Because of the Income Tax relief you get on the money you pay into your pot, your pension – used as part of a balanced investment portfolio – is one of the best ways to save for your retirement. This tax year, until 5th April, you can contribute, subject to certain allowances, up to £60,000 or 100% of your earnings, whichever is lower, and receive tax relief.
Bear in mind that the freezing of the Income Tax personal allowance and tax bands – and the reduction of the additional-rate Income Tax threshold to £125,140 – means you could end up paying more tax. Maximising your pension contributions is one way to reduce the effects of this.
It’s worth topping up your pension as early as you can. That’s because, over the long term, this money can benefit from compounding and could add a significant amount to your retirement fund. Therefore, the earlier in life you start contributing to a pension, the better.
Your pension allowances for 2024/25
You can personally get Income Tax relief on 100% of your earnings or £3,600, whichever is higher, but the total amount that can be paid into your pension, including from your employer, is limited to an annual allowance of £60,000.
You can ‘carry forward’ your annual allowance if you haven’t used it all in previous years. You use this year’s one first, then you can go back up to three tax years (i.e. 2021/22) and use the unused allowance, then the next, and the next. The total amount you pay personally would still be limited to 100% of your earnings or £3,600.
From age 55 (set to rise to 57 in 2028), you can take out up to 25% of your pension pot tax-free. The rest is charged at your usual Income Tax rate.
Proposed changes to pensions and what to do about them
Traditionally, your pensions would be the last thing that you would dip into, after drawing down on savings and ISAs. Using your savings would reduce the overall taxable value of your estate, while preserving the pension to pass to future generations without being liable to 40% IHT.
This is currently under discussion and may change from 6th April 2027. From 2027, while you can still draw down 25% of your pension as a tax-free lump sum (up to £268,275), any unspent pension will potentially be counted – and taxed – as part of your estate when you die.
Indeed, the Budget has left people wondering whether to draw their pension – taking the hit on income tax but then being able to gift some of the money to loved ones.
A technical consultation paper has been published on the implementation, with a deadline for responses of 22nd January 2025. As the new rules do not apply until 6th April 2027, this gives us time to fully consider the potential changes and take in any amendments that happen before the implementation date.
What you could do:
- Use your annual £3,000 IHT gifting exemption (£6,000 for a couple) to give money to family or loved ones during your lifetime, instead of as an inheritance. This will reduce the size of your estate over time.
- Make a gift of over £3,000. If, however, you die within seven years of making the gift, the gift will be counted as part of your estate.
- Make regular monthly ‘gifts’ to family members or cover some of their outgoings, such as childcare or school fees on a regular basis. These are tax-free – so long as they’re genuinely made from disposable income and do not affect your own standard of living.
- Consider spending more of your pension pot on yourself, or others.
- Take out a Lifetime Assurance policy to help cover the eventual IHT bill.
Should I start giving money away in my lifetime?
You can gift up to £3,000 a year tax-free – and if you didn’t make a gift the previous tax year, you could potentially gift £6,000. If you have a spouse or civil partner, they can also make similar gifts, which is a good way to start passing money on as a couple.
You can also gift larger sums, known as Potentially Exempt Transfers. What that means is they’ll be exempt from IHT so long as you live another seven years after making the gift. If you die before that, the amount moves back inside your estate – although the amount of IHT you’re liable for may taper off depending on the size of the gift if you survive three years or more.
Should I spend a bit more of my pension?
You could certainly consider it. After all, you earned it! But you could also consider spending it on other people too. This could be an opportunity to start moving wealth between generations and helping people out with some of their living expenses at the same time. If you offer to cover day care fees or mortgage repayments – even health insurance from your disposable income as part of your gifting allowances – it’s potentially free from IHT.
Are there any other pension-related Budget implications for business owners?
The National Living Wage will rise from April this year from £11.44 to £12.21 an hour. Additionally, the minimum wage for those aged between 18 and 20 will increase to £10 an hour.
More employees will therefore surpass the pensions auto-enrolment threshold of £10,000 a year, which is an additional cost to the business. This will also impact employee well-being as rather than having more money in their pockets, some of this pay rise will now go into their pension.
Crossing the tax year-end finish line with confidence
Following the Autumn Budget, many people are rightly trying to understand what it means for them and how it might change their own personal financial plan ahead of tax year-end. When it comes to pensions, at Wellesley, we’re already thinking about how to manage the potential change in 2027, while focusing on the present – and the allowances we know for sure.
Now’s the time to review your strategies and, as always, professional advice can make all the difference in navigating these changes confidently. It’s important not to lose sight of your own personal goals. They will likely still be in reach – you just might have to get there by a different route.
Get in touch to explore all your options for tax year-end. Together, we can make your hard-earned wealth truly count!
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