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You can save for retirement in a number of ways. The traditional route is via a pension scheme, but you could also use an ISA.

Savers aged under 40 can open a lifetime ISA, and contribute up to £4,000 per year which attracts a 25% bonus from the Government. This bonus is withdrawn if the savings are accessed in circumstances other than used as a deposit for the saver’s first home, diagnosis of a terminal illness, or from age 60 onwards.

The lifetime ISA savings are counted as part of the annual ISA allowance of £20,000 per tax year. This allowance can’t be carried over to a future tax year, so it’s a case of use it or lose it.

ISA savings are not taxed when they are withdrawn, but they don’t attract tax relief on the way into the account.

Pension scheme savings are taxed when they are withdrawn, with an exception for the first 25% cash lump sum taken. However, contributions into a registered pension fund will attract tax relief at your highest tax rate, subject to the cap imposed by your annual allowance.

This annual allowance is nominally set at £40,000, which covers contributions made by you and by your employer on your behalf. Any annual allowance not used can be carried forward for up to three years.

Where your total income, including pension contributions made by your employer, tops £150,000, your annual allowance is usually reduced by £1 for every £2 over that threshold, down to a minimum of £10,000.

Your annual allowance is also reduced to £4,000 exactly (not tapered down), if you have accessed your taxable pension savings built up in a money purchase (defined contribution) pension scheme. This is to prevent you from drawing funds from your pension scheme and then putting significant money into the same or another pension scheme, with additional tax relief.

This restricted £4,000 money purchase annual allowance can’t be carried forward to future tax years.

Action Point!
Review your pension saving plans before 6 April 2019.

In the UK, everyone is taxed as an individual, but social security benefits, including Tax Credits and Universal Credit, are awarded on the basis of the family’s total income. Child Benefit is also withdrawn based on the income of the higher earner of a couple, irrespective of who claimed it.

Families with an unequal distribution of income will often pay more tax than couples who earn just enough each to cover their basic Personal Allowance (£11,850 for 2017/18) and the basic rate band. The thresholds for restricting Child Benefit (£50,000), Personal Allowance (£100,000) and pension annual allowance (£150,000) all operate for the individual, so disadvantage families where the income is concentrated in one person’s hands.

Consider the Browns – they have two children and claim Child Benefit. In 2018/19 George Brown earns £88,000 and pays higher rate tax, but Sally Brown has no income. Because George’s income is over £60,000, the family’s Child Benefit is clawed back from him as a tax charge.

In contrast, John and Joy Green each earn £44,000, so they keep their Child Benefit, and pay less Income Tax as their highest marginal tax rate is 20%. Both Greens make use of their full Personal Allowance and most of their basic rate band.

Roger and Rose are in a worse tax position. Roger’s total income is £160,000 and his employer contributes £40,000 into his pension scheme. Roger and Rose have no effective Personal Allowances, as Rose has no income to set her allowance against, and Roger’s Personal Allowance is entirely withdrawn as his income exceeds £123,700.

Roger is treated as having income of £200,000 (£160,000 + 40,000) for pension relief purposes. His pension annual allowance is therefore reduced to £15,000, so he suffers an annual allowance charge at 45% on £25,000 of pension contribution.

These examples show that it makes sense to transfer some income from the higher earner to the lower earner in order to take advantage of the Personal Allowance and lower tax bands, and to avoid the clawback of allowances.

This is not always easy to do, but the following methods are possible:

• an outright gift of savings and investments which produce taxable income
• putting savings and investments into joint names and sharing the income
• employing the spouse or partner in a business
• taking the spouse or partner into partnership

HMRC can challenge some of these if they think the transfer is not genuine – it’s important to take advice to be sure that the plan will work.

Action Point!
Can you transfer income to reduce your family’s tax and save your allowances?

Giving to charity under Gift Aid can result in a win/win for both the donor and the charity.

Making a Gift Aid donation will reduce your tax bill for the year in which the donation is made if your total income is above the 40% threshold (£46,350 for 2018/19). Taxpayers resident in Scotland can save tax with Gift Aid donations if their total income, including earnings, is above the 21% threshold (£24,000 for 2018/19). Alternatively, you can shift the tax benefit of some or all of that gift back one year by telling HMRC on your tax return. This can be useful if your marginal tax rate was higher last year than in the current tax year.

The gift to be carried back must be made before you file your tax return for the earlier tax year. Say you make a Gift Aid donation of £2,000 on 21 December 2019. If you submit your 2018/19 tax return after that date (it’s due by 31 January 2020) you can include a claim in that return to carry back up to £2,000 of the donation you made on 21 December 2019, which will reduce your 2018/19 tax liability.

Gift Aid can reduce your income used to calculate the clawback of Child Benefit (income over £50,000) and the reduction in Personal Allowance (income over £100,000). It can also increase your higher rate or additional rate threshold, which determine whether you receive a Personal Savings Allowance of £1,000, £500, or nil.

To make a valid Gift Aid donation, you must declare that you will pay sufficient tax to cover 25% of the value of your gift in the year the gift is made. If you give £800 under Gift Aid, you must pay Income Tax and/or Capital Gains Tax of at least £200.

Action Point!
Do you want to make charitable donations before you complete your tax return?

When you let rooms in your own home as residential accommodation, you can receive the rent tax-free if it falls within the limits for rent-a-room relief. This relief is currently capped at rents of £7,500 per year. Where more than one person receives the rent from the property, each person has a tax-free exemption for rent of £3,750.

The conditions for rent-a-room relief stipulate that you must occupy the property as your main home – this relief can’t cover income from a holiday home or buy-to-let property. Also, the accommodation must be used for residential purposes, not as an office.

If you let out land or buildings which don’t qualify for rent-a-room relief, such as a store room, office, or even your driveway, the income could be covered by the £1,000 property income allowance. You can’t use this allowance against rent paid by your own company, a company you work for, or one which your spouse is associated with.

If either rental income exceeds the relevant limit, it must be declared on your tax return, along with any related expenses. However, the relevant limit may be claimed as deemed expenses, if this is higher than actual expenses.

Action Point!
Can you claim rent-a-room relief or the property allowance?

If you are yet to reach State Pension Age (SPA), you will need to have accrued 35 complete years of National Insurance Contributions (NIC) to receive the full state pension. To receive any UK state retirement pension, you need at least ten complete NIC years.
You can check how much state pension you are due to receive through your personal tax account on gov.uk. We can help you with this.

It is possible to plug gaps in your NIC record by paying voluntary class 2 or class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are a number of exceptions which extend that period.

You may also qualify for NI credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits were not always applied automatically, so it’s worth checking your own NIC record.

If you have already paid enough NIC to get the full state pension, you may consider taking further rewards from your company in other forms, such as dividends or private pension contributions.

Action Point!
Consider topping up your NIC record by claiming NIC credits or paying more contributions.

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Clarke Nicklin House, Brooks Drive, Cheadle Royal Business Park, Cheadle, Cheshire, SK8 3TD. Registered Number OC309225.
The firm is registered to carry on audit work in the UK & Ireland. Details about our audit registration can be viewed at www.auditregister.org.uk under reference number C001178544. The professional rules applicable are the Audit Regulations and Guidance which can be found at www.icaew.com/regulations, and the International Standards on Auditing (UK and Ireland) which can be found at www.frc.org.uk/apb/publications/isa.cfm.