Last minute tax planning March 2025

Pensions are very much in the news after the announcement in October’s budget that Inheritance tax will be applied to pension funds on death after April 2027. Despite this pensions remain very useful and very attractive planning tools for those saving for retirement and high rates of tax relief can apply in many circumstances.

The sacrifice of a tax year end bonus is an attractive way of saving. The spendable amount an individual could get back in retirement could be nearly double that of taking the cash bonus.

Bonus sacrifice to a pension involves the employee agreeing to give up some or all of their bonus in exchange for an extra employer contribution to their pension.

As the employee’s remuneration is reduced, they and their employer will pay less National Insurance (NI). The employer could decide to pay some or all of their NI saving into the employee’s pension too – overall, it won’t cost them any more than paying the bonus.

Example

Maria is 45, earns £70,000 a year and is due to receive a bonus of £10,000. After tax at 40%, and NI at 2%, she would only receive a £5,800 bonus in her hand. With employer NI on top, it costs her employer £11,380 to provide the bonus.

As an alternative, if Maria sacrifices her bonus in exchange for a pension contribution from her employer, the full £10,000 goes straight into her pension (without any need to reclaim higher rate tax relief as she  would  had she made the contribution personally).

What’s more, her employer may be willing to pass on their NI savings too, leaving them in a cost neutral position. This would add a further £1,380 to her pension contribution so the £5,800 she could have had in her hand as a cash bonus  is worth £11,380 in her pension.

To illustrate the benefit of forgoing the bonus:

• If Maria took £11,380 from her pension at retirement and was still a higher rate taxpayer, she’d receive £2,845 tax-free cash with the balance of £8,535 being taxed at 40%, leaving £5,121. This adds up to £7,966 – over 37% more than taking the bonus.
• If she was a basic rate taxpayer in retirement, as many working higher rate taxpayers are, the total would be £9,673 – over 66% up on the bonus alternative.
• These figures ignore any investment growth. The  fund actually enjoys  tax-free investment growth while invested in the pension so the eventual returns could be significantly higher. .

A large bonus can push income over certain thresholds, meaning other key allowances and benefits could be lost. Contributing to a pension can solve these issues too.

When your income (adjusted net income) is greater than £100,000, your personal income tax allowance is withdrawn by £1 for every £2 above this limit until there’s no personal allowance at all once income is over £125,140. A pension contribution can help  bring  income back down below £100,000 to retain the personal income tax allowance.

Someone with total income of £125,140 could get effective tax relief of 60% on a pension contribution of £25,140. This would be just enough to retain their personal allowance. That’s 40% tax relief on the £25,140 going into their pension and a further 20% by getting their personal allowance back.

For those with younger children and a salary above £60,000, if you or your partner are receiving Child Benefit, there is the High Income Child Benefit (HICB) charge which starts to offset the benefit, with the tax charge – at the rate of 1% of the benefit for every £200 over this threshold equalling the benefit once income reaches £80,000.

By making personal pension contributions, it is possible to effectively reduce your income for child benefit purposes and reduce the charge.

This is, however, a complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief, so do be careful and seek advice before making a contribution.

If you are a higher or additional rate taxpayer, similar tax benefits to pension contributions can be secured by making a gift of cash to a UK registered charity (and ensuring you tick the gift aid declaration). This  can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000 in a similar way to a personal pension contribution we described above.

When you make a cash gift to a charity under the gift aid scheme, this is treated as being made net of basic rate tax at 20%. The charity then reclaims the tax from HMRC. For example, if you make a donation of £80, the charity then reclaims a further £20 from HMRC.

Where you pay tax at 40% or 45%, you can claim additional tax relief through your tax return, so that you effectively only pay 20% tax on income up to the gross value of the donation, rather than at the higher rates as you would normally. . Continuing with the example above, as a 40% taxpayer, by making a donation of £80, the charity will receive a further £20 from HMRC, and you will receive relief through your tax return of another £20.  The charity therefore receives £100, but the cost to you is just £60.

You can actually make your gift aid donation after the end of the tax year and claim to carry it back to the 2024/25 year, as long as the donation is made before you submit your tax return and the claim is included on your original return (you cannot claim this on an amended tax return).

Another ‘Annual Exempt’ amount available for every individual, is one in respect of Inheritance Tax.

Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for Inheritance Tax purposes. This means that if the person making the gift (the donor) survives for seven years from the date of the gift, it will become exempt from Inheritance Tax.  However, if they pass away before seven years has passed, the amount of the gift will still be included in their estate for the purposes of  calculating the Inheritance Tax due.

There are a number of potential exemptions available, but the standard Annual Exempt amount is £3,000. If total gifts within a tax year are less than this, the gifts will be immediately exempt and the seven-year survivorship rule does not apply.

It is possible to carry forward an unused annual gift exemption for one year if it has not already been used. Therefore, if you did not make any gifts in the 2023/24 tax year, you could potentially make gifts of up to £6,000 by 5 April 2025 with immediate exemption from Inheritance Tax.

Please note that you are regarded as using your current year allowance first, before any unused brought forward allowance. Therefore, if you did not make any gifts in the 2023/24 tax year and you make gifts of £3,000 in the 2024/25 tax year, you will have used your 2024/25 allowance and there will be nothing to carry forward to the new tax year.

ISAs are a great means of tax efficient investment, as income arising from the underlying investments is tax free, as is the capital growth, so no exposure to Income Tax or Capital Gains Tax. In an era of very high personal taxation, the tax-free status of ISAs makes them very valuable tax wise.

The annual limits for ISA investment are currently £20,000 in total for an adult and £9,000 for Junior ISA for a child under the age of 18. However there has been speculation that the cash allowance for ISAs may be cut in the Chancellors Spring Statement at the end of March. If you were planning to use your allowance for cash then you could do this before 26 March.

Based on main UK tax rates and allowances for the 2024/25 tax year: not Scotland.