Get deadline ready:

Pensions

Last chance to get advice on tax relief on pension contributions for tax year 2020/21.

20% tax relief

If you’re under 75 and live in the UK you can get basic-rate tax relief (20%) on your pension contributions – limits apply. But those who pay tax at higher rates could claim back up to a further 25% via their tax return (rates for Scottish residents differ), although you must pay sufficient tax at the higher rates to claim full relief at those rates. Pension and tax rules can change and benefits depend on individual circumstances.

TOP TIP: The amount of tax relief you could receive is usually in line with the highest rate of income tax you pay.

£3,600 contribution

Even UK residents under 75 with no earnings can pay up to £3,600 (including tax relief) into a pension. HL Adviser Brad Clark says; “If you are not working and under age 75, you can still contribute £2,880 into a pension and receive £720 tax relief. This turns your £2,880 contribution into a £3,600 contribution”.

Annual allowance

The maximum amount which can be added to your pension this tax year is £40,000 for most people. This is called the Annual Allowance. Be aware contributions made by both you and your employer count towards this limit. If you’re a higher earner or have flexibly accessed a pension, your annual allowance may be lower.

Remember: You may be able to carry forward any unused allowance from the previous 3 tax years. You can normally only access your pension from the age of 55 (57 in 2028).

Lifetime allowance

It pays to remember that the maximum amount you can build up across all of your pensions over your lifetime before incurring a tax charge is £1,073,100 for the 2020/21 tax year. If you think you’re close to or are predicted to be close to the Lifetime Allowance an adviser can help you navigate your next steps.

If you’re unsure about your pension contributions due to your personal circumstances you can speak to one of our advisers.

Ask an adviser:

• Should I sacrifice my bonus into my pension?
• I’m not working, should I still contribute to my pension?

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IHT

Allow the taxman to get over £5.2bn in IHT, or keep your own money within your family?

40% of estate value

Under normal circumstances, IHT is paid at 40% on the value of your estate (this includes all of your assets such as property, money and possessions) over £325,000. This threshold is known as the nil rate band. There is also an additional allowance if you pass on your main residence to direct descendants upon death. This is called the residence nil rate band and has a threshold of £175,000, depending on the value of the property. Although this allowance reduces on a sliding scale for estates worth over £2m. Married couples and civil partners may be able to inherit any unused element of their spouse’s nil rate bands after their death.

Tax rules can change and benefits depend on your personal circumstances.

Gift £3,000

Spending (such as holidays) and gifting your money can be tax efficient ways of reducing your IHT liability as they help remove this money from your estate. You can gift up to £3,000 each year, tax free, to anybody. You can also make small gifts up to the amount of £250 to anyone provided you haven’t already made any other gifts to the same person during the same tax year.

Carrying forward

You can also carry forward any unused allowance from the previous year. Your allowance could increase from £3,000 to £6,000. If your partner also has any unused allowance from the previous tax year, you can combine them, to give you a gifting allowance of up to £12,000 together.

This is even more helpful for larger gifts such as weddings where your gifting amount can be combined. This would mean you could give up to £10,000 for children between you, up to £5,000 for grandchildren and up to £2,000 for anyone else. However, you can’t carry any allowance forward for these gifts, so the clock resets once we cross into the new tax year.

Remember: Make sure your Will is up to date. It’s recommended that you update your Will every 5 years or after a major life event.

IHT can be complex. If you feel as though you need more support with planning on passing down wealth you could speak to one of our advisers. For more complex tax calculations, we recommend you speak to an accountant. They can help you to determine the right course of action for your personal circumstances.

Ask an adviser:

• What is the best way to prepare for IHT?
• Will my ISA be free from IHT?

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