135- Your Tax Year End Checklist

With the end of the 2025/26 tax year now only a few weeks away, now is the time to make use of your freebies and allowances and focus on paying as little tax as possible. 

Knowledge is power money nerds and by strategically timing income, making thoughtful and considered gifts, and viewing your financial picture in its entirety, the tax savings can be huge. 

As with many things in financial planning, it's a case of use it or lose it and/or do it before it's too late. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:10

Hello money nerds, it's Heads Up on Money, it's Personal Finance Friday. You are the Money Nerds, I am Benjamin Mitchell. So, what have I got in store for you this week? Well, we are in March, which means we only have this month left to go before the tax year end is over. And I know lots of people they sit on their hands for 11 months of the year, and then we enter March and the panic sets in, the overwhelm kicks in, and often that overwhelm leads to indecision, which leads to inactivity, which means our financial plans stagnate. And this is why many people do not get on top of their finances. But fear not, it's going to be a quick episode. I'm going to cover a lot, so you might need to listen back a couple of times if any of this stuff is relevant to you. But this is my official checklist of things you should be thinking about now that we only have a few weeks left in the current tax year. So lots to be doing. It's keeping me in a job, that's for sure. But for those of you who are looking after your personal finances yourself, or if you have a financial planner and you're due to have a meeting with them, maybe this will give you some agenda topics to raise. So first of all, income tax planning. So key point is we all have, or most of us have, a personal allowance. The personal allowance is tapered for some individuals who earn over£100,000 of net adjusted income. And the key around this is controlling that£100,000 net adjusted income level so that you can keep your full personal allowance. Now there are certain cliff edges that can end up inadvertently pushing you over that£100,000 level. Again, a couple of episodes to reference on this one, Money Nerds, is episode£122, where I talked about earning over£100,000 a year or close to it and how you can avoid the 60% tax trap. It's even higher in Scotland. I'm not going to go into the weeds in this episode, but please listen back to that one. But the summary really is you want to get your income below that£100,000 level. Now, generally speaking, you can make gift aid donations, you can make personal pension contributions to get your income back below that level. You could also consider being more strategic about your timing of income, things like when you get dividends if you have a business, or when you perhaps realize certain levels of bonuses or rental income. Some people I appreciate have more control over these things than others, but if you are sitting here in March and you are getting close to that level and you can have some control over when you issue a dividend from your company, why not push it into the next tax year when you have a new allowance available? Keeping in mind, however, that as of April this year, the dividend rates do go up and projecting further forward, rates on property rental income go up next April, so April 2027. So those are things just to keep very much on your radar. As I talked about in previous episodes of the podcast, by controlling your income strategically at this time of year, trying to avoid thresholds being breached, you can not only reinstate your personal allowance, but you may recoup child benefit, you may recoup some of the personal savings allowance that we have on our interest income because if we are moving from a basic rate to a higher rate or a higher rate to an additional rate taxpayer, the personal savings allowance, which is the interest income freebie we all have, can move from, I believe,£1,000 down to£500 and then diddly squat if you're an additional rate taxpayer. So controlling your income can help to reinstate these allowances. Of course, we can't do an episode on tax reign planning without talking about pension planning. Pensions remain one of the greatest tools for your long-term financial plan. Yes, there are changes coming into effect in April 2027 that I've talked about in other episodes of the podcast. The fact that pensions may no longer be the beautiful savings vehicle for inheritance tax, but that doesn't mean they are redundant for your retirement planning. They're massive, massive benefits by getting tax relief on the way in, tax-free growth in the middle stage, and then when you come to draw down your wealth, you typically speaking you get a quarter of it tax-free, and the rest is taxable at your marginal tax rate. So obviously, if you're in retirement, you can have control as to your drawdown strategy to try and realize drawdown and realize income in a strategic way so you're not breaching perhaps higher or additional rate income tax thresholds. But when it comes to the accumulation stage, if you're still building up your wealth, you need to be aware of things like your pension annual allowance, which is typically£60,000. However, if you earn less than that, it will be capped at your level of earnings. So if an individual has a gross salary of£32,000, then their annual allowance is£32,000, not the£60,000 threshold. It's one or the other, whichever is lower. But for some people, they may have earnings well above£60,000. Does that mean you can only put in£60,000? Well, no, it doesn't. You may be able to make pension contributions from previous tax years using