We’re getting close to the end of the 2024/25 tax year, so here are some more ideas for you to think about. The emphasis here is on making personal pension contributions. Many business owners make contributions from their companies – employer contributions – which is fine. However, if you’re in a position whereby you’re not going to be able to ‘control’ your income for 2024/25 (for example, if you have a large salary, or property income), you can make use of personal pension contributions as a way of extending your basic rate band – or perhaps increasing the level at which your personal allowance starts to be withdrawn.
Personal pension contributions
Let’s say you decide to make a payment of £48,000 into your pension by 5th April 2025. I’m talking here about a personal pension contribution (from your personal bank account) rather than an employer contribution from your company. The government then adds 25% for you – so your pension fund receives £60,000.
But something else happens, too. Your higher rate tax threshold (£50,270) gets stretched upwards by £60,000 (the amount you paid in plus the government’s 25% top-up). This means that income that would have been taxed at 40% (or 33.75% if it’s dividends) will only be taxed at 20% (or 8.75% if it’s dividends).
£60,000 is currently the maximum annual amount you can put into your pension. However, you can use up any ‘unused’ allowances for the three previous tax years too. so, if you hadn’t made any contributions since 2020/21, you’d have your allowances available for this year (2024/25) plus the previous three tax years. The annual allowance was £40,000 until 2023/24, so you could potentially make a pension contribution of up to £200,000!
There is a caveat to add to this. You can’t generally* make a pension contribution greater than your ‘qualifying earnings’ in a given tax year. ‘Qualifying earnings’ includes employment income (salary, bonus, benefits-in-kind), self-employed and partnership profits. It does not include dividend income or profits from property letting – both of those are seen as ‘investment income’ rather than ‘earnings’.
*However, even someone with zero net relevant earnings can pay up to £3,600 per year into a pension. But, if you want to make contributions in excess of this, you have to have the net relevant earnings to prove it.
Contribute to pensions for your family
As anyone can contribute up to £3,600 to a pension scheme, even if they have no qualifying earnings, consider making contributions to schemes for spouses and children. Would it be worth setting up pensions for them?
Use pensions to avoid higher rates of tax
Where your income falls into a higher tax bracket, pension contributions will enable you to effectively bring your income down so that it is taxed at basic rather than higher rate. So, with an income of £110,000 (referred to earlier), a pension contribution would be a great way to avoid the effective tax rate of over 60% that I referred to for those with incomes of between £100,000 and £125,140. Or, if you’re just into the higher rate tax band, you can contribute to avoid the 40% rate (33.75% for dividends). This could also be a good strategy if you’re going to have capital gains tax to pay, as capital gains are taxed ‘on top of’ your income. So, if you have a income at the higher rate threshold and are going to make a capital gain too, you can consider making a personal pension contribution just big enough to stretch your higher rate threshold upwards by enough to absorb the capital gain. That way, the gain will be taxed at the basic rate rather than the higher rate.
Renting out a room in your home
Be sure to tell us if you receive income from letting out a room in your main residence as you’re allowed to earn rental income of £7,500 in 2024/25 from doing this – and it will all be exempt from income tax.
£1,000 property allowance
You can earn up to £1,000 from say renting out your driveway to someone – and it’s covered by the ‘property allowance’ and so will be tax-free. No relief is available, however, for any amounts received from:
- An employer, or a spouse/civil partner’s employer,
- A partnership in which you (or a connected party) are a partner, or
- A close company in which you (or an associate) are a participator (e.g. relief can’t be claimed where a director charges their company rent for use of their home)
