The 2020/21 tax year started at the stroke of midnight between the 5th and 6th of April. While many individuals leave tax planning to the end of the tax year, you can look to maximise the benefits by using your personal tax allowances* and reliefs straight away. Please get in touch to take advantage of one or more of the following:
Income Tax
The tax free personal allowance remains unchanged at £12,500.
Basic rate tax of 20% will be payable on income above the tax-free allowance and up to the higher rate threshold of £50,000.
Additional rate income tax remains the same at 45% on income above £150,000.
If you are married or in a civil partnership, you may be able to save money by structuring your finances as a couple to ensure you are using both spouse’s tax allowances. This could be an especially good idea if one spouse pays tax at a lower rate than the other.
ISA
The Junior ISA allowance has risen to £9,000 from £4,368 for children under 18.
The adult ISA allowance of £20,000 remains unchanged.
If you are 16 or 17 this tax year (or have children of these ages), they can benefit from both the Junior ISA allowance and adult ISA allowance (cash only).
Pensions
Saving into a pension comes with great tax benefits. For a start, investments in your pension are free from Income Tax and Capital Gains Tax. Pension contributions up to your annual allowance will also receive an automatic 20% top-up from the taxman, and higher-rate and additional-rate taxpayers can claim back another 20% or 25% through their Self-Assessment.
Because of these generous tax rules, there is a limit to the amount you can pay into your pension. Each year, you can contribute as much money as you earn, usually up to £40,000 (although this tapers down to £4,000 for higher earners).
If you have not used your annual allowance in the last three years, you may also be able to make extra contributions by using carry forward.
Minimum pension contributions (paid by employers and employees) through auto-enrolment remain 8% (3% employer and 5% employee) of band earnings.
The lower limit of the qualifying earnings band will increase from £6,136 to £6,240. This means the first £6,240 of an individual’s earnings don’t count towards auto enrolment contributions. The upper limit is £50,000.
The Lifetime Allowance for pension savings has increased to £1,073,100.
The State Pension has increased with the full allowance now £175.20.
Other Savings Allowances
The Personal Savings Allowance, which gives you tax-free savings interest, remains £1,000 for basic rate tax-payers. This reduces to £500 for higher rate tax payers and additional rate tax payers do not get any allowance.
The tax-free Dividend Allowance remains at £2,000 (although dividends received by pension funds and ISAs remain tax-free).
Venture Capital Trusts and Enterprise Investment Schemes
Although only suitable for individuals with a higher appetite for risk, there is no change to the taxation of Venture Capital Trusts, so you can invest up to £200,000 and get up to 30% income tax relief.
Similarly, the taxation of Enterprise Investment Schemes is unchanged, meaning you can invest up to £1 million and claim up to 30% income tax relief.
Inheritance Tax
Each tax year you can make a range of tax-free gifts. These leave your estate immediately and won’t be taken into account when calculating your Inheritance Tax bill.
All gifts to your husband, wife or civil partner (as long as the UK is their permanent home).
Gifts of up to £3,000 each tax year, which can be carried over one year for a total of £6,000. This is useful if you did not use it in the 2019/20 tax year.
Unlimited individual gifts of up to £250 per person. Although not to anyone who has already received a gift of your whole £3,000 annual exemption.
Wedding gifts of up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 to anybody else.
Unlimited payments towards the living costs of a child under 18 or in full-time education, elderly dependant or ex-spouse.
Unlimited gifts from surplus income that won’t affect your standard of living.
The Residence Nil Rate Band has risen to £175,000 from £150,000.
This can be added to the £325,000 Inheritance Tax allowance when a direct descendant inherits someone’s main house.
Capital Gains Tax
The Capital Gains Tax allowance has increased to £12,300 from £12,000.
Married couples and civil partners will continue to be able to combine their annual allowances.
Landlord Mortgages
Landlords are no longer able to offset their mortgage interest payments against their rental income.
There is now only a 20% tax credit saving from a landlord’s mortgage interest.
*This information is based on our current understanding of the rules for the 2020-21 tax year.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The value of investments and any income from them can go down as well as up and you may not get back the original amount invested.
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