something known as carry forward. But it's not as simple as that. It's not as simple as saying if you earn£150,000 in the current tax year, you can necessarily pay in£150,000 into your pension gross because you need to work out how much of your annual allowance you have used in the preceding tax years, and it gets a little bit more complicated because you need to work out if you have triggered something called the tapered annual allowance, which basically means the standard annual allowance of£60,000 starts to get watered down if you earn certain levels of income. I'm not going to go into the weeds in this episode of the podcast, but it's really a critical end-of-year tax planning thing you should be aware of is to understand how much of your pension annual allowance have you got available. Because if you've got a decent chunk and you've got affordability to park a good amount into your pension, not only can that help to reduce your taxable income in the previous points I was making about bringing you below certain thresholds, the reinstating your personal allowance, your personal savings allowance, child benefit, but also making the pension contribution is a great investment in future you because you get free government money now in the form of tax relief. That's all that tax relief actually is. And if you're earning higher levels or additional rate levels of income tax and you're paying those levels of income tax, the saving you can get in your pension contributions is absolutely beautiful. And the same goes for things like salary sacrifice and also bonus sacrifices. By controlling how much you're paying into your pension in certain tax years, you can really optimize the structure of your income tax and it can lead to massive savings. Now remember, you don't want to be breaching any annual allowances, so if you're in danger of doing this, be strategic. Perhaps pay in a sizable pension contribution after April, or if your employer is going to pay in a bonus pension payment and you know that's going to cause annual allowance issues, consider trying to delay that if possible into the next tax year. Moving on from pensions, when we talk about ISAs, typically speaking, we've got this generic ISA allowance of£20,000, and there's various flavours of ISA we can use to feed that allowance. We also have the junior ISA allowance, which is£9,000. A little word on ISA allowances, of course, is there are going to be some changes coming down the line with regards to how much you can invest in a cash ISA that's going to be brought down from£20,000 to£12,000. The rationale here, whether you like it or loathe it, is that the government are trying to get more of us investing in our financial futures, which is great, of course. That's one of the lessons I harp on about every single week of this podcast. But obviously, the more you invest, stocks and shares are the long-term triggers for long-term growth, not cash. So money nerds, you're already not the uninformed. The changes that Rachel Reeves and her government are bringing in are to target the people that think cash is safe and cash is best. And that's not you, money nerds. But consider, of course, using your ISA allowance is a good way to park a good amount of your wealth, whether it's in stocks and shares in the great companies of the world or in cash, regardless of your asset class choice, which will be determined by your planning, whether it's shorter term, cash, longer term, stocks and shares. But the ISA wrapper itself is a great shield from tax, from income tax, from capital gains tax, so it's really beneficial to use it every tax year, particularly if you have a feeder account that pays into your ISA. And by a feeder account, I mean a general investment account. That's typically what you will see these referred to. Now, where this links in with ISA is a practice known as BED and ISA, which is ludicrous. I don't even know where that terminology comes from, but the idea here basically is you move sums from your general account to your ISA every tax year so that more and more of your wealth is moved from a non-tax beneficial environment, your general account, into a taxed beneficial environment being your ISA. Recall that in a general investment account it's exactly the same as an ISA, however, there's no tax privileges. So the ongoing dividends that may be incurred within your general account will be subject to dividend tax. If you're invested in interest-bearing funds, they will be subject to interest. And similarly, if you realize any sales in that portfolio, you will be subject to capital gains tax, whereas none of that occurs in an ISA, which is why ISAs are better. However, you can't get all of your wealth into an ISA in one tax year, you can only get£20,000. However, if you're planning holistically as a couple, then you could be getting£40,000 into your ISAs before the 6th of April. And of course, you can then use other things like junior ISAs if you've got good affordability to do so. But when it comes to your general accounts, you've got your capital gains tax exemption, which currently is£3,000 every tax year, which means you can incur£3,000 worth of capital gains in any one tax year before technically you would pay capital gains tax on that. Now capital gains tax rates have gone up, the capital gains tax exemption has gone down, which means more and more taxpayers are getting pulled into the realm of having to declare and pay taxes on their general accounts. So the end of your tax planning by using GIA to ISAN, feeding that in is a beneficial strategy. And of course, I always say don't let the tax tail wag the investment dog. We should always make the decisions for our financial plan