Staying on top of your tax position is important all year round but with the tax year ending soon, it’s important you consider if you’ve made the most of this year’s tax allowances and pension tax benefits. If you haven’t, don’t worry - there’s still time for any payments or changes to be processed.

When thinking about this, please do bear in mind that tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

Let’s start with pensions

Your pension is a tax-efficient way to save for your future thanks to the tax relief you receive on any of the contributions you make to it. If you’re a higher or additional rate taxpayer, you can benefit from 40% or 45% tax relief on your pension contributions. (If you’re in Scotland, income tax rates are slightly different.)

You can normally contribute as much as you earn each year into your pension, up to the annual allowance of £60,000, and benefit from tax relief on your contributions. Even if you have no earnings, you can contribute up to £3,600.

If you contribute more than your annual allowance, you could face a tax charge designed to take back any tax relief you shouldn’t have got unless you can use any ‘unused allowance’ from the last three tax years.

The way tax relief is given depends on the type of pension scheme you’re in and how you make payments. In a lot of workplace schemes, your employer deducts your pension contributions from your salary before tax is collected. So, there’s no need for you to claim tax relief yourself. But in other schemes you may need to claim the tax relief from HM Revenue and Customs. If you’re not sure how your pension plan works, speak to your employer, your provider, or a financial planner. You can also find out more from the Money and Pensions Service.

Use up any unused allowance

The good news is that if you haven’t used all your annual allowance in the last three tax years, you could pay more into your pension plan by ‘carrying forward’ what’s left to make the most of the tax relief on offer.

This can be particularly useful for people who earn more than £60,000 and whose earnings or expenditure have fluctuated over the years. But if you’ve already started to take money from your pension savings that was taxed, you’re likely to be subject to what’s known as the money purchase annual allowance, meaning you can’t pay more than £10,000 a year into your pension. And if you’re a high earner, you should check whether you’re subject to the tapered annual allowance which may mean you can pay in less than the standard allowance of £60,000.

Carry forward calculations can be complicated, and you may find it beneficial to seek help from a financial planner.

Get your tax-free personal allowance back

When your taxable income reaches £100,000, you start to lose your tax-free personal allowance.

After £100,000, your personal allowance drops by £1 for every £2 of your income. And you don’t get any personal allowance once your income reaches £125,140.

But it doesn’t have to be that way. By making pension contributions that reduce your adjusted net income to less than £125,140, you can reclaim some or all of your personal allowance. You’ll get your full personal allowance back if your adjusted net income is reduced to £100,000 or less.

This can give an effective rate of tax relief on the pension contribution of up to 60%. (If you’re in Scotland, income tax rates are slightly different.)

Pay any bonuses into your pension and save tax

Choosing to have a bonus from your employer paid into your pension plan could mean you save on the tax and National Insurance you’d pay if taking it as part of your income.

It can be a tax-efficient way to boost your pension savings and could make your bonus work harder for you. If you’re considering this, check whether it would take you over your annual allowance as you could face a tax charge. If you’re unsure, it’s worth getting financial advice.

Top up your ISA for tax-efficient savings

ISAs are another tax-efficient way you can save and invest as there’s no income tax, personal tax on dividends or capital gains tax (CGT) to pay on any investment growth or interest you earn, or on the money you take from it. A bit like with pensions, there is a limit to how much you can pay in each year, but unlike your pension annual allowance, there’s no ‘carry forward’ available. It’s a use it or lose it allowance, so it's worthwhile considering whether you can afford to put up to £20,000 into an ISA for this current tax year. Also, if you want to save for young children or grandchildren, they get their own Junior ISA allowance of £9,000.

Make the most of your partner’s allowances

If you’re married or in a civil partnership, you will each have your own allowances to use, so when it comes to ISAs you could be tax-efficiently saving up to £40,000 a year between you. You could also make the most of your partner’s pension annual allowance if you’ve reached your limit, but they haven’t by making contributions into their pension.

Remember though, with both stocks and shares ISAs and pension plans your savings are invested, which means they have the opportunity to grow in value over time. But as these are investments, the value can go down as well as up, and could be worth less than what was paid in.

Use up your CGT allowance

Finally, don’t forget about your capital gains tax (CGT) allowance. CGT is paid on any gains you make when you sell an asset – for example, if you make a profit when you sell a second property, a piece of art, or investments that aren’t held in an ISA or pension. However, you have an annual CGT exempt allowance within which no tax is due. Currently this allowance is £6,000 but this will be halved to £3,000 next tax year.

So, you could think about selling some assets to trigger capital gains this tax year. This is known as crystallising a gain and means you can take advantage of the higher allowance that’s available this tax year. You could then put that money into your pension to get the tax benefits. Assuming you’ve got unused annual allowance, you’ll get tax relief on the pension contribution and could build up more tax-free cash entitlement. And more good news, you’ll have moved the money from inside your estate to outside your estate for inheritance purposes, which can be a real benefit for those who have accumulated more wealth.

And by doing this you’ll make use of current CGT allowances and may be able to avoid having a bigger gain in the future that isn’t all covered.

Capital gain tax planning can be complex. Timing will be key, as will ensuring that the sale of your assets makes sense as part of your wider financial plan and investment strategy, so having a professional adviser can be really helpful.

Giving you peace of mind

There’s no denying that tax planning can get complicated, especially as your personal circumstances and where you live in the UK could also have an impact on tax treatment. If you have any questions about the tax system, how it affects you, or you need help making sure you’re managing your money in the most tax-efficient way, getting professional advice can give you peace of mind.

Our financial planning and advice services can support you with everything you need when it comes to financial and tax planning - find out more about how we could help you. If you already have an abrdn financial planner, get in touch with them – they’ll be happy to help.

The information in this article should not be regarded as financial advice. Information is based on abrdn’s understanding in February 2024. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. The value of all investments can go down as well as up, and you may get back less than you paid in.