Get pensions, investments, cash savings and gifting in shape for tax-year end

The 2024/25 tax year is coming to a close against a very uncertain political and economic backdrop.

Chancellor Rachel Reeves is due to make a Spring Statement on 26 March, which had previously been flagged as an economic and fiscal update that would not include the sort of tax policy announcements now reserved for the Autumn Budget.

Gary Smith, Partner in Financial Planning at wealth management firm Evelyn Partners, says ‘Much has happened since the October Budget and there is speculation in some quarters that the Government might be forced into some sort of revenue-raising announcement at the Spring Statement towards then end of this month. Particularly given the rapidly developing outlook for defence spending and the narrow headroom in the public finances.

‘For the UK taxpayer though, the main focus right now should be not what might be in that statement, but the allowances and opportunities they will lose after 5 April and what they can do with their own finances to put themselves in the most tax-advantageous position possible.

‘We have had conversations with clients about using various annual allowances and exemptions a bit earlier in this tax year because the October Budget drew so much attention to these issues. But there is still time for people to take advantage of these entitlements, by for instance boosting pension contributions, or gifting to loved ones to reduce an inheritance tax liability.

‘Indeed gifting has been a major theme of our discussions with clients after the changes to the inheritance tax regime announced at the Budget, with many keen either to use their annual gifting allowances or to start the seven-year clock ticking on a larger gift. In particular, the forthcoming inclusion of unused pension pots in IHT has sparked conversations about withdrawing from pension funds either to spend or to gift.’

Here Smith sets out eight key areas where there are possible tax-mitigating steps to take.[1]   

1. Inheritance tax annual gifting allowances 

Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. 

Smith says: ‘But there is also an annual gift allowance of up to £3,000 per tax year – so £6,000 for a couple - and this will not be subject to IHT even if you do die within seven years, as it will be treated having left the estate immediately. This £3,000 annual allowance can be brought forward for one tax year if not used, which means a possible £12,000 per couple could be available to gift before the end of the tax year on 5 April. That can be given to one individual or split across several.[2]

‘This has been a hot topic with clients this year after the Budget as they take steps to reduce the value of their estate in order to mitigate a growing IHT liability. For many people the inclusion of pensions in IHT from April 2027 means that their estate will expand dramatically, so they are looking at steps they can take in the meantime to compensate for that.

‘Pensions aside, as the IHT nil-rate bands are in the deep freeze and have been for some time, many modest estates are being dragged into the IHT net and even the annual gifting allowances can make a difference by taking the estate below these levels so IHT does not become an issue for their beneficiaries. This can save not just money that would otherwise go to the Treasury but also time and aggravation for the executors who would otherwise have to calculate and pay an IHT bill before probate is granted.

‘We are also seeing increased interest in the “normal expenditure out of income” exemption to IHT, which allows people to make regular gifts over long periods of quite substantial amounts as long as they come out of income and do not impact their usual standard of living. These amounts – if the rules are followed correctly – leave the estate immediately and are not subject to the seven=-year rule so can be a very effective way of reducing IHT liabilities. 

‘While not particularly a tax-year-end issue this is something that some families might want to speak to their financial planner about, because this really is an area where professional help is necessary.’

2. Pension withdrawals up to the tax band limit 

Pension withdrawals outside of the 25% tax-free cash are taxable income and with the state pension taking up most of the personal income tax allowance, even a modest private pension income is likely to mean a retiree will pay basic rate tax on some of it.

Smith says: ‘We would always advise clients to consider the income tax they will pay when planning pension withdrawals, but this question is becoming more important now that more savers are looking to take greater amounts out, in the light of the IHT measure in the Budget.

‘Those now looking to spend or gift more of their pension funds need to keep an eye on the tax they will pay as they withdraw funds, because that is a definite liability that they will have to pay, whereas in some instances the IHT might only be a notional future problem.

