Maximise free government money

Whether it’s your pension, your Lifetime ISA or ensuring you claim tax breaks that you are eligible for, it’s important to get as much free government cash as you are entitled to.

Pensions benefit from tax relief at 20% for basic rate taxpayers, but higher and additional rate payers can reclaim an additional 20% or 25% tax relief respectively through their tax return. That means for a basic rate taxpayer every £1 in your pension only costs you 80p and for a higher rate taxpayer every £1 in your pension only costs you 60p.

Anyone using a Lifetime ISA can also get up to £1,000 of free money from the government each year, if you put in the maximum £4,000 contribution, bearing in mind that the age limit to open a Lifetime ISA is 39 years.

Use your ISA and pension annual allowances

ISAs and pensions are a great way to save for the future because any income and capital gains made on investments held in both are free from income tax and capital gains tax.

Everyone over the age of 16 can save £20,000 each year in a cash ISA and anyone over the age of 18 can save the same amount in a Stocks and Shares ISA. Those aged 18 to 39 can open a Lifetime ISA and save up to £4,000 each year. The crucial thing with ISAs is if you do not use all the allowance it cannot be carried forward to future tax years, so you lose it for good. Investors with spare money they plan to save and any unused ISA allowance for this year should consider using it before the 5 April deadline.

Junior ISAs are available to children under the age of 18 who are UK resident and who do not have a child trust fund. The annual subscription limit in 2024/25 is £9,000, which can be split between stocks and shares and/or cash. The funds are locked in until the child is 18, when the account will default to a normal ISA if the funds are not withdrawn.

The pension annual allowance for this tax year is £60,000 or 100% of earnings if that is lower – this includes both contributions made by you and your employer. The annual allowance can be carried forward for up to three years, so investors should consider whether they have made as much use of their pension annual allowance as possible ahead of the end of the tax year.

Note that anyone with a very high income or who has already started to take taxable income from their pension will have a restricted annual pension limit. If you want to carry forward any previously unused pension allowance, you will only get tax relief on personal contributions up to 100% of your earnings for that year. People with no earnings (including children) can still save up to £3,600 a year in a pension (including basic rate tax relief).

Higher rate pension tax relief

If you’re a higher rate taxpayer you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief. This is for personal pension contributions from your net pay.

Marriage Allowance

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. This reduces their tax by up to £252 in the tax year. To benefit as a couple, you (as the lower earner) must normally have an income below your Personal Allowance – this is usually £12,570. The higher earner cannot earn more than the basic rate band.

Use your capital gains allowance to cut your future tax bill

Any investments held outside an ISA or pension will be subject to capital gains tax (CGT), which means the annual tax-free allowance is very valuable. Investors can make investment gains of up to £3,000 before paying any tax. Gains over that amount are added to income and if they fall in the basic rate tax band are taxed at 18% and at 24% for the higher rate tax band. The annual capital gains tax-free allowance cannot be carried forward into future years so if you do not use it, you lose it. 

If you have investments with gains outside of an ISA or pension you should consider whether to realise some of that gain before the end the tax year to make the most of your tax-free allowance. If you’re in a couple you can get double this allowance as you can transfer investments to your spouse to use their annual CGT allowance too. This means that for the current tax year you can lock-in up to £6,000 of gains before you face any tax.

Rent a room relief

The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This means you can rent out a room in your main residence for up to £144 a week and not be subject to income tax. The allowance is split between couples and if your income exceeds £7,500 then normal income tax rates apply. If you claim the allowance then deducting expenses is not applicable.

Avoid getting caught in a tax trap

The tax-free personal allowance for most people is currently £12,570. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income, which means you lose it completely once your income reaches £125,140.

For example, someone who gets a pay rise from £100,000 to £110,000 will lose £5,000 of their personal allowance. They will be taxed at the normal 40% income tax on their pay rise, amounting to £4,000, and then taxed at 40% on their lost personal allowance, amounting to £2,000. This means they pay £6,000 on the £10,000 pay rise – an effective tax rate of 60%.

If you are in this position, you could consider reducing your taxable income so that it falls below the £100,000 level where the personal allowance starts to be eroded. There are two ways you can do this: by making charity donations or contributing to a pension.

By contributing to a pension, you are a making tax savings in the form of getting your personal allowance back whilst also saving for your future and benefiting from pension tax relief at 40%, so you wipe out the 60% effective tax rate completely.

Don’t miss out on child benefit

In a similar way as above, people will start to lose their child benefit when one half of the couple earns more than £60,000 – and the benefit will be wiped out entirely when they hit £80,000. The frustrating factor for many parents is that the rule applies if one parent is earning more than £60,000, regardless of their partner’s income. So, you could have both parents earning £58,000 each and have no problem, but if one earns nothing and the other earns £80,000 you’ll lose the benefit.

However, parents who have just tipped over the threshold can get around this by increasing their pension contributions. What’s counted for the purposes of the child benefit high income charge is your salary after any pension deductions. This means if you contribute enough to your pension to get your salary back to £59,999 then you’ll get the full child benefit again.

Make gifts to use annual IHT allowances

Reducing the value of the part of your estate that is above the nil rate band (£325,000) will reduce the IHT payable when you die.

Consider giving assets you do not need to other family members now. Gifts to a spouse or civil partner to enable them to use up their nil rate band are tax-free and gifts to other family members can also be tax-efficient over time. Most lifetime gifts to individuals that are not covered by a lifetime exemption do not immediately trigger IHT and become totally exempt if you survive for seven years. Whilst the gift remains in your estate, the rate of IHT applied to it on death (40%) reduces each year depending on how many years you survive after making the gift.

You can give away up to £3,000 worth of gifts a year plus £250 to as many individuals as you like in a year and £5,000 to your children on their marriage.

Onvio

Do you us our online portal Onvio? If so, you can either access this online via onvio.co.uk or via the app which you can download to your phone.

Onvio is there to send documents securely and for you to be able to sign documents online. You can also log on and view any documents on there which are there for your safe keeping and available for download.

On the Onvio App you can also upload documents for us to view from your phone.