Starting a new tax year brings an opportunity to review savings and investments to make sure you maximise tax reliefs. Here’s a brief overview of some key things to consider.

Pensions

The government encourages retirement saving, requiring employers to auto-enrol staff in workplace pensions and to make contributions. Payments made by you or your employer can receive full tax relief, and salary sacrifice schemes can also reduce National Insurance contributions (NICs). You cannot make withdrawals until age 55 (58 from April 2028) but income and growth are tax free. When you do make withdrawals, these are taxed as income, but you may be in a lower tax band at that point or able to time withdrawals to reduce the tax. You can also take 25% of your pot tax-free (capped at £268,275) to reduce the tax further.

Annual contributions are limited to the lower of taxable earnings and £60,000 (with unused allowances carried forward for three years). The allowance is reduced (eventually down to £10,000) for ‘adjusted income’ above £260,000. Personal contributions are paid net of 20% tax, meaning an £80 contribution is automatically topped up to £100. Do not forget to claim additional tax relief on your tax return if you pay 40%/45% income tax.

Individual Savings Accounts

Everyone has an annual £20,000 individual savings account (ISA) allowance. There is no tax relief on contributions, but all income and growth is tax-free and withdrawals can be made anytime with no tax. Some ISAs even allow flexible withdrawals, where money taken out can be replaced within the same tax year without affecting the allowance.

You can hold cash or investments (stocks and shares) in your ISA, or a mix of both. Cash ISAs can be beneficial for 40%/45% taxpayers who have a reduced personal savings allowance and there are many ‘ISA millionaires’ who have managed to accumulate substantial amounts through long-term investing in stocks and shares. Investment in peerto-peer loans is also permitted in an ‘Innovative Finance ISA’.

Lifetime ISA

Introduced in 2017, lifetime ISAs (LISAs) offer a 25% government bonus on contributions. Growth is taxfree, and withdrawals can be made after age 60 or to buy your first home (up to £450,000). Withdrawals at any other time suffer a 25% penalty (meaning you lose part of your original savings).

Annual contributions are capped at £4,000 (so the maximum government bonus is £1,000) and reduce the overall £20,000 ISA allowance. LISAs can be opened only before age 40, and contributions must stop at 50. For 20%-taxpayers, LISAs offer similar benefits to pensions; you get a tax benefit on contributions, but withdrawals after 60 are taxfree, unlike pensions. They’re also a good option for first-time buyers.

Premium Bonds

Government-backed Premium Bonds allow investments of up to £50,000 per person. There is no interest, but every month each bond has a chance to win a prize ranging from £25 to £1m, completely tax-free. While returns are uncertain, Premium Bonds are a good, secure option for emergency funds or short-term savings. And unlike playing the lottery, you get your money back even if you do not win a prize!

Summary

While savings strategies should be tailored to individual circumstances, some general principles apply:

• Pensions are highly tax-efficient, and employer contributions also boost your savings.
• LISAs are useful for basic-rate taxpayers and self-employed individuals saving for retirement, as withdrawals after 60 are taxfree. LISAs also work well for first-time home buyers.
• ISAs and premium bonds are ideal for taxfree cash savings or long-term investing.

Practical Tip

Pensions are tax efficient for everyone, but if you earn £100,000 to £125,000, contributions can reduce your income to avoid the 60% ‘tax trap’ and loss of free childcare. Don’t forget you can also set up pensions and Junior ISAs for children or family members tax-efficiently, too. Expert financial advice based on your personal circumstances is strongly recommended.