As we approach the end of another tax year on 5 April, there is some ‘last minute’ planning you can do make sure you’re being as tax efficient as possible with your funds. Read on to find our top recommendations.
Paying into a pension
If you haven’t already, you can make a personal pension contribution to reduce the amount of tax you will be due to pay by the following January. Personal pension contributions receive 20% tax relief inside the pension scheme, effectively increasing your pot by £20 for every £80 that you contribute.
You are limited by your net relevant earnings; broadly speaking this is your salary, rental income and trading income from self-employment and partnerships. Most importantly, dividends are excluded from this calculation. You can contribute a maximum of £3,600 or your net relevant earnings, depending on which is higher. Bear in mind that this £3,600 maximum includes the 20% tax relief inside the scheme, meaning that for lower earners, how much you can actually pay into your pension is effectively capped at £3,000.
You are also limited by the annual pension allowance, currently £60,000 – although keep in mind you may have some brought forward allowances from the previous few years, which may be of use.
For those at the higher end of the net relevant earnings spectrum (those with income more than £260,000), your annual allowance may be tapered down to as low as £10,000 – this reduces on a linear scale between £260,000 and £360,000.
How does the additional tax relief work?
As well as the tax relief that you receive inside the pension scheme of 20%, you can also receive extra tax relief if you are a higher or additional rate taxpayer. This is achieved via your self-assessment tax return.
Effectively if you are a higher rate taxpayer, you will receive an additional 20% tax relief on your pension contributions, to bring the total relief up to 40%. If you are an additional rate taxpayer, you can potentially receive up to 40% extra tax relief, if the contribution brings your adjusted net income (total income less gross pension contributions) below £125,140, being the point at which you lose your full personal allowance.
On the topic of losing your personal allowance, if your income has just tipped you over the £100,000 mark, where you start to lose your personal allowance (£1 for every £2 of income in excess of the £100,000), making a personal pension contribution could bring your income back below this threshold, reinstating your personal allowance and allowing you to qualify for things like tax-free childcare still.
What if I’m a director of a limited company?
If you are a limited company director, it is generally more tax efficient for your company to contribute to your pension, rather than you contributing personally. The reason being, you would have to pay tax on the funds withdrawn from the company, to then pay them into your pension and get tax relief on them – effectively negating the tax benefit of making the contribution.
Your company will receive corporation tax relief on the amount contributed into your pension at between 19 and 26.5% depending on the level of profits.
You are still limited by the £60,000 annual allowance mentioned above, but another key benefit is that you’re not limited by the net relevant earnings requirement, which is a positive as most of your income as a limited company director/shareholder is likely to be from dividends.
Maximising your rate bands
In the UK, income is taxed according to rate bands, with all income above a certain band taxed at a certain percentage.
If you are a limited company director/shareholder and have total income below £50,270 for the tax year, you may want to consider voting additional dividends to bring your income up to this level. These dividends are taxed at 8.75%, which is the lowest rate of tax on income that you can withdraw from your company. You do need to make sure that the company has sufficient distributable reserves to vote the dividend though.
If your income is already over the £50,270 threshold, but not quite up to the next threshold at £100,000, you may want to consider voting additional dividends to bring you up to that level. These dividends will be taxed at 33.75% and if you keep your income below £100,000, you will retain your full personal allowance.
If you’re lucky enough to have already exceeded the £125,140 threshold and have lost your personal allowance, it is still worth considering paying additional dividends, if the reserves are available, as you’ve already lost your personal allowance, and additional dividends will be taxed at 39.35%. This could mean that you won’t need to take as many dividends in 2025/26 and may be able to retain your personal allowance next year.
Making a big payment a day earlier
Whilst it is never recommended buying things you don’t need purely for the tax treatment (as at best the taxman subsidises a cost, you’re still paying the bulk of it), if there’s something you know your business needs, you’ll get things like corporation tax relief a year earlier if you buy it just before your company year end as opposed to just after.
Again, only consider these if they’re things that you know you need:
Computer equipment: Is your laptop on its last legs? Is your work suffering because of it? Could do with a new one? If so, you’ll get the tax relief a year earlier if you buy a replacement pre-year end.
Mobile phone: As long as this is taken out in your company’s name, and paid for by your company, this is considered an allowable expense for your company, even where there is also personal use.
Company Bike: Providing this is mainly used for relevant business journeys and is available to all employees, your company can pay for a push bike and related safety equipment without creating a benefit in kind. Whereas commuting to your normal place of work isn’t usually an allowable business expense, it is considered a relevant journey when looking at the business use of a bicycle.
Trivial Benefits: These gifts of no more than £50 cannot be cash. As a director of a limited company you can take six of these per year. More detail in our video.
Staff Bonuses: (If you have employees other than the directors.) This will be based on when your payroll is processed.
Charitable Donations
Read about what expenses you can claim for more information on charitable donations and other allowable business costs.
Other considerations
Child benefit
If you receive child benefit and you or your partner earn above £60,000, you will have to repay 1% of the amount received for every £200 earned over £60,000 by the higher earning partner. This means if you or your partner earns above £80,000 you will need to repay the full amount.
The good news is that this can be mitigated by contributing into your pension to bring your adjusted net income below the threshold.
Even where you are required to repay the full amount, it can make sense to continue claiming the child benefit each year. Here’s why:
- Effectively an interest-free loan
- Eases the process for your children receiving their NI numbers
- Can gain contributing years towards the basic state pension for a non-earning parent until your youngest child is 12
Other tax efficient vehicles
Dividend allowance – you can currently receive £500 in dividends tax-free, per tax year.
ISA allowances (or maybe LISA if saving for a house/retirement) – you’re entitled to £20,000 per tax year.
Investing into EIS/SEIS/VCTs – what are considered ‘riskier’ investments carry income tax relief at either 30% or 50%. For example, if you invest £10,000 into an EIS qualifying company, you will be able to claim a £3,000 reduction against your income tax liability.
Capital gain annual exemption – if investing, you may wish to consider selling some assets (currently you can make up to £3,000 of tax-free gains per tax year).
Trading allowance – if your main business is through a limited company, you can also earn up to £1,000 tax-free through a separate trade. This allowance is available to sole traders but claiming it will prevent you from deducting any actual expenses incurred; meaning it makes more sense for low-cost businesses to claim this allowance. (For a trade to qualify, there must be a profit-seeking motive.)
Property allowance – if you have any space/property that you can rent out, you can make the most of this £1,000 allowance. This could includea parking space, garage space for storage, a driveway. Be aware that if you rent out other properties, claiming this allowance would negate your ability to claim actual expenses across all property income.
If you’d like to discuss any of the potential tax savings in more detail, get in touch and we can happily assist.
