Client Newsletter – March 2022

Welcome to our tax year end newsletter.

The 5th of April is fast approaching and with that comes the end of another tax year.

We continually speak with our clients about the benefits of tax planning, and how saving tax can impact on your financial planning journey.

We issued a newsletter recently regarding the impact on global markets with the Ukraine invasion and the global economic outlook remaining uncertain. Additionally, inflation is currently around 5.4% and this figure could yet rise further.   You will already be feeling the pinch through increases to the costs of household goods and services, particularly electricity and gas, which hits most individuals’ pockets.

Furthermore, from April 2022 we will see an increase of 1.25% to national insurance contributions (NICs) which will reduce “take home pay” for those still working. 

In this newsletter, we will focus on pension contributions and how they can be used to help “balance the books” by reducing your tax bill whilst increasing your retirement savings.     


Pension contributions and their tax benefits

Investments in a Personal Pension (or Workplace Pension Scheme) qualify for tax relief at your highest rate, boosting the savings you are making towards your retirement fund.

As well as tax relief on top of your pension contribution, there can be additional tax savings.

For example, if you are earning over £50,000 annually, or are a higher earner with income of more than £100,000, you could consider: 

  • For those who have children under the age of 18, if anyone within the family household is earning over £50,000 child benefit payments are reduced £1 for every £2 over £50,000. When you surpass £60,000, your entitlement ceases.  For those earning in between £50,000 to £60,000 and receiving the full child benefit payment, your tapered entitlement is settled as a tax charge.
  • For high earners your personal allowance (the first £12,570 pa of your income which is normally tax free) reduces by £1 for every £2 over £100,000 and for those above £125,000 you will have no personal allowance. 

Making pension contributions can help and this is best illustrated using examples.

We have changed the names below to highlight how we have helped clients by recommending one-off pension contributions. 

John: Earns £60,000, contributes £3,000 net pension contribution, and has 2 children under 18

Current outlook:

  • John is liable to higher rate tax of £5,161 on his earnings.
  • Earning £60,000 means John may no longer be entitled to Child Benefit payments. However, some entitlement remains due to the £3,000 (£3,750 gross) pension contributions
  • As his child benefit is tapered there would be a £1,133 child benefit tax charge

If John makes an additional £6,000 (net) contribution, he benefits as follows:

  • £1,500 basic rate tax relief on the contribution immediately as the pension provider will apply 20% tax relief at source and invest £7,500.  
  • Higher rate tax payable is £2,086, meaning there has been a reduction of £3,075.
  • The additional pension payment of £6,000 net (£7,500 gross) means John has invested £10,500 in total which reduces his overall income for the purpose of child benefit to below £50,000. Therefore, he gains back his full entitlement to child benefit.

With the pension tax relief, savings on income tax, and the return of the full child benefit entitlement, John receives an overall effective rate of tax relief at 56.11%.

Laura: Earns £115,000 and contributes £4,000 net pension contribution – no children under 18

Current outlook:

  • Laura is faced with a total income tax bill of £36,630
  • The higher rate tax liability is £29,248
  • Earning over £100,000 reduces Laura’s personal allowance from £12,570 to £7,570

If Laura makes an additional £8,000 (net) pension contribution, she benefits as follows:

  • £2,000 tax relief on her pension contribution immediately. The pension provider will apply 20% tax relief at source and invest £10,000.
  • She reduces her overall income tax due by £4,150 by increasing her basic rate tax band threshold by her gross pension payment
  • Higher rate tax therefore reduces to £23,099
  • The additional pension payment of £8,000 (£10,000 gross) means Laura has invested £15,000 in total and her personal allowance would be fully reinstated.

When considering; pension tax relief, the return of the full personal allowance and the income tax savings Laura receives an overall effective rate of tax relief at 61.5%.

As demonstrated, making pension contributions will save tax now whilst increasing the value of your pension pot to provide for you in retirement.

We have concentrated on pensions today for those of you still working.  If you are no longer working or want to make contributions towards a pension for, say your children or grandchildren, you can pay £2,880 into a pension and benefit from an immediate uplift as £3,600 will be invested in your fund.


Other year end tax allowances and exemptions

As the tax year end approaches, there are other tax allowances and exemptions available which do not often change year to year. So don’t forget to make use of:

  • ISA allowances, currently £20,000
  • Capital gains tax allowance, currently £12,300
  • Annual inheritance tax (IHT) allowances, such as the annual gift (£3,000) and small gift (£250) exemptions. Follow this link for a full list: Inheritance Tax summary
  • Charitable gifts

If you would like to take advantage of tax relief through pension contributions or indeed any of the other tax planning opportunities, please get in touch, we would be happy to help.

Kind regards,
Ricky Clark

Ricky Clark

Ricky Clark

I have worked with Henderson Loggie Financial Planning since 2013. Throughout this time, I have provided my client’s services and solutions suitable to help them meet their needs. Ensuring that I build strong ongoing relationships…