'If possible, keeping one’s taxable income the right side of the next tax band can make sense, so for many people this might mean measuring their pension withdrawals so they do not push total annual income above £50,270 into higher rate tax at 40%. For wealthier savers the additional rate boundary of £125,140 might be the upper limit – but retirees, just like workers, also suffer an effective marginal income tax rate of 60% above £100,000 of income, as that is where the Personal Allowance starts to be withdrawn.

‘While someone drawing on a pension might be less likely to be impacted by the withdrawal of tax-free childcare that can make an income over £100,000 even less remunerative for many earners, this level is likely to be on the radar of those relying on income from savings and assets as one not to be crossed.

‘So in terms of tax year end, if someone expects to need extra funds from their pension in the next tax year but still has “room” to withdraw more in this tax year without breaking into the next tax band, then it could be sensible to make extra withdrawals now.’

3. Reducing taxable income and the 60% tax trap   

The highest rate of tax is 45%, which from April 2023 has applied to individuals with total income over £125,140. Personal allowances are tapered for individuals with income between £100,000 and £125,140, which means the marginal tax rate in this band is 60% - exacerbated for many families also by the loss of tax-free childcare. 

Smith says: 'Most people will now know their likely total taxable income for the tax year, including any bonuses, and therefore whether they looking like being pushed across one of the big marginal rate steps in the UK tax and benefit system.

‘There are some relatively easy steps you can take to reduce taxable income, and that can be particularly tax efficient if you are about to or have just fallen into this 60% marginal tax rate band.' These include:

• Making pension contributions, especially by salary sacrifice, or charitable gift aid payments 

• Transferring income-generating assets between spouses/civil partners 

• Using tax-free investments and/or tax-efficient investments such as VCTs or EIS 

• Investing in assets which generate capital growth rather than income

• Altering the timing of income to maximise use of lower rate bands.’ 
     

4. Pension contributions – using your annual allowance   

Smith says: ‘Pension contributions are the most powerful way of saving for retirement – with tax relief given at an earner’s marginal rate of income tax - but they have also become simply a way of keeping more of your income, rather than it going to the Treasury. Although that money will remain inaccessible until age 55 currently, or 57 which is where the normal minimum pension age is set to rise to in April 2028.

'The tax benefits are accentuated in salary sacrifice payroll systems that also afford relief against employee National Insurance payments, and can additionally draw in an extra contribution from the employer due to their NI saving.

'As millions of people are drawn into higher income tax bands and paying more tax as their earnings rise, increasing pension contributions is one of the few ways to mitigate against this. The higher rates of pension tax relief are not something that can indefinitely be taken for granted, with some speculation that the Chancellor looked at reform of the system before the last Budget (as have several Chancellors in previous Budgets).

‘With pressures on the public finances showing no signs of abating, it can’t be assumed that pension tax relief – or indeed the annual allowance of £60,000 - is out of the woods. So if it makes sense given an individual’s overall financial situation to save more into their pension, then they might think it’s best to take advantage of the generous system while it remains untouched.’ 

The £60,000 pensions annual allowance is the total one can save into a pension in a tax year while still benefitting from tax relief - but if your annual 'net relevant earnings’ are less than £60,000 then that forms the limit for tax-relieved contributions in a tax year.[3] 

The highest earners are also restricted by the tapered annual allowance: this means individuals with 'threshold income' of over £200,000 and 'adjusted income' of over £260,000 are subject to a steadily diminishing annual allowance down to a minimum of £10,000.[4]

Smith adds: 'For high earners, who typically earn a significant proportion of their compensation on a variable basis, such as bonuses, it can be difficult to be sure of what “total adjusted income” will be until the very end of a tax year, meaning a lack of clarity about how much they can subscribe to a pension without inadvertently exceeding their allowance. Professional advice from a financial planner or accountant is invaluable in this instance.'

