Tax planning

SJP Tax planning

There are many tax aspects to consider when accessing your retirement savings, and the best place to start is to speak to your St. James’s Place Partner.

Without seeking advice, it can be difficult to know whether a particular course of action is the most tax efficient way to achieve your retirement goals, or if it could potentially create tax problems at a later date.

The following sections cover a few areas of tax planning, to highlight some of the things to think about alongside your retirement options.

Money Purchase Annual Allowance (MPAA)

If you access your defined contribution pension, beyond the tax-free cash lump sum, then the amount you are allowed to contribute to a defined contribution pension in the future, and benefit from tax relief, is reduced from a maximum of £60,000 to just £10,000 per year.

This is important if you haven’t fully retired yet, and plan to keep on working and wish to continue contributing to your pensions before eventually giving up work.

This could be detrimental to your longer-term retirement plans, reducing the ability to fund your pensions to the extent that you wish. Your St. James’s Place Partner can help you to carefully consider your options.

Income considerations

Different investments are taxed differently, so although this may sound obvious, where you take your income from, and in what order, can make a huge difference to your retirement.

For example, ISAs are not taxed for income withdrawal, but are included as part of your estate for Inheritance Tax planning. Whereas income drawn from your pension is taxed at your highest marginal rate of income tax, but your pensions usually fall outside of your estate.

So, this could raise a question of which investments and assets you draw from first, and which to hold onto for legacy planning.

Also, you have various allowances you are entitled to, so making the most of them should be factored into your income plans. Here are a few to think about (rates correct as at 2024/25):

Personal allowance: £12,570

This is the amount of income you can receive before you pay income tax. If your income is over £100,000, the allowance is reduced by £1 for every £2 earned.

Starting rate for savings: £5,000

This is the amount of tax free interest you can receive if your earnings are below the personal allowance. The amount reduces by £1 for every £1 you earn over the personal allowance.

Personal Savings allowance: £1000 / £500

This allows you to earn interest on savings tax free up to £1000 for basic rate taxpayers, and £500 for higher rate.

Dividend allowance: £500

This is the amount of dividend income (from equities or equity collectives) you can receive before paying tax. Above this, tax is paid depending on your rate of marginal income tax.

Capital Gains tax allowance: £3,000

This is the amount of profit you can make on an asset before any tax is payable. For jointly owned assets, both allowances can be used, effectively doubling the allowance.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. 

Lump sum withdrawals and emergency tax

If you withdraw a lump sum of capital from your defined contribution pension (beyond the tax free cash lump sum, usually 25%), the money will be taxed at your highest marginal rate of income tax.

In some circumstances, this can give rise to emergency tax being applied to the transaction. The reason for this, is that unless the pension provider has an up to date tax code from HMRC, one off lump sum withdrawals are paid out under emergency tax rules.

This means you may see an over payment of tax on the lump sum withdrawal, which may come as a bit of a shock. This could cause problems if you are planning to use the money for a particular purchase, or need a set sum of money at a given time.

Your  St. James’s Place Partner will be able to help you plan around this, as well as understand which forms are needed to reclaim the overpaid tax.