New tax rules and reliefs explained

We explain the new and existing tax rules for pensions and Isas as the end of the tax year rapidly approaches.

 

PENSIONS

How much can I pay into my pension?

You are entitled to tax relief on private pension contributions of up to 100 per cent of your annual earnings, but there are caveats.

Usually, tax at the basic rate is dealt with automatically. However, if you pay 40 per cent income tax, you normally have to claim that element of tax relief via your self-assessment tax return.

Read more: What should pension investors look out for in 2016?

What are the tax-free allowance limits?

There are two limits. The annual allowance governs how much you can invest with tax relief in any one tax year; the lifetime allowance caps the value of payouts from your pension allowable without an extra tax charge.

The annual allowance is £40,000. If you start to take money from your defined contribution pension in the form of ad hoc sums or income drawdown, this will trigger a lower annual allowance of £10,000.

It will not be triggered if you withdraw just your tax-free cash and put the remainder into an annuity or an income drawdown plan that you then leave intact.

The lifetime allowance is currently £1.25 million, but this will fall to £1 million from April. Unfortunately, a pension pot that might appear modest today could exceed the lifetime allowance by the time you take your benefits.

The total value of final salary schemes is calculated as 20 times the annual pension payable plus any tax-free cash.

For defined contribution pots, it will be determined by the fund's value when you come to draw benefits. To calculate this you need to look at the expected fund growth and future contribution levels.

Read more: Boost your pension by £40,000 with this one weird trick

Are there any changes in the pipeline?

The Treasury is introducing measures to force high earners to pay more tax on their pension contributions from April, by reducing the annual limit for tax relief from £40,000 to £10,000 on a sliding scale for salaries between £150,000 and £210,000 a year.

Leaks about the government's review of pension contribution taxation suggested the Treasury might abolish tax relief linked to income tax rates in favour of a universal flat-rate 'incentive' of 25, 30 or 33 per cent.

Some experts predict that higher-rate relief will be abolished in the 16 March Budget, and that anti-forestalling measures will be introduced then.

Consequently, any higher earners should make their contributions before 16 March, while basic-rate taxpayers should wait until after that date.

Read more: No further tinkering with pension tax relief

Can allowances from past years be used?

Yes, you can 'carry forward' or top up your allowance for the current tax year with any unused allowance from the previous three tax years. For tax years 2011-2014, the annual allowance was £50,000.

To use carry forward, you must make the maximum allowable contribution in the current tax year and then use unused annual allowances, starting first with the tax year three years ago.

It may be particularly useful if you are self-employed and your earnings fluctuate each year.

ISAS

How much can I put into an Isa?

The Isa allowance for the 2015/16 tax year is £15,240, and you can now split it as you wish between shares and cash Isas. Unused allowances cannot be rolled over. The allowance for a junior Isa is £4,080 a year.

Those aged 16-18 can open a cash Isa and a junior Isa in the same year, which allows them to save up to £19,320 a year in cash tax-free. The money can only be accessed when they turn 18.

Read more: Autumn Statement 2015 was a 'kick in the teeth' for Isa savers

What is the tax treatment for Isas?

There is no tax on capital gains or interest earned on bonds. Any income earned from shares is taxed at 10 per cent. This is a worthwhile saving for higher- and additional-rate taxpayers, who would otherwise pay rates of 32.5 and 37.5 per cent respectively.

What will happen to my Isa savings if I die?

From April 2015 the rules were changed so that your surviving spouse or civil partner can inherit your Isa holdings without losing the tax shelter.

Are there any new Isa developments I should be aware of?

From April the government is launching Innovative Finance Isas, which invest in loans through peer-to-peer platforms. Note that your money isn't covered by the Financial Services Compensation Scheme, which protects up to £75,000 in savings if a financial firm goes under.

Read more: New P2P Isa of 'little benefit' in current form

I believe a new savings scheme helps people get on the housing ladder. How does it work?

This is the new Help to Buy Isa. For every £200 you save, the government gives you a bonus of £50 (or 25 per cent) up to a maximum of £3,000 when you save £12,000. The minimum bonus is £400, so you must save at least £1,600 into the account before you can claim your bonus. 

Read more: Which help-to-buy Isa account should I get?

To kickstart your account, in month one, you can deposit a lump sum of up to £1,200, but after this the maximum monthly deposit is £200 (£2,400 per year).

Accounts are available to each first-time buyer, two for a couple. To qualify for the Isa, you must be a UK resident aged 16 or over with a national insurance number. The property must be purchased with a mortgage of up to £250,000, or £450,000 in London.

You can't save into a Help to Buy Isa and a cash Isa in the same tax year unless it's in an umbrella scheme.

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