Make a date for cutting your tax bill

TIME is running out if like most people you have left your tax year planning until the last minute, and with a raft of new changes coming in from April it will pay to be particularly alert for tax-saving opportunities. As ever, 5 April marks your last chance to make Isa and pension contributions for this tax year, but there are also new retirement rules arriving next tax year which could have a bearing on your plans.

The Isa is a "use it or lose it" allowance, currently set at 10,200 and rising to 10,680 in April. Over the next two months a couple can stash a handsome 41,760 in Isas, outside the lengthy reach of the taxman. Once inside the Isa, your investments grow free of UK income and capital gains tax.

The importance of these simple tax shelters cannot be overestimated and the tax savings can add up to tens of thousands of pounds over time, particularly for higher rate taxpayers. This group is growing: there will be an extra 750,000 higher rate taxpayers next tax year as the government reduces the basic rate band, according to the Institute for Fiscal Studies.

Pension contribution limits are changing in April too. Currently, the most you and your employer can pay into a pension is 255,000 per tax year. That is unless your taxable income is above 130,000, in which case the amount you can pay in is limited, to 20,000 in many cases.

From April, the maximum will change to a flat 50,000 for everyone. While this looks like a hefty cut, a 50,000 annual contribution limit will still be more than enough for most people, and for many of those earning above 130,000 it is an improvement on the current situation. Plus you will be allowed to carry forward unused allowances from the previous three tax years, so if you or your employer haven't made any pension contributions since April 2008 next year you could potentially pay in 200,000 between you.

Your personal contributions to a pension can only offset the tax you have paid in the tax year you make them, however. So if you want to cut the higher rate tax bill you have racked up in 2010/11, you still need to make a contribution by 5 April this year at the latest.

For each 1,000 paid into a pension before then, everyone gets 250 basic rate tax relief added. Higher rate taxpayers can then also knock a further 250 off their 2010/11 higher rate tax bill, while 50 per cent taxpayers can get 375 knocked off. Non-earning spouses and children can also pay 2,880 into a pension by 5 April each tax year and get 720 in basic rate tax relief, even though they pay no tax. It is worthy of note that your personal contributions to a pension must not exceed 100 per cent of your earnings in the tax year if you want them to attract tax relief.

The 5 April deadline also marks the last opportunity to crystallise any gains up to the annual capital gains tax exemption, currently 10,100 per person. You can transfer investments into your spouse's name in advance of the sale to use up his/her allowance too.

If you buy back the investments within 30 days, however, the crystallisation of the gain becomes ineffective, so the question arises of what you can do with these investments. A Bed and Sipp or Bed and Isa can help out here: after selling them, you buy them straight back within a Sipp (Self Invested Personal Pension) or an Isa, sheltering them from any further capital gains tax on their growth, and nabbing some pension tax relief on the way in if you choose the Sipp option.

April also sees the introduction of new retirement rules that mean you don't have to use your pension to buy an annuity. Many will still want to, but if you don't then you won't be forced to. Instead you can continue to keep your pension invested in a drawdown plan and draw an income from it.

This option is only appropriate for those who are willing to accept the risk of staying in the market, which tends to be those with larger pension pots.

Drawdown will come in two forms: capped drawdown and flexible drawdown. Anyone will be allowed to go into capped drawdown, where you will be subject to government limits on how much income you can draw from your plan each year.

Flexible drawdown will only be available to those who already have a secure pension income of 20,000 per annum, made up of state pension, final salary pension, and/or annuity income. But if you qualify you can take as much as you like out of your flexible drawdown plan whenever you want.

Importantly, you can't go into flexible drawdown if you have made a pension contribution in the same tax year (nor can you make any further pension contributions subsequently).

So if you are planning to take advantage of this new opportunity, you need to ensure you have made your final pension contribution by 5 April at the latest.

Laith Khalaf is a pensions analyst at financial advisers Hargreaves Lansdown

'We save as much as we can to help children through college'

Paisley couple Wendy and Ken Mayne have four children and put as much money as they can into a Nationwide Building Society e-Isa. Photograph: Robert Perry

WENDY and Ken Mayne both save for their pensions mainly through their jobs. But with four children, their next urgent financial planning priority is their offspring's education.

So they put as much money as they can into their e-Isa with Nationwide Building Society each month.

Their eldest daughter Kaitlin is 17 and hoping to begin studying medicine in the near future. Wendy, who lectures in adult nursing, said: "We opened our first Isa about ten years ago, but now we save as much as we can to help our children through college.

"With the eldest set on medicine, we'll be in for the long haul."

The Paisley couple particularly like the ease of using an internet-based account.

Wendy added: "With us both working, it is much easier paying in over the internet. And you can see the cash going in straight away."

Ken, a Church of Scotland minister, also has a personal pension.