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Last tax year pensions and ISAs saved us over £27 billion

Protect your investments from tax.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

When you’re trying to put money aside, it can be frustrating to watch the taxman swoop in and take a slice. But by using tax-efficient accounts like ISAs and pensions, you can shelter your hard earned savings from tax.

We know that putting money into an ISA and/or a pension could stop us paying more tax than we need to, but it’s easy to forget just how much we’re saving in real terms.

Income tax saved in 17/18 Forecast income tax saved in 18/19
Pensions £24.3 billion £25.6 billion
ISAs £2.9 billion £3.15 billion

Source: Gov.uk, 31/01/2019

These latest figures from the government show that between them, ISAs and pensions slashed our tax bill by £27.2 billion in 2017/18.

That’s a lot of money. So much, that it’s almost difficult to comprehend.

It’s the equivalent of 5,440 million five-pound notes.

Or one million pounds every week, for the next 523 years.

And that’s through income tax alone. Stocks and shares ISAs and pensions are saving us a small fortune in capital gains tax too (CGT). Usually you have to pay tax on the profit your investments make, but if you hold those investments in a tax wrapper, like an ISA or pension, then your investments can grow free from UK tax.

Pensions – a tax-saving machine

The amount of tax we save on pensions keeps rising, as the amount we’re required to pay into our workplace pensions increases.

Pension tax relief certainly helps too. The amount of tax relief claimed for personal pension contributions is expected to jump from £24.3 billion in 2017/18 to just over £25.6 billion for the current tax year.

It’s one of the most generous tax breaks going.

How pension tax relief works

If you’re UK resident under 75, you can usually contribute up to £3,600 gross or as much as you earn, if greater, to a pension and receive tax relief each year. So if you earn £10,000 you can put up to £8,000 in your pension, to which the government will add an extra £2,000, bringing the total amount to £10,000.

If you pay 40% income tax, you can claim back up to an extra 20% on your tax return. That means a £10,000 pension pot could effectively only cost you £6,000. Tax rules can change and tax benefits depend on individual circumstances.

If you’re a 45% taxpayer, you could claim back up to 25% on your tax return.

You must pay sufficient tax at the higher or top-rate to claim the full 40% or 45% tax relief. If you’re a Scottish taxpayer, you can claim up to 46% tax relief. Take a look at our information on the Scottish income tax changes page.

The amount you can contribute without a tax charge is limited to the annual allowance, which is currently £40,000 for most people.

There are a few exceptions which might mean your allowance is lower:

  • If your ‘adjusted income’ is over £150,000 your annual allowance will reduce by £1 for every £2 of adjusted income over £150,000 down to a minimum of £10,000. Your adjusted income is broadly your total taxable income, plus any pension contributions paid by your employer.
  • If you’ve flexibly accessed a pension you can only contribute up to £4,000 each year to money purchase pensions. Your pension provider should let you know when this starts applying to you.

Pension vs. ISA - which is better?

For most people, pensions are the best way to save for retirement. With up to 45% tax relief on contributions, and no UK tax on any gains or income your investments make, they’re one of the most tax-efficient ways to build a retirement pot. When deciding to invest in a pension you should be aware that the money isn’t usually available until 55 (57 from 2028). You can take up to 25% of your pension tax free, the rest is taxed as income.

If you’re saving into a workplace pension, it’s important you use any contributions you receive from your employer before considering making contributions to other pensions.

A SIPP (self-invested personal pension) is different to a traditional pension., A SIPP gives you more choice in how you invest your money, opening the door to a wider range of investment options. Hargreaves Lansdown is the UK’s biggest SIPP provider.

The HL SIPP

ISA's are one of the most popular ways to save for the more immediate future, and can complement your pension savings. You can shelter up to £20,000 (in 2018/19) from tax, with no UK tax on any gains or income your investments make.

Although investing is best considered for the long term, you can take your money out of an ISA whenever you need it without paying any UK tax.

We believe it’s not a case of one versus the other. Both should be considered when investing as they offer different benefits, but tax rules can change and the value of any benefits will depend on individual circumstances.

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The value of investments can fall as well as rise, so you could get back less than you invest. This article isn’t personal advice, so if you’re not sure an investment is right for you please take advice.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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