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Tax year end planning with Covid considerations

Tax Year End Planning – Maximising the benefit of your contributions

Normally at this time of year, we would be contacting our clients to ensure that they utilise their annual allowances where affordable and to consider making pension contributions to maximise tax reliefs and to reclaim the lost allowances or benefits.

However, due to the events of the last year, many people will have earned less this tax year than they normally would or are likely to next year (assuming that things finally get back to normal soon).  A lot of people have also accrued cash savings due to the fact that their expenses have been greatly reduced when working from home and discretionary spending options have been extremely limited.

Those that have been on furlough may well have gone from being higher rate taxpayers to basic rate ones.  Many will still plan to use excess funds to maximise their pension contributions this year but is there a better way?

Let’s look at a few examples. 


Prior to Covid (which feels a long time ago now), James was earning £60,000 p.a.  He has two children.  His industry was heavily affected by the various lockdowns and he has been on furlough more or less throughout.  His effective earnings for the current tax year will be £30,000.

In 2019/20, he made total gross personal pension contributions of £5,000 and he planned to do this every year going forward as he has worked with his adviser and not only will contributions of this amount be highly tax efficient now, it is expected that these contributions will also provide sufficient savings over the long term to give him a comfortable retirement.  They will also leave enough excess income to ensure that he doesn’t have to give up doing the things he enjoys in the meantime.

In 2019/20, he made the following contributions:

  • He made a payment of £4,000 to his pension (net of tax relief)
  • Basic rate tax relief of £1,000 was added automatically to make the payment up to the desired gross pension contributions of £5,000
  • As a higher rate taxpayer, he was able to claim higher rate relief of a further £1,000
  • The pension contribution also reduced his effective taxable earnings to £55,000. With earnings of £60,000 (prior to making the contribution) this meant that he was no longer eligible to receive child benefit as he had to pay the full child benefit tax charge.  However, given that his effective earnings were reduced to £55,000, he was now eligible to claim 50% of the available child benefit which amounted to £894.40
  • This means that £10,000 invested into his pension effectively cost him £2,105.60.

If he makes a £5,000 gross contribution this tax year, he will still receive the £1,000 basic rate tax relief but as his earnings this year will be below £50,000, no higher rate tax relief is available and the child benefit tax charge will not apply so he will not be able to reclaim this.  The same £5,000 contribution will therefore cost him £4,000.

However, things are looking up now that the vaccine is being distributed and he expects to go back to work soon, enabling him to earn the same £60,000 income as before.

Would he be better off if he deferred his pension payment this year and instead added it to next years’ proposed contributions to pay in £10,000 instead?

In 2021/22:

  • James makes a net payment of £8,000 to his pension
  • £2,000 basic rate tax relief is added, making the gross contribution up to £10,000
  • As a higher rate taxpayer, he can claim further higher rate relief of £1,946
  • The payment also brings his effective income down to £50,000 meaning he is able to reclaim the full child benefit of £1,827.80
  • The effective cost of the £10,000 that is invested is therefore £4,226.20.

If he had paid the same total pension contributions of £10,000 (£5,000 in 2020/21 and in 2021/22), the effective cost would have been £6,086.10 over the course of the two years as he would not have received higher rate tax relief in 2020/21 and would have only been able to reclaim half of the child benefit in 2021/22 so by delaying the contribution, he has saved £1,859.90.

Being able to reclaim the child benefit is an additional bonus but even without this, he would be better off by maximising contributions and securing higher rate tax relief in 2021/22 than by only getting basic rate relief in the current tax year.


Sam was earning £120,000 p.a. prior to Covid and like James, her income has been heavily affected by the pandemic and her earnings in the current tax year have also reduced dramatically to £30,000.  She paid in £10,000 to her pension in 2019/20 and planned to pay in the same amount every year going forward.  She has no children.

She has found that she still has sufficient savings in order to make a £10,000 pension contribution in 2020/21 and plans to do so as she wants to stick to the financial plan she put together with her adviser which showed that these contributions would be sufficient to secure her desired lifestyle in retirement.  She calls her adviser to arrange the payment but they suggest that she waits until the following tax year when she expects that her income will return to the pre-Covid level of £120,000.

They give the following reasoning for this:

  • If she pays in £10,000 this year, she will only get basic rate tax relief of £2,000 so the cost of the contribution to her will be £8,000.

If she waits until 2021/22 and adds the £10,000 saved this year to the £10,000 she plans to pay in the new tax year to contribute a total of £20,000, the payment will be treated as follows:

  • She will make a net payment of £16,000 to her pension
  • Basic rate tax relief of £4,000 will be added automatically
  • She can claim a further £4,000 higher rate tax relief via her self-assessment
  • The pension contribution will also enable her to reclaim £10,000 of lost Personal Allowance which is tapered away for £1 for every £2 of earnings in excess up £100,000 up to £125,140
  • The effective cost of investing £20,000 into her pension is therefore just £8,000 once these savings are taken into account

Had she made contributions of £10,000 in 2020/21 and £10,000 in 2021/22, the total net cost to her would have been £12,000 so by delaying the contribution, she has saved £4,000.

Some may be able to maximise contributions in the current year as well as following years and this could be a good option, especially where annual allowances might be tapered or lost in future years.  However, for those who cannot, it may be a good idea to delay making their contributions if their income is expected to increase next year to a level where they will pay tax at a higher rate or benefits/allowances will be tapered.

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