based upon the investment side of things rather than the tax side of things. So if you need to incur more capital gains beyond the capital gains tax exemption, if that is going to be beneficial for the asset allocation within your financial plan or your long-term investment strategy, that can still be beneficial. Not paying tax is not always the goal, money nerds. Keep that in mind. Also remember with capital gains, if you're married or a civil partnership, you can transfer assets to one another to use your own capital gains tax exemption and that of your spouse. So that's a nice way of realizing more gains in a tax year perhaps than you would do ordinarily if you were not in a marriage or civil partnership. Again, it's out with the realm of this episode of the podcast, but people who are cohabiting really do get a crap deal when it comes to personal finances. And I really have genuinely in my career seen clients get married for tax planning reasons. Obviously, that is not advice. When it comes to inheritance tax, so lots going on with inheritance tax down the road in 2027, pensions are going to be brought into the net of inheritance tax, which means many people who would not have been near the levels of having to pay inheritance tax previously are now going to have to potentially pay inheritance tax from their estates when they're no longer here. So knowledge is power with this. Using things like your annual exemption freebie of£3,000 per person, you can use that both of you. So if you're married, let's say you've got£3,000 each, that's£6,000 cumulatively. If you've not used your annual exemptions from the preceding£24-25 tax year, that's another£6,000 you can use, which means in theory, you've got£12,000 you could give straight away, and that would be immediately out with your estate effectively. There are other inheritance tax mitigation rules you can use, such as gifts out of surplus income. If you can demonstrate it's habitual and has no impact on your standard of living, then that can also be immediately out with your estate for inheritance tax reasons. That's less stringent around the tax-year-end planning, so that's not as critical, but it's obviously a very important strategy that many people don't appreciate when it comes to making gifts that are immediately exempt from your estate. And going into the next few years as I help my clients navigate the changes around pensions. For many people, the strategy we may be employing, again, not advice money nerds, is switching on the income payments from your pension with a view to you then gifting that to the next generation and that becoming a habitual and regular pattern so it's immediately out with your state and doesn't trigger the seven-year clock that most gifts make. So the tax year end onus here is to think about the annual freebies you have, your annual exemption. Has your child been married in this tax year? Has there been a wedding? Could you make a gift to them in respect of that wedding? Can you make other gifts to other individuals such as your children's uh spouse, children's children, so your grandchildren? There's things you can be doing here to be planning around that. And also think about this from a wider family planning angle. If you have an inheritance tax issue, by gifting money to these people, it can be beneficial for your own inheritance tax situation, but also can help their long-term futures. So, what I've seen many people do really effectively is they make gifts using their annual exemption, and that gift goes straight into perhaps a pension for their children or a pension for their grandchildren. And although the children or grandchildren may not have relevant earnings to justify a large pension contribution, you can typically still pay in£3,600 gross per year, which equates to£2,880 net. So that's a good bit of tax planning, is you can use your annual exemption of£3,000, and all of that can be immediately out with your estate from inheritance tax. You've also paid that into a pension, it's again basic rate tax relief for your loved ones, and it's there for their financial futures. Again, not advice money nerds, I'm just articulating some of the end-of-year tax planning you should be thinking about. Now, of course, there are other things you can be doing. There's things like making EIS investments, SEIS investments, VCT investments. Generally speaking, these are very high-risk investments, and again, I generally don't advise these for clients. Financial planning, good financial planning, doesn't need to be reinventing the wheel. I never recommend something to my clients that I personally would not invest in myself. So again, these are a bit more esoteric and probably out with the realm of this episode of the podcast. Another one, perhaps, to be aware of is the marriage allowance transfer. So this is a lesser known rule and quirk of our tax system, perhaps, whereby you can transfer 10% of your personal allowance to your loved one, to your spouse. So if you are a nil rate taxpayer and your spouse is paying tax at the basic rate, then you can effectively allow the lower earning spouse, let's say you in this case, you can transfer 10% of your personal tax-free personal allowance, whatever you want to call it, your tax freebie as I call it, to your higher earning husband, wife, civil partner, allowing them to effectively earn more income tax-free. Now, this the caveat, of course, to this is you your spouse in this case would need to be a basic rate taxpayer. It doesn't apply if they're a higher rate or additional rate taxpayer, but this is something again, use it or lose it in every tax year. I'm a conscious have covered a lot of stuff and I really could get