Nosso guide

Grab every slice of the allowance cake

delicious cakes

Each year the government bakes a cake and slices this up into several tasty pieces. Now, let’s say each piece represents a tax allowance. Unlike that chocolate cake at your kid’s party, it’s fine to grab as many pieces as you can.

Let’s start with the first piece, which everyone gets — a tax-free personal allowance of £12,570. This means you are allowed to earn money completely tax-free up to that amount. Cha-ching! Even your kids have a tax free allowance. And as they won’t be making a salary, (pocket money doesn’t count), this allowance can come in handy. You can use it for any savings or investments held in your kid’s name that grow in value. Woo-hoo!

Remember those investment accounts we mentioned earlier? ISA’s and JISA’s? Think of these as little boxes you put money into, and if that money grows in value, it won’t be taxed.

Currently you can put in:

  • £20,000 into a ISA
  • £9,000 in a JISA

This amount is for each tax year, so 6th April to the 5th April. Which means the amount you can put into one of these has just reset. Exciting.

There are two types of ISA and JISA, cash or stocks and shares. The first is what it says on the tin — it allows you to save cash. Whilst the second one allows you to invest. And unlike going to the ice cream shop and only being allowed to pick one flavour of ice cream, the best thing about ISA’s and JISA’s is that you can pick one of each. Yum.

Whereas ISAs can be opened by anyone over 16, (or 18 for a stocks and shares one), JISA’s can only be opened by parents or legal guardians. Guess what though? Anyone can contribute to a JISA, making it the perfect option for grandparents and other family members looking to top up that pot of money. Whilst you have a whole year to think about using this allowance, it’s best not to leave it to the last minute. So why not get into a habit? By regularly chipping away at these allowances you can make the most of them. Hooray!

Another allowance that resets each tax year is your annual pension allowance. Whether you're working or not, everyone is entitled to get basic rate tax relief up to £40,000. This means that when you pay money into your pension, the government will pay an additional 20% to your pension pot. Nice!

This applies if you’re part of:

  1. An employee pension scheme - one which gets paid out of your salary;
  2. Or a personal pension scheme (one you pay into yourself).

And don’t worry. You don’t need to fill out any sort of online form. The government applies 20% to your pension automatically. This means that if you pay £1000 into your pension, you’ll only need to pay £800 as the government adds the other £200.

Now if your part of an employee pension scheme, there is two ways this is done:

  • Gross, meaning money is paid into your pension before your salary is taxed; or
  • Net, meaning money is paid into your pension, after your salary has been taxed.

If your employer pays money into your pension before your salary is taxed, this means this amount is not subject to any tax at all, upto the £40,000 allowance. Cha-Ching! If your employer pays money into your pension pot after your salary has been taxed, then as that money goes into your pot, another 20% will be automatically added. A personal private pension works in the same way, meaning if you pay money into a pension pot from your hard earned wages, another 20% is added to this pot. This is done by the company in charge of your pension.

Now, whilst 20% tax relief is taken care of on your behalf, if you are a higher or additional rate taxpayer (40% and 45%), you might need to claim the additional 20% or 25% if the payments made into your pension pot have been done so after you’ve paid tax on your salary. For example let's say you earn £65,000 and pay £8,000 into your pension you’ll be entitled to receive £3,200 in tax relief. £1,600 of that will be added automatically to your pot, however you’ll need to claim back the other 20% from HMRC. And if you don’t claim it back you won’t get that relief.

And here is the scary thing, in 2019 it was estimated that some 8 in 10 higher rate taxpayers failed to claim their full tax relief amounting to around £810m in unclaimed tax relief. Three years on the amount of failed tax relief is likely to be the same, given that many taxpayers who are employees still do not complete a tax return - which is the only way to claim this relief.

You can claim this back for the last 4 tax years, so if you’ve paid into a pension during that time it is worth seeing whether you are owed some tax relief. The best way to do this is to first check in with your pension provider and check whether the money has been paid into your pot, gross or net and then see how much was actually paid in for each tax year. Once you’ve got this information you’ll need to give HMRC a call to claim this backdated pension tax relief.

Also check out this handy calculator which breaks down your tax relief.

Another neat thing about your pension allowance is that it carries over for up to 3 years. So for example if you only contributed £10,000 in the last two tax years then you’ll have an allowance of £100,000 this tax year. Meaning you can get tax relief on any contributions up to that amount.

And pensions aren’t just for the grown ups. Your little ones can also have a pension. You can open a pension for them called a Junior SIPP. These little pension pots allow you to pay in up £3600, and you guessed it, you get tax relief on any money paid into these also. So for example if you wanted to pay in £3600 to into a pension pot for your little one, you’d only need to put in £2,880, with the other £720 being paid into a pot by the government. Just remember that anyone can contribute towards a Junior SIPP, but only a parent or legal guardian can open on behalf of a child.