You may also be able to take advantage of any unused annual allowances from the previous three tax years to make additional pension contributions under the 'carry forward' rules – although the total amount you pay in in one tax year can still not exceed net relevant earnings, and this potentially complicated measure is something best addressed with help from a financial planner.

Smith adds: ‘One final thought on pensions is that many pension savers are worried about the longevity of the 25% tax free lump sum, as this also reportedly came into the spotlight at the last Budget. While those putting money into pensions should be aware that there is no guarantee the pension access rules will be unchanged when they come to use their pension, they can only really make decisions based on the rules as they stand.’

5. Giving to charity can also save you tax   

If you pay tax at the 40% rate or higher, you may benefit from tax relief on gift aid donations you make to charity. Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief. 

Individuals can gift quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from capital gains tax. 

6. Couples can save tax on savings income 

Some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and £500 for dividend income. Savings and dividend income falling within these bands is taxed at 0%. 

Separate to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers – but additional rate taxpayers get none at all, so holding cash savings is potentially unrewarding for them, unless in a cash ISA.

Smith says: 'Spouses and civil partners should make sure they are using both PSAs. And if they still have some savings that are generating taxable income then they can ensure they are held by the partner who will pay least tax on it.

‘Higher and additional rate taxpayers with large cash savings they don’t need immediate access to might also consider investing directly in low coupon gilts, where much of the quite high probable “yield” will come in the form of tax-free capital gains. This is an option best considered with the advice of a financial planner or investment manager.’ 

7. Using up capital gains tax allowances

As capital gains tax is charged when an asset is sold, you have some control over when to pay it. If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is now just £3,000 per tax year. 

Smith says: 'Now that investors and business owners are facing higher CGT rates of 18% and 24% on all assets, it is all the more important they consider whether to crystallise some gains in the current tax year – or crystallising unrealised losses to set against some gains may also be an option. Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses. 

'The increased rates of CGT and now meagre CGT annual exempt amount are strong arguments in favour of keeping as many investments as possible in tax-protected wrappers like ISAs or pensions. There is still time for those who hold investments that are exposed to CGT or income or dividend tax to transfer those assets – where possible – into an ISA or pension before the end of the tax year, possibly using up some of their annual CGT exemption in the process.’ 

8. Making use of ISA allowances 

Smith says: ‘Savers have become quite twitchy in recent weeks as reports in the media have suggested cash ISA allowances might be under threat, with UK asset managers keen to see more funds funnelled towards UK equities, and the Government reported to be listening.

‘There is no hard evidence the Chancellor is set to tamper with ISA allowances and savers can only proceed on the basis of current rules. It's unlikely funding decisions into ISAs made now will be affected by future rule changes but either way, the uncertainty probably strengthens rather than weakens the argument for using your ISA allowance before the tax year end, whether it’s for cash or investments.

'The annual ISA subscription limit for 2024/25 is £20,000, and this limit cannot be carried forward if not used. Couples who have funds that are exposed to tax but where one person is not using their ISA allowance might consider using up that spare allowance, even if that means transferring cash or assets. You can fund an ISA with cash to take advantage of the 2024/25 allowance without having to choose investments, which can be done at a later date.

‘You can also consider Junior ISAs for children under 18, for which there is a separate annual allowance of £9,000.  Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As ISA income is not taxable, this allows you to give cash to your children without having to pay tax on the income generated. ‘

NOTES

[1] In England and Wales.

[2] Additionally, the small gift allowance means you can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

And each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership - up to:

£5,000 to a child

£2,500 to a grandchild or great-grandchild

£1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

[3]‘Net relevant earnings’ are the total earnings for an individual (including salary, bonuses and value of many benefits in kind for employees and trading profits of the self-employed) for the tax year.

[4] Both include all taxable income, not just earnings. Investment income of all types and benefits in kind, such as medical insurance premiums paid by the employer are also be included. Adjusted income includes all pension contributions (including any employer contributions), while threshold income does not.