carried away here. Some of the more lesser known and lesser used is things like capital losses. So touch foods, the portfolios I put my clients into, we're investing in equities in the global stock market, is over time it goes up as history's told us, so we're not really dealing with capital losses. But for some people who've uh incurred perhaps a capital loss in a tax year, you can use that to offset against gains. So it may be worth if you've had sizable capital gains in the current tax year, you could realize some losses to help to water down some of those gains. So consider selling loss making assets before the 5th of April. Of course, other things to be thinking about is if you claim professional expenses, then doing so you want to make sure you get your claim in for the current tax year, and indeed you can backdate that. I think it's four four preceding tax years. Again, I'm not an accountant, so speak to them on this, but keeping in mind, although it's not necessarily tax year-end planning for the current 25-26 tax year, keep in mind a lot of tax legislation and financial planning practice has preceding years that can be used, and as you move forward, some of those early years drop off the radar. So if you've got some professional expenses to claim from four tax years ago, then now really is the time to do that. So again, I mean I could go on and on, but the key takeaways really money and nerds, and I appreciate you may need to listen to this episode again because I have talked at length to try and keep the podcast episode fairly palatable on the ears. The summary is when it comes to good financial planning and tax planning around the tax years, is you need to look at things holistically. You need to look at your entire financial picture for the current tax year and ascertain what have your various incomes looked like? What have you got as earned income? What have you got as interest income? What have you got as dividend income? What have you got as capital gains? And work out how these all interrelate with one another to avoid the eventuality that you have breached a certain threshold and paid more tax than you need to do. And if so, you try and control these levels of incomes in a strategic way to avoid paying higher or additional rates of tax. Now I know in some cases some people earn a sizable amount, that there's no way they can be anything other than a higher rate or an additional rate taxpayer. But that's not to say you can't use things like ISAS, pensions, and shield as much of your wealth from ongoing tax implications as possible. Because if your income is set, say 200 grand a year and you're already in the additional rate threshold, then any interest income that you have, even in a bank account, will automatically feed into the tax system at that additional rate of tax. So look at things holistically is the key. A lot of people just get silo mentality, using their pension, using their ISA. They don't think about the interrelation of all of these things. And to give you an example, I've had a review recently with a client and they are taking taxable flexi axis drawdown withdrawals from their pension. We structured that in a strategic way so that we ensured that the total level of taxable pension income and their salary income would not breach the higher rate threshold. However, this individual left work earlier than they planned, and as a result, they had a sizable bonus, which we had not planned for. They had a sizable level of final pay slip from their company. So as a result, by looking to see how that level of pay would breach the higher rate threshold, we had to work back and try and avoid taking more pension income from their private pension than we would originally have done to avoid paying. Well, in this case, they are a client who lives south of the border, higher rate tax. So you need to think about this because if you just carry on willy-nilly and do not think about this, then you could actually be paying more tax than you need to. And just being strategic and a little bit open-minded and thoughtful now, as we're at the start of March rather than the start of April, the tax savings can be significant. And again, knowledge is power, you need to play the rules of the game in your favour because if you don't do this, money nerds, nobody else will do it for you. So I hope that was helpful as a very quick rundown of your tax year end planning checklist. If you've any questions, of course, regarding any of this, you know by now my contact details are in the show notes of the podcast. I'm always happy to help where I can. Obviously, I can't give you regulated financial advice, but I can certainly give you a steering for some of the things you should be thinking about and let you know if there are any things or mistakes you may be making. So reach out to me, I love to hear from you, money nerds, and even if it's just to leave me a review, it means so much to me. It keeps the podcast high up on the personal finance podcast charts and gets more money knowledge to more people. So it really does mean so much to me, money nerds, that you are continuing to engage and enjoy the podcast. And by leaving me a review, it gives me the massive pat on the back and confidence boost to keep going with this journey. I'll wrap that up now. Let's try and keep this to under 20 if I can. Apologies if I haven't, but I will catch you next Friday. This has been Heads Up on Money, your tax year end checklist. Things to be thinking about now. Don't delay till tomorrow, but you can start today. You've still got a few weeks left of the 25-26 tax year. Make them count. See you next Friday. Have a good weekend in the meantime. Goodbye once again.