Pension and ISA allowance: Key date is taking place next month as tax year ends | Personal Finance

The end of the 2019 to 2020 tax year is fast approaching, with this falling on April 5, 2020. A tax year refers to the year covered by a tax return.

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In the 2019 to 2020 tax year, savers are able to save up to £20,000 in an ISA entirely tax-free, while the pension annual allowance is generally capped at £40,000 or up to 100 percent of a person’s earnings – whichever is lower.

If a person is a higher or additional-rate taxpayer, they can benefit from 40 percent or 45 percent tax relief on pension contributions.

Making the most of allowances where possible can be a tax-efficient way to save for one’s future, particularly when it comes to pension funding, Jamie Jenkins, Head of Global Savings Policy at Standard Life explained.

Ahead of the tax year ending, he has told Express.co.uk about three things people may want to consider when it comes to the benefits of using a pension allowance.

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Pension and ISA allowance: The tax year end is on April 5, 2020 (Image: GETTY)1. Pension contributions and Child Benefit

Mr Jenkins said: “Worth around £2,500 a year to a family with three children, child benefit is reduced by the High-Income Child Benefit Charge if one parent’s income reaches £50,000 – with the benefit being cancelled out completely for those on more than £60,000.

“Because making a pension contribution reduces what counts as your income, paying more into your pension could cut the tax charge if your earnings are around this level.

“Moving pension savings from the parent who earns less to the higher-earning partner could also make a difference. You can find out more about the High-Income Child Benefit Charge at Gov.uk.”

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“This time of year is traditionally bonus season for many companies,” Mr Jenkins said.

“Bonuses are welcomed with open arms for anyone lucky enough to receive one but, no matter what the sum, but the timing of them can make tax planning difficult.

“In some cases, a large bonus might push income over certain thresholds, meaning key allowances and benefits could be lost. Using your bonus to contribute to a pension can solve these issues.

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“If your employer gives the option of making a pension contribution using bonus sacrifice, the boost to your pension could be worth nearly double the net amount you’d get if you took the bonus as cash and will help with other tax efficiencies.

“Paying your bonus into your pension means you could save on the tax and NI (National Insurance) payments which would otherwise have to be paid.

“Some employers may even be willing to pass on their NI savings too.”

3. Getting the tax-free personal allowance back

“If your taxable income reaches £100,000, you start to lose your tax-free personal allowance, which is £12,500 for 2019-20,” Mr Jenkins explained.

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“After £100,000, your Personal Allowance drops by £1 for every £2 of your income and you don’t get any allowance once your income reaches £125,000

“But there is a way you can get it back, if your income is over £100,000. Making pension contributions can reduce your income for personal allowance purposes, giving you some or all of your allowance back.

“As a higher-rate taxpayer, for example, you could benefit from 40% tax relief on what you pay in and save tax by keeping your tax-free allowance.”