Making the most of your money before tax year end

Making the most of your money before tax year end

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Did you know?

It’s nearly the end of the tax year, a perfect moment to check in on your finances and make sure you're making the most of the annual allowances available to you. Whether you’re building your long-term retirement savings or simply trying to stay on top of day-to-day finances, taking a few small steps now can make a real difference to your future financial wellbeing.

Why tax year end matters

Many pensions and savings allowances are reset at the end of the tax year. So it’s good to take time in the months leading up to it to:

  • Make the most of tax efficient pension top ups.
  • Use or carry forward pension allowances.
  • Revisit your retirement planning.
  • Understand how flexible options might affect future allowances.
  • Check whether your current level of saving is still right for you.

 

Let's talk about annual allowances

These can help you make the most of your savings, any related benefits and support your long term retirement plans.

So, what are they and how do they work?

Pension Annual Allowance (AA)

The annual allowance is the most you can save into your pension each tax year and still receive tax relief. It applies to all your pension schemes combined. Most people can receive tax relief on pension contributions up to £60,000 a year, or 100% of their earnings, whichever is lower.

When you contribute to a pension, the government adds tax relief, meaning some of the tax you’d have paid goes into your pension instead.

The £60,000 limit includes all contributions (yours, your employer and basic rate tax relief).

If contributions exceed the allowance, you won’t get any tax relief on the excess, and it may result in you having to pay an Annual Allowance tax charge.

You can sometimes use unused allowance from the previous 3 tax years (known as carry forward) to reduce or avoid charges.

Tapered annual allowance

This is a rule that reduces how much high income you can pay into your pension each tax year, while still getting tax relief. It mainly affects people with higher earnings and ensures pension tax benefits are allocated out more fairly.

How does it work?

For every £2 of adjusted income above £260,000, the allowance reduces by £1. The minimum it can fall to is £10,000.

Take Alex, whose adjusted income is £30,000 over the £260,000 threshold. Dividing this by 2 means her allowance reduction is £15,000. By taking that away from the £60,000 (AA), this would give Alex a new allowance of £45,000.

 

Money Purchase Annual Allowance (MPAA)

What if you’ve already taken some taxable money from a defined contribution pension? Maybe you’ve taken more than the tax-free 25% of it as a lump sum? Or just been accessing the pension flexibly and taking some taxable income. If you have, this is when the MPAA comes in; it replaces the normal annual allowance for your defined contribution savings.

 

Take Sarah, between her contribution of £5,000 and her employer’s contribution of £8,000, the total going into her pension is £13,000. As the MPAA limit is £10,000, there’s an excess of £3,000 above the allowance. This would result in Sarah having to pay an Annual Allowance tax charge on £3,000 excess.

 

ISA Allowances

They sit separately from and doesn’t impact your pension allowances. Withdrawals from an ISA are completely tax free, however you can’t get tax relief on contributions.

How do pensions work alongside ISAs?

Both pensions and ISAs are tax efficient ways to save. So, if you want easy access to your savings, an ISA may be worth looking at. If you just want to lock away this money until retirement, and get tax relief on your contributions, you may prefer to put more into a pension.

High earner or close to reaching those pension limits? If you’ve used all your Annual Allowance, ISAs could give an extra, tax efficient saving pot. They’re even more useful if tapering has reduced your pension allowance.

How do pensions and ISAs compare?

Pension

  • Get tax relief - up to 45%
  • Access from age 55 (rising to 57 by 2028)
  • Contribute up to £60,000/year or 100% of earnings
  • 25% tax-free* at withdrawal - the rest taxed as income
  • Employers can contribute - sometimes matching your payments

ISA

  • No tax relief - you save from your post-tax income
  • Access any time - no age restrictions
  • Contribute up to £20,000/year**
  • All withdrawals are tax-free 
  • No employer contributions - it's self-funded only

* Up to the Lump sum allowance (LSA)/Lump sum and benefits allowance (LSDBA); this is currently £1,073,100 and counts all the tax-free lump sums taken from pensions before and after death. Therefore, if you’ve taken lump sums, you’ll have a lower limit here.

** ISA rules change in 2027; whilst the £20,000 annual ISA allowance remains, contributing to a cash ISA will be capped at £12,000 for people under age 65; the remaining allowance can go into other ISA types i.e. stocks and shares.

 A few minutes now could make a big difference later 

 Everyone’s situation is unique, but understanding your allowances and options before tax year end gives you more choice and more confidence.   Whether you decide to top up, learn more about your allowances, or simply review your broader financial habits, you’re taking a positive step   towards your financial future.

 Be Money Well can help you boost your financial confidence and improve your digital skills.

Want to know more?

Our recent webinar gives more details on the support available as we approach tax year end. Full of tips and ideas, check out the session recording here.

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