Capital gains and tax year end: A tax efficient way to meet your clients’ retirement income needs
Recent changes to how capital gains (CGT) are taxed could mean making a pension contribution before the tax year end a very tax efficient way to meet your clients’ retirement income needs.
The Budget on 30 October 2024 announced important changes to CGT effective from this date. Any gains from 30 October 2024 exceeding the £3,000 exemption are taxed at 24% for higher or additional rate taxpayers. This applies to both residential property gains, which are subject to CGT, as well as other chargeable assets. Any chargeable gains within your basic rate income band will be taxed at 18%.
Any gains between 6 April 2024 and 29 October 2024 will be taxed differently. Gains subject to higher or additional rates will be subject to 24% on chargeable residential properties, or 20% on other chargeable assets. For gains within the basic rate bands, the rates are 18% and 10%.
Let’s explore a case study to see how an individual pension contribution can help.
Consider Meera, who is resident in England, who sells a painting in December 2024. After the £3,000 exempt amount she has a gain of £10,000. She has salary of £50,270, which means the gain is taxed at 24% as her salary uses up the total of her basic rate income tax band, and the gain is after 30 October 2024.
Her total tax liability before any pension contribution would therefore be £7,540, which is the basic rate income tax on her salary plus £2,400 as a result of the capital gain, or £9,940.
If Meera paid a net pension contribution of £8,000, this would be grossed up to £10,000 by the provider. The amount before any higher rate tax would be due is increased from £50,270 to £60,270 as a result of the pension contribution. This means the capital gain will be subject to the lower rate or basic rate of 18% and this means the CGT will be £1,800 instead of £2,400.
The effective tax relief therefore is £2,600 or 26%. This figure comes from the £600 saving in CGT plus the £2,000 tax relief on the £10,000 pension contribution. Using part of this gain to make a pension contribution saves Meera tax as well boosts her pension fund by £10,000.
It’s vital Meera makes the pension contribution before the tax year end if she wants to benefit from the potential 26% relief.
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
